David Law
by David Law
Colorado’s revised noncompete statute takes effect on August 10, 2022. It imposes strict new requirements for noncompete and customer non-solicit agreements. Here are four steps employers can take to ensure compliance with the revised statute.
Review existing templates
Under the new law, noncompete and customer non-solicit agreements (noncompete agreements) are only enforceable if they’re reasonably necessary to protect an employer’s trade secrets. Trade secrets are specifically defined under the Colorado Uniform Trade Secrets Act (CUTSA) and have a different meaning than ordinary confidential information. Unlike the old law, the new statute doesn’t contain an exception for executive and management personnel.
Employers should review their existing templates and make sure that their noncompete agreements are drafted to protect only trade secrets and not anything else, such as general confidential information or business goodwill. While confidential information and goodwill are protectable interests, they aren’t sufficient to hold up a noncompete agreement under the new statute.
Additionally, a well-drafted agreement will (1) expressly define trade secrets based on the definition in the CUTSA; (2) differentiate trade secrets from confidential information generally; and (3) include acknowledgment provisions under which the employee acknowledges that the sole purpose of the noncompete provisions is to protect trade secrets.
Confirm necessity of noncompetes
Before presenting a noncompete agreement to a prospective employee, an employer should pause and ask, “Is this agreement really necessary? Is this employee going to have access to valuable trade secrets that could materially benefit my competitors and harm me?” Factors relevant to these questions include the person’s position within the company and job duties, as well as industry standards and trends.
Additionally, an employer might consider noncompete alternatives, such as loyalty-based compensation plans. For example, they might give the employee an opportunity to enter a long-term incentive or equity plan under which benefits don’t fully vest if she unfairly competes with the company or solicits its customers.
Such agreements aren’t noncompete provisions under the new statute because they don’t prohibit the employee from doing anything. They are free to work with or solicit whomever they choose, but they must decide whether they value those activities over any vested benefits.
Review annual cash compensation requirements
Under the new statue, noncompete agreements are only enforceable for employees whose annualized cash compensation meets or exceeds Colorado’s highly compensated employee (HCE) threshold, as set out in the Colorado Department of Labor’s Pay CALC Order (currently set at $101,250 and will increase annually).
For a prospective employee, “annualized cash compensation” means the total compensation that person would earn in their first year of employment, based on their expected salary or wages. For example, if they will be paid on a salary basis, their annualized cash compensation is their annual expected salary. Bonuses shouldn’t be included in the annual salary calculation unless they’re guaranteed with the first year (i.e., non-discretionary).
Ensure HR is trained on notice requirements
The new law sets stringent notice requirements dictating how and when a noncompete agreement must be presented. To satisfy these requirements, employers should (1) present the noncompete agreement to the employee with the initial offer of employment (never after an offer has already been accepted); (2) present (as a separate document) a notice letter satisfying C.R.S. § 8-2-113(4)(d), as described below; and (3) give the candidate a reasonable opportunity to review the agreement and consult counsel before signing.
A notice letter satisfies C.R.S. § 8-2-113(4)(d) if it (1) identifies the agreement by name and states that it contains a covenant not to compete that could restrict the worker’s options for subsequent employment following her separation; and (2) directs the worker to the specific sections of the agreement that contain the covenants.
Takeaways
Colorado’s new noncompete law isn’t unique and reflects a trend across the country of state and local laws curtailing the use of restrictive covenants. Unfortunately, there are no signs that the trend will abate anytime soon, and some believe that noncompete agreements will soon be unenforceable everywhere. For the time being, however, there are steps you can take to protect yourself from unfair competition and avoid penalties and prosecution for violating the new statute.
