Colorado’s Labor Code statute C.R.S. 8-2-11, entitled “Unlawful to intimidate worker - agreement not to compete -prohibition - exceptions - notice – definition,” was recently revised to offer additional protections to workers throughout Colorado against non-compete and non-solicitation provisions.[1] The revisions have left many companies employing Colorado workers and independent contractors, or otherwise doing business in Colorado, wondering whether non-compete, non-solicitation, and similar provisions regularly contained in employment, independent contractor, and commercial contracts are legal and enforceable.
In pertinent part, the statute includes a blanket ban on non-compete provisions which states that “any covenant not to compete that restricts the right of any person to receive compensation for performance of labor for any employer is void.”[2] However, the statute carves out a few narrow exceptions, the main one being an exception for “highly compensated workers.”[3] The statute defines a “highly compensated worker” as one who “earns an amount of annualized cash compensation equivalent to or greater than the threshold amount for highly compensated workers” set by the Colorado Department of labor and employment.[4] For 2023, the threshold amount appears to be $112,500.[5] Similarly, a covenant not to solicit customers is generally void unless applied to a worker earning at least sixty percent (60%) of the threshold amount for highly compensated workers.[6] In both instances, the covenant must also be narrowly tailored and must be designed to protect a company’s “trade secrets.”[7]
Although the highly compensated worker is the main exception created by the statute, other types of non-compete provisions may be enforceable in limited circumstances, such as the following:
(1) A provision which provides for an employer’s recovery of the expense of educating and training a worker may be permissible if (a) the training is distinct from normal, on-the-job training, (b) the employer’s recovery is limited to the reasonable costs of the training and decreases over the course of the two years subsequent to the training proportionately based on the number of months that have passed since the completion of the training, and (c) the recovery is not otherwise barred by applicable federal law.[8]
(2) A confidentiality provision related to an employer’s business may be enforceable if (a) it is reasonable, and (b) it does not prohibit disclosure of information that:
i. arises either from the worker’s general training, knowledge, skill, or experience, whether gained on the job or otherwise;
ii. is readily ascertainable to the public; or
iii. a worker otherwise has a right to disclose as legally protected conduct.[9]
(3) Restrictive covenants for the purchase and sale of a business or the assets of a business may be enforceable so long as they are reasonable.[10]
(4) A provision requiring the repayment of a scholarship provided to an individual working in an apprenticeship may be enforceable if the individual fails to comply with the conditions of the scholarship agreement.[11]
However, in all cases, such provisions must be narrowly tailored and reasonable. Additionally, for any such provisions to be enforceable, the statute requires that the terms of the covenant must be provided to a prospective worker before the prospective worker accepts an offer of employment.[12] For current workers, the covenant must be presented to the worker at least fourteen (14) days prior to the effective date of the provision.[13] In both cases, the notice must be provided in a separate document and must be signed by the worker or prospective worker.[14] Additionally, Colorado courts have held that prior versions of the statute apply equally to independent contractors as to employees.[15] The rules may also apply to other types of commercial transactions, such as deals between franchisors and franchisees.[16] Additional conditions may apply to contracts concerning physicians, dentists, attorneys, or other specialized fields.[17]
Lastly, in all cases, the statute requires that Colorado law govern the covenant, and also requires that any action to enforce such a covenant be brought in Colorado courts if the worker to whom the covenant applies resided or worked in Colorado at the time of termination of employment.[18] As such, choice of law or venue provisions designating any state other than Colorado may not be enforceable in any contract governing a Colorado worker which contains a non-compete, non-solicitation, or similar provision.
Although some companies may be tempted to include broad non-compete and non-solicitation provisions in Colorado contracts notwithstanding the statute, careful compliance with the statute is important, as violations of the statute may not only subject an employer to fines,[19] but may also subject an employer to criminal liability.[20] Accordingly, companies employing workers or independent contractors in Colorado, or otherwise entering into contracts with Colorado companies, should take care to ensure any non-compete, non-solicitation, or similar restrictive covenants, including confidentiality, invention assignment, or non-interference provisions, are carefully drafted to ensure compliance with C.R.S. 8-2-11 and related Colorado law.
Sources:
[1] C.R.S.8-2-113.
[2] C.R.S. 8-2-113(2)(a).
[3] C.R.S. 8-2-113(2)(b).
[4] C.R.S. 8-2-113(2)(b), (2)(c)(II).
[5] 7 CCR 1103-14 2023 PAY CALC Order (2023).
[6] C.R.S. 8-2-113(2)(d).
[7] C.R.S. 8-2-113(2)(b), (2)(d).
[8] C.R.S. 8-2-113(3)(a).
[9] C.R.S. 8-2-113(3)(b).
[10] C.R.S. 8-2-113(3)(c).
[11] C.R.S. 8-2-113(3)(d).
[12] C.R.S. 8-2-113(4)(a)(I).
[13] C.R.S. 8-2-113(4)(a)(II).
[14] C.R.S. 8-2-113(4)(b).
[15] Colorado Supply Co. v. Stewart, 797 P.2d 1303, 1305 (Colo. App. 1990) (“Plaintiff argues on appeal that, since Stewart was an independent contractor, the trial court erred in applying § 8-2-113(2) to his contracts. However, that statute does apply to independent contractors. See Smith v. Sellers, 747 P.2d 15 (Colo. App. 1987).”). Saturn Sys. v. Militare, 252 P.3d 516 (Colo. App. 2011) (enforcing non-solicitation provision against independent contractor); PostNet Int'l Franchise Corp. v. Wu, 521 F. Supp. 3d 1087(D. Colo. 2021) (suggesting that a non-compete agreement may be enforceable against a franchisee).
[16] Keller Corp. v. Kelley, 187 P.3d 1133 (Colo. App. 2008) (holding that a franchise agreement fell under the purchase or sale of a business exception to the statute.).
[17] See,e.g., C.R.S. 8-2-113(5).
[18] C.R.S. 8-2-113(6).
[19] C.R.S. 8-2-113(8)(b).
[20] C.R.S. 8-2-113(4)(b).
