By Patrick O’Brien, Legal Coordinator, American Med Spa Association

Under a new Colorado law, non-compete agreements entered into after August 10, 2022, will need to meet certain requirements to be enforceable. The law, known as House Bill 1317, was signed by Governor Jared Polis in June. Non-compete agreements frequently appear in employment contracts. The purpose of these agreements or clauses is to restrict or restrain a former employee from competing with or taking business from the company. The underlying concept or theory for these agreements is that the former employee had training and access to information that would give them an unfair advantage against their former employer.

However, just because something is written in a contract or agreement does not mean that it is necessarily enforceable. An “agreement” that prohibits a person from working, say, for 30 years or anywhere in the U.S. is bad for the economy as a whole. Therefore, states have often taken an interest in limiting the extent to which they will uphold these agreements. According to Renee Coover, JD, an attorney with ByrdAdatto, “We are seeing a trend across the country where several states, Colorado being the most recent, are whittling away at their non-compete agreements. Over the past few years, non-competes have faced new obstacles in several jurisdictions and it has become increasingly challenging for employers to restrain workers from competing when they separate from employment.”

The new Colorado law makes several important changes to non-competes (referred to as “covenants not to compete” in the statute; for brevity, this will be referred to as “covenants” going forward). The biggest of these is to void all covenants unless they meet certain rules. Highly compensated workers may still be restricted by a covenant. These are workers who meet the threshold compensation according to the Division of Labor Standards and Statistics in the Department of Labor and Employment. For 2022, that means earning more than $130,000. Even if the covenant can be enforced against the highly compensated worker, it must be only for the protection of “trade secrets” and no broader than is reasonable and necessary to protect those secrets. Persons making 60% of the “highly compensated” amount can also be restricted from soliciting customers as long as the restriction is no broader than is reasonable and necessary to protect those legitimate trade secrets.

The law then lists several different clauses that don’t fall under the above general prohibition and are permissible in employment agreements. They include: 

1. A provision for the recovery of training or education expenses (this has a number of requirements and does not include on-the-job training);
2. A confidentiality clause that does not include information that the worker gains from general training, skill, knowledge or experience;
3. A provision for the purchase or sale of a business or its assets; and
4. A provision for a repayment of a scholarship for an apprenticeship.

Furthermore, any covenant that might be allowed under these rules also has to meet specific notice rules prior to the employee accepting or the covenant going into effect. The most significant of these is that violations or attempts to enforce a non-compliant covenant allow for penalties to be assessed and the ability for the worker to recover damages. It should also be noted that the law doesn’t change any agreements that were entered into before August 10, so existing non-competes can still be enforced under the old rules.

As Coover’s comment suggests, non-compete agreements are disfavored by states and there has been a long and steady trend to limit their scope and enforceability. Just because a non-compete says something doesn’t mean a court will necessarily uphold it. This applies not just in Colorado, but also in all states. It is important to carefully review your state’s rules and court cases around non-competes before creating or signing one. If you are going to have a non-compete as part of an employment agreement, it is worth the effort to review it with an attorney before moving forward with it.