Colorado’s statute has historically allowed restrictions for only a narrow subset of exceptions. Under section 8-2-113(2) of the Colorado Revised Statutes, noncompete and customer non-solicitation restrictions are void unless they involve one or more of the following exceptions: (1) a contract for the purchase and sale of a business or the assets of a business, (2) a contract for the protection of trade secrets, (3) any contractual provision providing for the recovery of the expense of educating and training an employee who has served an employer for a period of less than two years, or (4) a covenant applied to executive and management personnel and officers and employees who constitute professional staff to executive and management personnel. Covenants that do not meet one of these exceptions or that are not reasonable in duration or geographic scope are deemed void under the statute, and effective March 1, 2022, a violation can result in a class 2 misdemeanor. Colo. Rev. Stat. § 8-2-113(4).
Prior to the amendment, another Colorado statute, section 8-2-115, provided that a violation of the restrictive covenant statute could result in a misdemeanor—the key word being “could,” as section 8-2-115 was mostly referenced by courts as a deterrent and not exercised against employers that violated the statute. It remains to be seen if courts will now more frequently issue misdemeanors under the revised statute.
Colorado Is One of Many
Colorado is not the only state to recently strengthen its restrictive covenant statute in favor of employees. For example, effective January 1, 2022, Illinois amended its restrictive covenant statutes with several employee-friendly changes that limit enforceability. For example, the Illinois amendments render noncompete restrictions that apply to employees both during and after employment void and unenforceable unless the employee’s actual or expected annualized rate of earnings exceeds $75,000 per year (note that the statutory threshold amounts will be increased in the years to come to adjust for inflation). See 820 Ill. Comp. Stat. 90/10(a). Under the new Illinois framework, employee and customer non-solicitation restrictions are likewise void and unenforceable unless the employee’s actual or expected annualized rate of earnings exceeds $45,000 per year (these amounts will also be increased in various years thereafter). 820 Ill. Comp. Stat. 90/10(b). Employers must advise employees in writing to consult with an attorney and must provide employees with a copy of the covenant at least 14 calendar days before the commencement of an employee’s employment or allow at least 14 calendar days to review the covenant. 820 Ill. Comp. Stat. 90/20.
An employee who prevails on a claim to enforce a covenant is entitled to recover from the employer all costs and all reasonable attorney fees in connection with the claim, in addition to civil remedies. 820 Ill. Comp. Stat. 90/25. While the statute does not contain criminal penalties like those in the Colorado law, if the Illinois attorney general has “reasonable cause” to believe an employer has violated the statute, the attorney general can impose a civil penalty not to exceed $5,000 for each violation, or $10,000 for each person who was subject to an unlawful agreement within a five-year period. 820 Ill. Comp. Stat. 90/30(d)(1).
In addition, effective October 1, 2021, Nevada’s amended Unfair Trade Practices Act prohibits noncompetition covenants for employees who are paid solely on an hourly wage basis, exclusive of any tips or gratuities. Nev. Rev. Stat. § 613.195(3) (2021). Under the Nevada amendment, employers are required to pay reasonable attorney fees and costs if the employer tries to enforce or challenges an agreement that applies to an hourly employee. Nev. Rev. Stat. § 613.195(7) (2021). Similarly, effective January 1, 2020, Washington’s updated restrictive covenant law, which contains earnings threshold requirements for enforceable provisions like those in the Illinois law, provides that if a court determines that a covenant violates the statute, the employer must pay an employee the greater of the employee’s actual damages or a statutory penalty of $5,000, plus attorney fees, expenses, and costs. Wash. Rev. Code § 49.62.080(2). Penalties may also be assessed if a court or arbitrator has to reform, modify, or partially enforce a covenant. Wash. Rev. Code § 49.62.080(3).
There Is No One Size Fits All
In response to the increased movement in the labor market, employers have looked to revise their form restrictive covenant agreements. Given the myriad of state restrictive covenant laws, it is nearly impossible to develop a “one size fits all” form that can be used by employers that have multiple locations. Employers are wise to invest their time and financial resources to prepare state-by-state customized agreements to increase the likelihood of enforcement and also decrease the risk of a variety of penalties that exist under the differing state laws.
Don’t Forget about New Hires
While employers often focus on requiring new or current employees to sign restrictive covenants, it is likewise important for employers to determine whether new hires have signed any existing agreements that may limit their ability to be employed. Given the increase in resignations and employers’ desire to protect their businesses, former employers have been more aggressive in their efforts to enforce their covenants against former employees.
Too often, employees forget about agreements they signed at the beginning of their employment. For that reason, it is important for employers to engage in discussions with new hires about potential agreements. We also generally recommend that employers include clauses in their restrictive covenant agreements that require new hires to disclose any agreements that may limit their ability to be employed by the new employer. Employees should also be required to immediately notify the company if they receive any cease-and-desist communication from former employers.
Counsel in today’s market should be ready to assist employers in evaluating the applicability and enforceability of a new hire’s agreement, negotiating a waiver of various restrictions or a buy-out if a new hire is highly desired, or paying an employee to engage in no activity (or at least noncompetitive activity) until the employee’s restrictive covenant obligations expire.
With restrictive covenant laws trending more in favor of employees, employers must exercise care in drafting their agreements and be prepared to exercise flexibility to avoid potential penalties with both new hires and current employees.