In May 2022, Colorado legislators passed a law that bans employee non-compete clauses for workers making less than six figures annually. Governor Jared Polis (D) signed the bill into law on June 8, 2022, giving it an effective date of August 10, 2022.
In short, HB 22-1317, imposes an income-based minimum on enforceable non-compete agreements between employers and employees. The new restrictions apply to employment contracts signed or renewed after the legislation’s effective date.
Colorado law already limited the use of non-competes to executives, corporate officers, and their professional staff, but this latest measure adds a “highly compensated” standard that will start at $101,250 and increase annually — a figure that will be indexed and set by the Colorado Department of Labor for “highly compensated” employees and will increase proportionately to inflation.
As companies evaluate their employment practices and operate in remote work environments, it is also worth noting that choice-of-forum and choice-of-law provisions applicable to non-competes may not mandate adjudication outside of Colorado, if the worker primarily resided or worked in Colorado at the time their employment was terminated. This could pose a special challenge for employers which are increasingly relying on a remote workforce.
The Colorado law sets a lower bar for non-solicitation clauses that prevent employees from poaching their former employer’s customers, allowing businesses to impose those restrictions on workers making up to 60% of the “highly compensated” standard, i.e. $60,750 for 2022.
The new Colorado law leaves untouched existing exceptions for restrictive covenants imposed as part of the sale of a business or its assets, or to protect trade secrets.
The law marks a trend in state-level action addressing non-compete agreements: 10 other states have passed laws in the last six years to ban non-competes for low-wage workers, although the income thresholds in those laws vary widely from about $30,000 of annual income in New Hampshire, $75,000 in Illinois, to $100,533 in Oregon, and now Colorado. Note that Colorado was the first state to criminalize the use of non-competes exceeding the permissible scope of Colorado state law. To read more about that development, see our earlier Alert here.
Ultimately, employers must be cognizant of the state laws that apply to their restrictive covenant agreements in a legal landscape that is increasingly a patchwork of incongruent laws. Choice of forum provisions and choice of law provisions represent a potential option for certain employers seeking streamlining, but their enforceability depends on state laws.