When Colorado Senate Bill 21-271 goes into effect on March 1, 2022, a violation of Colorado’s non-compete statute may land you with a criminal record, or even worse, a trip to jail. The aim of this new law is to reinforce Colorado’s strong public policy against restrictive covenants.
Colorado law has traditionally disfavored non-compete agreements. Non-compete agreements are typically used by employers to limit a former employee’s ability to use certain information or materials gained in their employment to the disadvantage of the employer. In Colorado, C.R.S. 8-2-113(2) already makes it unlawful for employers to use force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation of their choice. Notably, however, there are four exceptions. A non-compete can be used:
- To protect trade secrets
- To protect the purchaser in connection with the sale of a business and/or its assets
- To recover the expense of education or training an employee of less than a two-year duration; and
- To restrict executive and management personnel or professional staff to those personnel.
Even if an exception applies to the agreement, however the non-compete must still be reasonable in time and geographical scope to be enforceable under Colorado law. Senate Bill 21-271 amends C.R.S. 8-2-113 to add a criminal penalty for employers who knowingly implement void restrictive covenants. In fact, a violation of the newly amended section 8-2-113 will carry a Class 2 misdemeanor which could lead to 120 days imprisonment, a $750 fine, or both.
Perhaps overlooked is that the stated exceptions above, such as protecting trade secrets, remain broad and are up to the Court’s interpretation. Employers who have been implementing non-competes that fall within the exceptions will not have any new obligations when SB 21-271 goes into effect. However, the new law does raise the stakes for employers who are liberal with implementing non-competes or threaten to terminate an employee if they do not sign an invalid non-compete. Thus, employers in Colorado should only implement a non-compete after carefully consulting the exceptions to ensure the non-compete is lawful.
Certainly, it remains to be seen how widely the application of criminal liability will be used by prosecutors. Therefore, employers should review their agreements and procedures carefully to ensure they are protected before asking employees to sign.
The attorneys at WSHB are knowledgeable and experienced in employment law matters and are ready to assist employers in navigating these new issues and laws in Colorado. Please do not hesitate to reach out to a member of our team should you have any questions or concerns.