Colorado Criminalizes Unenforceable Non Compete Agreements

Employers who violate Colorado’s restrictive covenants statute, commonly known as noncompete agreements, could now face jail time after new legislation takes effect.

Starting March 1, 2022, anyone who violates Colorado Revised Statute § 8-2-113 commits a class 2 misdemeanor. A class 2 misdemeanor conviction in Colorado can lead to 120 days in jail, a $750 fine, or both.

This article takes a look at Colorado Senate Bill 21-271 and its potential repercussions for Colorado employers.

What are noncompete agreements?

A noncompete agreement formally restricts an employee, contractor, or company from engaging in certain competitive activities.

For instance, the seller of a business can be restricted from competing with the buyer for a period of time. Or an employee with intimate knowledge of the business, such as a manager, can be restricted from divulging that knowledge to competitors. In certain industries, non-compete agreements are used to restrict individuals from working in the same market or within a certain radius of that market for a period of time after leaving their employer. That is a fairly common restriction for TV and radio personalities and journalists.

How restrictive can noncompete agreements be?

Noncompete agreements cannot be overly restrictive. Businesses are allowed to protect themselves from unfair competition, but not from all competition. Competition is an essential component of free trade in the United States.

People should be able to engage in productive employment. Noncompete agreements, however, tend to restrict a person’s ability to do this.

When are noncompete agreements valid in Colorado?

Under C.R.S. § 8-2-113, it is unlawful to intimidate workers in order to limit their ability to engage in lawful work. Agreements that restrict trade, such as noncompete and non-solicitation-of-customers agreements, are generally unenforceable unless they relate to contracts for:

1. the purchase or sale of a business or its assets
2. protecting trade secrets
3. recovering education or training expenses associated with an employee who has been with an employer for less than two years; or
4. a restriction on executive or management personnel or staff. C.R.S. § 8-2-113

Read more about Colorado’s restrictive covenants statute here.

Exactly what has changed?

It’s important to note that Colorado’s restrictive covenants statute has not changed nor have the provisions on the enforceability of restrictive covenants. Lawmakers are merely enlisting the help of the criminal justice system to crack down on restrictive covenants.

Previously, a restrictive covenant that did not fall into any of the exceptions under C.R.S. § 8-2-113 merely resulted in an unenforceable agreement. Now, an employer who attempts to enforce an unenforceable noncompete agreement may be subject to misdemeanor criminal liability.

Exactly When is an Employer Criminally Liable?

It is currently unclear how Colorado courts will apply the bill’s misdemeanor provision to noncompete and customer non-solicitation agreements, or how often the provision will be used.

SB 21-271 simply states that “a person who violates [C.R.S. § 8-2-113] commits a class 2 misdemeanor.” The bill does not offer further guidance as to what will constitute a violation.

After March 2022, the following actions could open the door for criminal penalties:

• requiring an employee to sign an unenforceable noncompete or non-solicitation agreement
• attempting to enforce an unenforceable noncompete or non-solicitation agreement
• threatening to enforce an unenforceable noncompete or non-solicitation agreement

Employers who follow existing laws should not be concerned about a violation. If they are not, however, they could potentially face criminal charges.

Let’s look at an example:

Employee John Q. Public is a numbers cruncher who has no access to his employer’s trade secrets. However, the company requires John to sign a noncompete agreement. Beginning in March 2022, the employer can be charged with a class 2 misdemeanor.

Call a Colorado Employment Attorney

Employers in the Centennial State would do well to review their noncompete agreements and internal policies. If you are an employer who is concerned about unknowingly violating the restrictive covenant statute, give us a call. The employment attorneys at Robinson & Henry will review your company procedures and help you take steps toward complying with SB 21-271. Call 303-688-0944 today to begin your case assessment.