Colorado Criminalizes Restrictive Covenants
- Published: 01 April 2022
- Law Firm: Woods | Aitken
Colorado is criminalizing violations of Colorado’s noncompete law through Senate Bill 21-271 (“SB 21-271”). SB 21-271 was introduced May 13, 2021, became law on July 6, 2021, and will take effect March 1, 2022. The bill is over 300 pages long, and generally addresses misdemeanor and criminal sentencing reform.1 Per SB 21-271, a violation of Colorado’s noncompete statute will become a class 2 misdemeanor, meaning offenders will be subject to criminal punishments applicable to other class 2 misdemeanor criminal convictions.
Colorado already regulates restrictive labor covenants and prohibits use of “force, threats, or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit.” § 8-2-113(1). More generally, the existing Colorado statute contains a presumption that any covenant not to compete which restricts the right of any person to receive compensation for performance of skilled or unskilled labor shall is void. Notably, however, the existing statute contains four exceptions where such restrictive covenants may be permissible: (1) contracts for the purchase and sale of a business or its assets; (2) contracts protecting trade secrets; (3) contracts providing for recovery of expenses associated with training employees who have been employed for less than two years; and (4) restrictive covenants applicable to executive and management personnel, or their professional staff.2
Even if a noncompete falls under one of the exceptions, it must still be reasonable in both duration and geographic scope.3
Prior to enaction of SB 21-271, an invalid noncompete was either reformed for reasonableness, or rendered void, and repercussions for an employer’s violation were unclear, at best.4 Section 81 of SB 21-271 will add a fourth section to the existing law, which reads: “A person who violates this section commits a class 2 misdemeanor.” This means that anyone who violates any provision of the existing statute could be subjected to 120 days in jail, a $750 fine, or both.
Finally, clarity at last . . . right? Not so fast. Despite the definitive punishments SB 21-271 attaches to violations of the existing statute, a great deal of uncertainty still remains. Namely, SB 21-271 does not address what constitutes a violation of the existing statute, and because the bill will not take effect until March 1, 2022, it is unclear how courts will interpret and apply this additional statutory provision. As a result, even after SB 21-271 takes effect, employers will still be left to wonder what constitutes a violation? Additional questions also remain, such as:
- Will employers generate rap sheets by prompting employees to sign a noncompete that violates Colorado’s existing noncompete statute, or will criminal charges result from attempts to enforce the noncompete?
- Can employers pick up charges by presenting a void noncompete to a prospective employee, even if they don’t sign?
- What about employees? SB 21-271 does not limit itself only to actions of employers, so will employees be subject to criminal charges if they offend a valid noncompete? Would this be in addition to, or instead of, claims for breach of contract?
- If employers violate the noncompete statute, will charges be brought against individuals, or against the company?
- What should employers do if they currently have a noncompete in place that violates SB 21-271?
- What about alternative efforts, such as non-qualified deferred compensation plans, that may disincentivize employees from leaving and potentially competing elsewhere?
The answers to these questions can be complex and multifaceted depending on each situation. To navigate appropriate action steps in response to these questions and other ramifications of SB 21-271, contact our Labor & Employment Law Practice Group. We encourage you to subscribe to our Labor & Employment E-Briefs to keep up with the latest HR news, tips, and updates.
1 SB 21-271: Misdemeanor Reform, Colo. Gen. Assembly, https://leg.colorado.gov/bills/sb21-271 (last visited Jan. 31, 2022).
2 § 8-2-113(2), (a)-(d).
3 Nat’l Geographics Co. v. Dilley, 681 P.2d 546, 547 (Colo. App. 1984) (“[E]ven if a noncompetition is not void under § 8-2-113, C.R.S., to be enforceable it must satisfy the rule of reasonableness as to both duration and geographic scope.”).
4 See Deschenes Consulting LLC v. Nu Life Mkt., L.L.C., No. 19-cv-03465-RM-SKC, 2020 WL 7025142, at *6 (D. Colo., Nov. 30, 2020) (noting the lack of Colorado decisions providing guidance on damages for violations of portions of Colorado’s noncompete statute).