The Pros and Cons of Non-Compete Agreements[1]: Balancing Protection and Innovation
Non-compete agreements are a common feature of many employment contracts, but they’re also controversial. On the one hand, they can help protect a company’s intellectual property and prevent employees from taking valuable trade secrets to a competitor. On the other hand, they can also limit employee mobility and stifle innovation. In recent years, there has been a growing movement to restrict the use of employee covenant agreements, with some states even banning them altogether. In this article, we’ll take a closer look at the pros and cons of non-compete agreements in Colorado and explore the legal landscape surrounding them.
The Pros of Non-Compete Agreements
Non-compete agreements can provide several benefits to employers, including:
- Protecting intellectual property: A non-compete agreement is one of several tools that can help prevent employees from taking valuable trade secrets, customer lists, and other confidential information to a competitor. Non-compete agreements can help prevent this by prohibiting employees from working for a competitor for a certain period of time after leaving their current employer.
- Promoting stability: Non-compete agreements can help promote stability in the workforce by reducing turnover and ensuring that employees stay with the company for a certain period of time. When employees are prohibited from working for a competitor for a certain period of time after leaving their current employer, they are less likely to leave their job for a competitor. This can help reduce employee turnover and provide employers with a more stable workforce.
The Cons of Non-Compete Agreements
Non-compete agreements can also have several drawbacks, including:
- Limiting employee mobility: Non-compete agreements can limit an employee’s ability to find new employment in their field, which can be particularly problematic in industries with few employers.
- Stifling innovation: Non-compete agreements can discourage employees from pursuing new ideas or starting their own businesses, which can stifle innovation and entrepreneurship.
- Being unfair: Non-compete agreements can be seen as unfair to employees, who may feel that they are being forced to choose between their livelihood and their career aspirations.
- Increases risk of litigation: Enforcement of a non-compete agreement often requires litigation. In addition, Colorado law allows employees to seek a declaratory judgment to determine whether a non-compete agreement is enforceable.
The Legal Landscape Surrounding Non-Compete Agreements
The legal landscape surrounding non-compete agreements varies from state to state; however, if an employee lives or works in Colorado, Colorado courts will apply Colorado law for the purposes of non-compete agreements. In general, courts will only enforce non-compete agreements that are reasonable in scope, duration, and geographic area. Employers should also be aware that non-compete agreements may be subject to antitrust laws if they are used to limit competition.
In Colorado, any non-compete agreement executed or renewed after August 10, 2022 is also subject to strict statutory requirements. Employers may not enter into a non-compete agreement with any employee who makes less than the threshold for a “Highly Compensated Employee” as set by the Colorado Department of Labor and Employment. This threshold amount may change each year, and employers will need to review non-compete agreements to ensure this salary requirement is met on a yearly basis.
Employers must also give at least fourteen days of advance notice to employees (and prospective employees) before entering into a non-compete agreement. The notice must provide the terms of the non-compete, as well as a statement advising the employee that the agreement could restrict the employee’s options for subsequent employment.
An employer who fails to comply with the statutory requirements for a non-compete agreement will find that not only is the agreement itself void, but the employer could also be subject to criminal penalties. Although it is unclear how a violation of the statute will be prosecuted, best practice would be to never find out!
Conclusion: Non-compete agreements can provide important protections for employers, but they can also limit employee mobility and stifle innovation. Employers should carefully consider whether a non-compete agreement is necessary and ensure that it is tailored to the employment relationship, reasonable in scope, duration, and geographic area, and fully complies with statutory requirements. Employees should also be aware of their rights and consult with an attorney if they have concerns about a non-compete agreement. By balancing protection and innovation, we can create a workforce that is both competitive and dynamic.
[1] This article does not address Non-Solicitation, Confidentiality, or other types of employment covenants regulated under C.R.S. 8-2-113.
