Several States are Increasing Penalties for Enforcing Non-Compete Agreements

As non-competition laws and the scrutiny of non-compete agreements continue to be in the spotlight, several states are revisiting their non-compete laws.  Colorado has been in the spotlight after the Colorado Legislature passed S.B. 21-271 on July 6, 2021 in an effort to reform the sentencing provisions related to numerous petty offenses and misdemeanors. As a result, several Colorado laws related to labor and employment are affected, including Colorado’s statute addressing restrictive covenant agreements, C.R.S. § 8-2-113.

Under C.R.S. § 8-2-113, it is unlawful to: intimidate workers in order to limit their ability to engage in lawful work; and enter into covenants that restrict trade, such as non-compete and non-solicitation agreements, unless the covenants fit within limited exceptions provided under the statute. The penalty if convicted for violating the non-compete statute is currently a misdemeanor punishable by a fine between $10–$250, or jail time of not more than 60 days, or both. C.R.S. § 8-2-115.   Effective March 1, 2022, the penalty for violating the non-compete statute will be increased to a class 2 misdemeanor punishable by up to 120 days in jail, or a fine of up to $750, or both, as a result of the changes from S.B. 21-271.  S.B. 21-271 also amends the text of C.R.S. § 8-2-113 to include the increased penalty as a new subsection (4).

Colorado is not the only state with laws that impose penalties for violation of non-competition statutes.  Indeed, Colorado is one of a small, but growing, handful of states imposing monetary penalties on employers who implement and enforce non-compete agreements. For example, effective October 1, 2021, Nevada employers are not only prohibited from imposing non-compete agreements on hourly employees, but will be on the hook for their hourly employees’ attorneys’ fees and costs in any enforcement action. Similarly, effective January 1, 2022, an Illinois law not only imposes restrictions on non-compete agreements, but permits the state’s Attorney General to investigate any employer it believes is engaged in overreaching under the state’s non-compete legislation and impose a civil penalty of up to $5,000 for each violation or $10,000 for each repeat violation within a five-year period. And finally, in January of 2021, the mayor of Washington, D.C. signed the Ban on Non-Compete Agreements Amendment Act of 2020 which, in addition to placing a near-total ban on non-compete agreements, imposes an affirmative duty on employers to inform employees of the new law or face monetary fines.

These developments serve as a reminder to employers to review their restrictive covenant and non-competition agreements regularly to ensure they are meeting the statutory requirements of the states in which they are operating.  Employers should consult an employment attorney with questions about their compliance efforts.