Written by Martine Wells, Shareholder; Hannah Caplan, Shareholder; and Julie Mitarotondo from Greenberg Traurig, LLP on December 6, 2024
In recent years, the legal landscape impacting employment contracts has evolved, increasing employers’ need to navigate federal and Colorado law to ensure compliance and risk mitigation. Even more so than in prior years, to the extent employers intend for their employees to be bound by certain provisions, such as those protecting the employer’s confidential information, these changes have introduced myriad nuanced complexities, from hire through separation.
Of course, it is impossible to predict what the future holds from a federal and state legal perspective, given ongoing political and judicial developments. However, until future notice, the status quo ante is that employment contracts must be drafted thoughtfully to be enforceable under state and federal law, as well as to avoid employment claims.
Colorado law
Relevant throughout the employment relationship, effective August 10, 2022, the Colorado Legislature enacted significant changes to the state’s restrictive covenant statute, impacting employment-related confidentiality, non-compete and non-solicit provisions. [1] Specifically, restrictive covenants entered into after this amendment are presumptively void unless they fall within certain, limited statutory exceptions, including annual minimum compensation thresholds (currently $123,750 to be bound by a non-competition covenant and $74,250 to be bound by a non-solicitation covenant).
Further, employees and applicants must receive a notice containing specific information about the covenants within a specified timeframe before entering the agreement, or else the covenants are void. To deter employers including void covenants, the law provides that presenting an employee or applicant with a void covenant, or attempting to enforce it, gives rise to an employment claim providing for immediate liability for actual damages and a statutory penalty of $5,000 per worker harmed by the conduct, in addition to the predating statutory language that such conduct could constitute a criminal misdemeanor.
In addition, and as may become relevant when legal claims against employers are involved, the Colorado Protecting Opportunities and Workers’ Rights Act (POWR Act), [2] effective August 10, 2023, imposes strict requirements if a nondisclosure provision is used, for example, in a release agreement, with a current or prospective employee, which operates to limit the employee’s ability to disclose or discuss any alleged “discriminatory” or “unfair” employment practice.
Such nondisclosure provisions are void unless, among other things, they apply equally to all parties, allow disclosure to enumerated individuals and agencies or as otherwise required by law, and expressly state that such disclosure does not constitute disparagement. Further, all parties must sign an addendum attesting to compliance with these requirements. Similar with the restrictive covenant statutes, to deter invalid nondisclosure provisions, employers that present employees or prospective employees with agreements that violate these conditions are subject to a statutory claim giving rise to actual damages, attorney’s fees, costs and a $5,000 penalty per violation.
Finally, developments under Colorado statutory and case law continue to reinforce that employers must carefully craft incentive compensation agreements and policies to comply with Colorado wage law. Particularly, for example, once a bonus or commission is “earned,” it cannot be forfeited, even if the employee agrees to forfeit it, in effect prohibiting “present to win” (a clause requiring an employee to be employed by the employer at the time of payout to receive the commission or bonus) and “claw-back” clauses found in many employment contracts and incentive programs unless they are properly drafted.
Federal law
Under federal law, in 2023, the National Labor Relations Board (NLRB) found that an employer violated the National Labor Relations Act (NLRA) by offering severance agreements containing overly broad non-disparagement and confidentiality clauses. Importantly, this development covers all workplaces, even those lacking a unionized workforce. To avoid such claims under the NLRA, employment contracts and policies with non-supervisor employees must include disclaimers that the provisions do not interfere with, restrain or coerce employees’ NLRA rights. Employers who are found to have violated the NLRA may be subject to cease-and-desist orders and other remedies, such as back pay and reinstatement.
Also in 2023, the Securities and Exchange Commission (SEC) displayed a renewed interest in scrutinizing agreement provisions that potentially impede individuals from reporting securities law violations in violation of the Securities Exchange Act (the “Act”). Again, this impacts all employers, even those which are not publicly traded, and affects a variety of employment agreements, including those containing confidentiality, non-disparagement or other non-disclosure provisions. Such provisions must contain express language authorizing employees to communicate with securities regulators about possible securities law violations and must not prevent employees from receiving whistleblower awards. Violations of the Act can result in cease-and-desist orders, fines and other sanctions against both public and privately held companies.
Federal agencies also remain active in the non-compete space. The Federal Trade Commission recently attempted to ban non-competes nationwide, which was enjoined at the eleventh hour. Additionally, the NLRB General Counsel issued a memorandum stating an intention to prosecute, and seek remedies from, employers who require employees to sign non-competes and “stay-or-pay” provisions that chill the exercise of their NLRA rights.
When drafting employment contracts, Colorado and federal law cannot be considered in a vacuum; rather, new legal mandates and clauses must be carefully considered in concert with the employer’s goals.
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