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Are non-compete agreements legal?

On Behalf of | May 23, 2024 | Employment Law

For years, there have been debates on the necessity of non-compete agreements. Businesses see them as a way to protect company secrets and keep current clients from following their ex-employees. Employees view the agreements as a way to keep them in their current position at a lower wage than they may earn elsewhere.

The argument may be moot because, on April 23, 2024, the FTC enacted a rule that made most non-compete agreements illegal. How does that impact Colorado businesses?

Colorado’s current non-compete laws

Colorado enacted a statute stating that non-compete agreements are generally void unless they fall into certain exceptions:

  • They are necessary to protect trade secrets
  • They are to recoup the costs of educating and training employees who have worked for the employer for less than two year
  • The employee is a senior executive

Furthermore, the law didn’t apply to agreements enacted before August 10.

The FTC rule is much more restrictive. For-profit businesses can not enact a non-compete agreement for any employee. Any current agreements are considered null and void after the rule’s effective date. The exceptions are agreements with senior executives. While current ones will stand, businesses cannot enact new ones.

The FTC believes that eliminating non-compete clauses will have the following impact:

  • Workers can see their annual earnings increase by an average of $524
  • Innovation will flourish with approximately 17,000–29,000 applications for new patents each year
  • There will be a 2.7% yearly increase in start-up formations, equalling over 8,500 new businesses

This new rule will likely face several legal challenges. Employers and employees should fully understand their rights and the implications of non-compete agreements.