What Colorado Small Businesses Should Know About Non-Compete Agreements in 2025: Insight from a Business Contract Lawyer
When running a small business, protecting your interests is crucial. Business owners often use contracts as tools to structure employment and ownership arrangements in a clear and enforceable manner. One common concern for business owners is that a former employee could take their trade secrets or customers to benefit a competing business. A non-compete agreement might seem like an attractive option to help prevent this scenario. However, Colorado small businesses must tread carefully around non-compete agreements.
In 2025, recent statutory changes, case law developments, and evolving enforcement practices make it especially important for business owners to understand when a non-compete may be valid, how to limit legal exposure, and how to draft enforceable agreements (or use alternatives to avoid non-competes altogether). As a business law firm with extensive experience advising Colorado enterprises, Anzen Legal Group offers this guide to help you assess non-compete risk and shape your contracts in compliance with Colorado law.
Why Non-Compete Agreements Matter for Small Businesses
Non-compete (or restrictive covenant) clauses may appear attractive to business owners who wish to protect their customer relationships, trade secrets, or investment in staff training, as well as their relationships with business partners and the maintenance of strong business relationships. However, in many jurisdictions—including Colorado—courts and legislatures view restraints on competition with skepticism, particularly where they inhibit a worker’s ability to earn a living.
For small businesses, the risks of over-broad non-compete clauses include:
- Legal invalidation of the restraint in whole or in part
- Liability for statutory penalties and attorneys’ fees
- Adverse effects on recruiting and retention
- Potential exposure in a dispute where a departing employee challenges the restraint
- Costly mistakes that can arise if non-competes are not properly drafted or enforced, leading to significant financial losses
Thus, a prudent small business will understand not only the benefits of a non-compete in appropriate cases, but also the statutory boundaries, drafting pitfalls, and enforcement uncertainties inherent in Colorado’s evolving regime.
The Statutory Framework in Colorado: Updates for 2025
Baseline: Colorado’s Restrictive Employment Agreements Act (2022)
In August 2022, Colorado overhauled its non-compete statute (C.R.S. § 8-2-113) through the Restrictive Employment Agreement Act, imposing strict limits on non-competes and non-solicitation provisions. Under that law:
- Non-compete and non-solicitation agreements must satisfy compensation thresholds (i.e. only “highly compensated” employees can be subject to them), and must be legally binding and legally enforceable to protect business interests.
- The agreement must be for protection of trade secrets and must not be broader than reasonably necessary to protect legitimate business interests.
- Employers must give proper notice to prospective and current workers (distinct, standalone notice) before requiring signature.
- Certain categories of restrictive covenants remain permissible:
- Recovery of training/education costs (within strict bounds)
- Reasonable confidentiality (nondisclosure) agreements and other legally binding agreements
- Purchase/sale of business or assets (business sale exception)
If an employer fails to comply with statutory requirements (such as notice or compensation threshold), the covenant may be void and the employer may face penalties, actual damages, and attorneys’ fees. As experienced Colorado noncompete attorneys, we can review and provide legal guidance on terms to ensure compliance with law.
2025 Revisions: Senate Bill 25-083 (Became Effective August 6, 2025)
Colorado’s legislature has adopted additional changes to the non-compete law that took effect on August 6, 2025. Key updates include:
- Ban on non-competes for health care professionals. SB 25-083 bars most non-compete agreements (and broadens prohibitions on non-solicitation) for physicians, advanced practice registered nurses, dentists, and certified midwives. The law prohibits restrictions on:
- Disclosure of continuing practice, new contact information, or patients’ right to choose a provider.
- Enforcing a non-compete for a health care provider even if they would otherwise meet the compensation threshold.
- Narrowing of business sale exemption (especially for minority owners). Under prior law, non-compete covenants tied to a sale of a business or its assets were broadly permitted. SB 25-083 retains that exemption, but imposes a duration cap for minority owners who received their ownership interest as compensation or in connection with services rendered. The formula is:
Maximum Duration = (Total consideration from the sale) ÷ (Average annualized cash compensation from the business during the prior period). Majority owners (i.e. >50% owners) are not subject to the same cap.
- Non-retroactivity and grandfathering. The new restrictions apply only to non-competes entered into or renewed on or after August 6, 2025. Preexisting agreements remain subject to prior law.
- Statutory enforcement mechanisms and penalties. SB 25-083 confirms that enforcement is available via the Colorado Attorney General and provides for penalties and recovery of attorneys’ fees in appropriate cases. In addition, disputes over non-compete enforcement may give rise to litigation matters, where parties may need courtroom representation to resolve legal disputes through formal litigation processes.
Taken together, these changes reinforce Colorado’s constraining stance on non-compete agreements and sharpen the calculus for small businesses seeking enforceable restraints.
Key Considerations for Small Businesses in 2025
1. Compensation threshold
As of 2025, non-compete agreements (outside of the business sale and health care exceptions) may generally be imposed only on workers whose annual compensation meets or exceeds $127,091.
2. Narrow tailoring and trade secrets protection
Even when an employee satisfies the compensation threshold, the non-compete must be justifiable. Courts will examine time limits, geographic scope, and whether the clause protects legitimate interests such as trade secrets, proprietary information, intellectual property, or customer relationships.
3. Procedural requirements
Employers must provide a standalone notice. Prospective employees must receive that notice before accepting employment. Existing employees must receive at least 14 days’ notice before a new restrictive covenant takes effect.
4. Health care and business sale exceptions
If they haven’t already, employers of health care providers should revise contracts as soon as possible to compy with August 2025 legislative changes. In business sales, special formula-based duration limits apply to minority owners. These transactions often involve various business entities, such as a limited liability company (LLC) or an S corporation, and it is important to consider the type of business entity involved, as the legal structure can impact liability, tax treatment, and compliance requirements.
5. Alternatives to non-competes
Businesses may consider nondisclosure agreements, customer non-solicitation clauses, or training reimbursement agreements, which remain permissible under specific conditions. Other types of agreements that can protect business interests include operating agreements, partnership agreements, employment agreements, and non disclosure agreements, each serving to safeguard sensitive information, define roles and responsibilities, and ensure legal protection for all parties involved.
Practical Steps for Drafting and Enforcing Non-Competes in 2025
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Pitfalls and Business Litigation Risks
- Overbroad terms – Agreements with vague or excessive restrictions may be struck down.
- Failure to give notice – Skipping standalone written notice voids the agreement.
- Misclassifying workers – Applying non-competes to workers under the threshold risks liability.
- Health care bans – Non-competes for physicians and similar professionals are invalid after August 6, 2025.
- Business sale errors – Ignoring duration caps for minority owners could void the restraint.
- Training cost abuses – Overly aggressive repayment clauses may be invalid.
- Penalties – Employers may face statutory fines of $5,000 per worker, damages, and attorney fees for invalid covenants.
- Contract disputes – Non-compete agreements often lead to contract disputes, especially when parties disagree on enforceability or terms.
- Breach of contract – Alleged violations of non-compete agreements can result in breach of contract claims, exposing parties to damages and legal action.
- Business litigation – Enforcing or defending non-compete agreements may escalate to business litigation, requiring specialized legal expertise to resolve complex business conflicts.
- Personal liability – Improperly structured agreements or failure to follow legal formalities can expose business owners to personal liability, putting personal assets at risk in the event of lawsuits, contract disputes, or breach of contract claims.
Sample Scenarios Of Noncompete Matters
- Account manager below threshold: A $90,000-salary employee cannot be bound by a non-compete. In this scenario, non-compete agreements are not enforceable, which can impact the company’s day to day operations by allowing employees to move freely between competitors.
- Executive above threshold: A $150,000-salary director may be subject to a narrowly tailored non-compete with proper notice. Such agreements are often used to protect sensitive business operations, ensuring that strategic information and internal processes remain confidential.
- Physician associate: Non-competes for health care providers entered after August 2025 are void.
- Business sale with minority owner: Duration of restraint must comply with the statutory formula. When drafting the contract, it is important to clearly identify the other party to ensure all responsibilities and obligations are properly assigned.
Using NDAs and Non-Solicitation Agreements as Alternatives
For many Colorado businesses, nondisclosure agreements (NDAs) and non-solicitation agreements provide effective alternatives to non-competes. NDAs protect sensitive information such as client lists, pricing structures, and proprietary processes without restricting an employee’s ability to work elsewhere. Non-solicitation agreements can prevent former employees from actively targeting your clients or staff after they leave, helping preserve key relationships. These tools often offer a more enforceable and less risky way to safeguard your business interests because courts generally view them as narrower and less burdensome on workers’ rights compared to broad non-compete clauses. By prioritizing these agreements, small business owners can strike a balance between protecting their company and maintaining compliance with Colorado’s restrictive covenant laws.
Best Practices and Legal Guidance for Colorado Small Businesses
- Audit current agreements.
- Amend to comply with August 2025 changes.
- Use standalone written agreements.
- Narrow restrictions aggressively.
- Consider alternatives, such as NDAs.
- Add severability clauses to ensure the rest of your agreement remains enforceable even if non-compete is voided.
- Maintain clear records.
- Seek legal guidance from an experienced business contract lawyer for contract drafting, review, and compliance.
FAQ: Common Questions About Non-Compete Agreements in Colorado (2025)
Are non-compete agreements fully banned in Colorado?
No. They are restricted to highly compensated employees, business sale contexts, and other narrow exceptions.
What is the 2025 compensation threshold?
$127,091.
Can I enforce a non-compete against a physician?
No. After August 6, 2025 updates, health care non-competes are barred.
Do pre-2025 agreements remain valid?
Yes, but only if they complied with prior law.
What are the risks of enforcing an invalid non-compete?
There are significant legal implications for a business owner attempting to enforce an invalid non-compete, including exposure to damages, penalties, and attorneys’ fees.
Can I recover training costs?
Yes, under strict conditions, such as reasonableness and amortization over time.
How long can a non-compete last?
It depends on reasonableness. For minority owners in a sale, statutory formulas now cap duration.
Should small businesses use non-competes at all?
They can, but only in limited circumstances. Many businesses rely more heavily on NDAs and non-solicitation provisions to protect business plans and personal assets. Proper agreements help business owners safeguard sensitive information and reduce liability risks.
Schedule A Consultation With Our Experienced Noncompete Attorneys
For Colorado small businesses in 2025, non-compete agreements carry both opportunity and risk. While a properly crafted non-compete may help protect your business interests, Colorado’s stringent statutory framework and recent legislative changes require careful planning and execution. With the August 2025 changes in effect, now is the time to audit existing agreements, refine your contract templates, and engage legal counsel to ensure compliance.
If your business needs assistance with drafting, reviewing, or defending non-compete agreements or any other business law matter, please contact us. As a business law firm committed to serving Colorado enterprises, we stand ready to assist you with employment law, contract drafting, mergers, governance, and more. Reach out today to discuss how we can support your business law needs, including those related to non-compete agreements.
