Hiring your first employee marks a major milestone for any Colorado startup. It signals growth, validation of your business concept, and the beginning of building a team that shares your vision. But this exciting step also introduces substantial legal obligations that many founders underestimate.
Colorado has some of the most employee-friendly laws in the nation. From strict restrictions on non-compete agreements to comprehensive pay transparency requirements, the state imposes obligations that differ significantly from other jurisdictions. Getting these requirements right from day one prevents costly penalties, lawsuits, and operational disruptions down the road.
How to Obtain Federal and State Tax Identification
Before you can legally hire employees, you need an Employer Identification Number from the IRS. Your EIN identifies your company for tax purposes and is required for payroll, tax withholding, and business banking. Applying for an EIN is straightforward and free through the IRS website, providing instant approval upon submission.
Once you have your federal EIN, the next steps involves registering for Colorado state tax accounts. You must register with both the Colorado Department of Revenue for state income tax withholding and the Colorado Department of Labor and Employment for unemployment insurance. Both registrations can be completed through MyBizColorado, the state’s centralized business portal. Complete these registrations before your first payroll date to avoid penalties.
Secure Workers’ Compensation Insurance
Colorado law mandates workers’ compensation insurance for any business with employees, regardless of company size. This requirement applies even if you have just one employee, whether full-time, part-time, or even family members on your payroll.
Workers’ compensation insurance must be in place before your employee’s first day of work. You can purchase coverage through private insurance providers or through Pinnacol Assurance, Colorado’s workers’ compensation carrier of last resort. The penalties for non-compliance are severe; operating without required coverage can result in substantial fines, stop-work orders, and personal liability for workplace injuries.
Draft Comprehensive Employment Documentation
Generic employment documents downloaded from the internet won’t protect your Colorado startup. You need tailored documentation that addresses your specific business, complies with Colorado law, and protects your intellectual property.
Essential employment documents include employment agreements that clearly define the employment relationship, compensation, benefits, job duties, and grounds for termination. Employee handbooks should contain anti-harassment policies, equal employment opportunity statements, and wage and hour compliance provisions. Colorado law requires specific policy language in several areas.
Intellectual property agreements that assign ownership of work product to a company are also critical. For startups, IP protection is often the company’s most valuable asset. Without proper agreements, employees might claim ownership of inventions, code, or creative works they develop on the job.
Navigate Colorado’s Strict Non-Compete Laws
Colorado has some of the nation’s strictest limitations on non-compete agreements. Violating these rules can result in devastating penalties, including lawsuits where your startup pays the employee’s attorney fees plus damages.
Under Colorado law, non-compete agreements are generally void unless specific exceptions apply. For 2025, you can only enforce a non-compete if the employee earns at least $127,091 annually. For non-solicitation of customer agreements, the threshold is $76,255 annually.
Even if your employee meets the compensation threshold, you must comply with strict notice requirements. Colorado law requires you to provide specific written notice of the non-compete at least 14 days before the employee starts work. The non-compete must be in a separate document with clear, conspicuous language.
The penalties for presenting an invalid non-compete are severe: employees can sue for $5,000 plus attorney fees just for being asked to sign a non-compliant agreement, even if they never actually sign it. As experienced Colorado employment attorneys, we can help ensure any restrictive covenants comply with current law, even as the thresholds adjust annually.
Comply with Colorado’s Equal Pay for Equal Work Act
Colorado’s Equal Pay for Equal Work Act imposes transparency requirements that apply from your very first employee. You must include compensation ranges in all job postings, whether external or internal. This isn’t optional; every job opening must disclose the pay range, benefits information, application process, and deadlines.
The Act also prohibits asking about a candidate’s wage history. You cannot request information about previous compensation, and you cannot discriminate against applicants who refuse to disclose their salary history. When you fill a position, you must announce promotional opportunities to all current employees.
Finally, you must maintain detailed records of wage histories and job descriptions for the entire duration of employment plus two additional years. Violations can result in fines up to $10,000 per incident.
Complete Required New Hire Paperwork
Federal and Colorado law require specific paperwork for every new hire. Submit new hire information to the Colorado New Hire Reporting System within 20 days of hire. This reporting helps the state enforce child support orders and prevent unemployment and workers’ compensation fraud.
Federal law requires employment eligibility verification through Form I-9 for all hires. Your employee completes Section 1 on their first day of work. You must complete Section 2, which verifies identity and work authorization documents, within three business days of the start date. Store I-9 forms for at least three years after hire or one year after employment ends, whichever is later.
Collect completed W-4 (federal) and DR 0004 (Colorado state) tax withholding forms before processing your first payroll. Consider enrolling in E-Verify, an optional online system that verifies work eligibility through government databases.
Structure Competitive Compensation Packages
Determining your first employee’s compensation package requires balancing your startup’s budget constraints with the need to attract quality talent. For many startups, equity compensation helps bridge the gap between what you can afford to pay in cash and what top candidates expect.
Consider offering equity compensation through stock options or restricted stock units. Employee equity agreements should outline the type of equity, number of options or shares, vesting schedule, and exercise information. Vesting schedules (typically four years with a one-year cliff) incentivize employees to stay and grow with your company.
Even small startups increasingly offer health insurance, dental coverage, retirement benefits, and paid time off to compete for talent. Work with an attorney when implementing equity compensation, as securities laws regulate equity grants and mistakes can have serious consequences.
Display Required Labor Law Posters and Establish Recordkeeping
Colorado and federal law require employers to display specific labor law posters in the workplace or provide them digitally to remote workers. Required posters cover minimum wage, overtime rules, workplace safety, discrimination protections, workers’ compensation, unemployment insurance, and family and medical leave rights.
Download current Colorado labor law posters from the Colorado Department of Labor and Employment website. Federal posters are available from the U.S. Department of Labor. Update posters whenever laws change.
Colorado requires meticulous documentation of employment records. Tax and payroll records must be kept for at least four years. I-9 forms must be retained for three years. Consider implementing cloud-based payroll and HR systems from day one to maintain compliance and scale as you grow.
Correctly Classify Workers
One of the most common and costly mistakes startups make is misclassifying employees as independent contractors. Colorado law presumes workers are employees unless the employer can prove otherwise. To classify someone as an independent contractor, they must meet strict criteria: they must work in an independent trade or occupation, and they must control the means and manner of performing services.
When in doubt, classify workers as employees. The penalties for misclassification, including back taxes, penalties, and liability for unpaid wages and benefits, far exceed the cost of properly classifying someone as an employee from the start.
Understand Additional Colorado Requirements
Colorado employment law includes several unique provisions that trip up startups unfamiliar with the state’s requirements. Colorado law prohibits asking about criminal convictions in initial employment applications. You cannot state in job ads that candidates with criminal records shouldn’t apply, though you can ask about convictions during interviews or conduct background checks after making conditional offers.
Any provision in employment contracts requiring application of non-Colorado law is void. You cannot circumvent Colorado employment protections by specifying that another state’s law governs the agreement. Similarly, provisions requiring Colorado employees to bring disputes in courts or arbitration outside Colorado are void.
Colorado requires employers to pay unemployment insurance premiums through a quarterly reporting process. New employers start at a standard rate that adjusts over time. You must submit wage reports every quarter, even if you have just one employee. When an employee files for unemployment benefits, you’ll need to submit job separation documentation explaining why employment ended.
The Value of Legal Counsel
Many startup founders try to handle employment law compliance themselves to save money. This is often an expensive mistake. The cost of making mistakes could result in fines, lawsuits, back wages, and penalties, far exceeding the cost of proper legal guidance.
An experienced Colorado employment attorney helps you draft compliant employment documents tailored to your business, navigate complex non-compete restrictions, implement equity compensation programs, and ensure you meet all state and federal requirements. Consider legal expenses as an investment in your company’s foundation.
Protect Your Startup From Day One
Your first employee represents growth and opportunity but also brings serious legal obligations. Colorado’s employee-friendly laws create a complex compliance landscape that requires careful navigation. Taking shortcuts or delaying compliance creates unnecessary risk for your growing business.
At Anzen Legal Group, we help Colorado startups establish strong legal foundations for growth. Our business law team guides founders through every aspect of hiring their first employees, from drafting employment agreements to implementing equity compensation plans. We understand the unique challenges startups face and provide practical, cost-effective legal solutions.
Schedule a consultation with Anzen Legal Group before you make that first hire. Investing in proper legal setup protects your startup, your employees, and your vision for the future. Let us help you build your team on a solid legal foundation.
