With certain exceptions, Colorado law prohibits the enforcement of covenants not to compete.  The assumption is that the State of Colorado wishes to have its citizens engaged in gainful employment.

Specifically, Colorado Revised Statute § 8-2-113 provides that “it shall be unlawful to use force, threats or other means of intimidation to prevent any person from engaging in any lawful occupation at any place he sees fit.”  The Statute further goes on to provide that any covenant not to compete which restricts the right of a person to receive compensation for performance of skilled or unskilled labor for any employer shall be void except for the following: (1) any contract with the purchase and sale of a business or the assets of a business; (2) any contract for the protection of trade secrets; (3) any contractual provision providing for recovery of the expense of educating and training of an employee who served as an employer for a period less than two years; and (4) executive and management personnel officers and employees who constitute professional staff to executive and management personnel.  The Statute provides for a fifth exception related to the practice of medicine.  Specifically, while a physician cannot be prohibited from practicing medicine, he or she may be liable to a previous practice for damages caused by his/her termination of their previous employment including, but not limited to damages related to competition.

The focus of this article is on covenants not to compete in the context of a sale of a business.  In the vast majority of transactions involving the sale and acquisition of a business, the buyer should always bargain for a covenant given by the seller of the business not to compete in the same or similar business for a period of time in an agreed upon geographical area.  In most cases, substantial value exists in the business’ base of established customers, reputation, routines and trade secrets.  This value beyond the physical assets of the business is sometimes referred to as “goodwill.”  The value of this “goodwill” is a significant part of what the seller offers to the buyer and covenants not to compete protect the value of such “goodwill.”

The three critical components of a covenant are as noted above, the scope of the prohibited business activities, the geographical limitation of the covenant and the length of time of the covenant.  With respect to the scope of the covenant, the restrictions are typically limited to the definition of the activities of the business when purchased, subject to any negotiated modifications.  The geographical limits to the covenant typically cannot be overly broad and are usually limited to the existing geographical foot print of the business at the time of the sale of the business.  Again, that can be modified by agreement to some degree.  Finally, the covenant must be a reasonable length.  Typically five years is standard.  Although in the sale of a business context, Colorado courts have found reasonable covenants not to compete for three years in a twenty-mile radius, for five years throughout a designated area; for five years in a single county; for five years in a fifty-mile radius; and, for ten years throughout Colorado. 

A covenant not to compete, supported by consideration, is presumed reasonable.  The party challenging enforcement of the covenant bears the burden of showing that the covenant is unreasonable.  Colorado law presumes that a party’s breach of a covenant results in an irreparable injury, for which legal remedies are inadequate.  The buyer is entitled to injunctive relief and such relief is appropriate whether or not the buyer proves damages.  The proper measure of damages is the purchaser’s loss of profit attributable to the breach.  The buyer of a business may later assign a covenant not to compete if he/she later sells the business to a third party, if the covenant permits assignment.  The covenant will pass to a new buyer and the new buyer may enforce the covenant. 

Finally, on the sale of a business, one of the items negotiated is an allocation of purchase price.  It is typical that very little of the purchase price is allocated to a covenant not to compete as it results in ordinary income to the seller of the business but retains the same fifteen year amortization that is otherwise assigned to the goodwill of the business outside the value of the covenant not to compete.  Therefore, it is important in drafting the actual agreement outlining the covenant not to compete, to provide that damages are not limited by the amount of the purchase price allocated to the covenant, in the event of a violation of the covenant. 

Again, even though covenants not to compete are not favored in Colorado, covenants related to the sale of a business are generally enforceable in Colorado. 

– John M. Stinar, Esq.

In a handful of industries, the concept of having an employee live on-site is an attractive proposition. Such industries include hotels, motels, assisted care facilities, convenience stores, or businesses that cater to or provide extended-hour operation to customers or clients.

Although attractive, arranging an on-site or “live-in” employee comes with complications. In this series of articles, Chris Wilhelmi of Colorado Law Group will briefly discuss common pitfalls businesses may face with “live-in” employees. This article addresses how to avoid unwillfully creating a landlord/tenant relationship between the business and the employee.

In Colorado, to avoid creating a landlord/tenant relationship between a business and its employee, a business must create and effectuate a written contract of employment between itself and the employee that complies with C.R.S. § 8-4-123. By complying with the statute, a business creates a “a license to occupy the premises entered into as part of an employee’s compensation” that would then terminate at the end of the employment relationship. Per the statute’s subsection (b):

An agreement made pursuant to this section shall be in writing and shall include the following:

• (I) The names of the employer and employee;
• (II) A statement that the license to occupy the premises is provided to the employee as part of the employee’s compensation and is subject to termination at any time after the employment relationship ceases;
• (III) The address of the premises; and
• (IV) The signature of both the employer and the employee.

Once a compliant contract of employment is entered into, “a license to occupy the premises,” rather than a traditional tenancy is created. The benefits of creating a complaint contract are numerous and in particular allow an employer to avoid having to bring a Forcible Entry and Detainer (“FED”) action to evict a current/former employee who refuses to vacate his/her employer-provided dwelling. The statute provides that with a compliant contract in hand and a properly issued receipt of the notice of termination, an employer may go directly to the county sheriff to have the employee removed from the premises. Essentially, a complaint contract will act in lieu of an order of a court that would otherwise be necessary to forcibly evict – thus saving a business significant time, expense, and headache in effectuating the vacancy of an employee from his or her employer-provided dwelling.

This relatively simple guideline (like many statutes) is unfortunately not always complied with by businesses and creates wholly avoidable issues, expense, and frustration. Please look forward to additional articles from Colorado Law Group, PLLC related to employment and business issues.

This article is not meant to be and should not be construed as legal advice by or from Christopher Wilhelmi or the law firm of Colorado Law Group, PLLC. Before relying on or taking any action based on the content of this article, you should contact a duly-licensed attorney for specific advice concerning the information contained in this article. Colorado Law Group, PLLC welcomes inquiries and offers free initial consultations.

The status of a worker as an “employee” or an “independent contractor” continues to be an issue for both employers and the IRS. The basis of the issue is how the particular designation affects the employers’ payment of employment taxes. For those employers who have incorrectly in the past treated workers who are employees as independent contracts, the IRS has instituted a program to provide relief to an employer agreeing to prospectively treat such workers as employees.

Generally, an employee relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the service, not only as to the results to be accomplished but also as to how it is to be accomplished.

There are three broad tests in determining who is an employee.

The first test is “Behavioral Control.” Behavioral control means an employee is generally subject to the business’ instructions about when, where, and how to work. All of the following are examples of types of instructions about how to do work: (i) When and where to do the work; (ii) What tools or equipment to use; (iii) What workers to hire or to assist with the work; (iv) Where to purchase supplies and services; (v) What work must be performed by a specified individual; and (vi) What order or sequence to follow.

The second test is “Financial Control.” Facts that show whether the business has a right to control the business and financial aspects of the worker’s job include: (i) the extent to which the worker has unreimbursed business expenses; (ii) the extent of the worker’s investment; (iii) the extent to which the worker makes services available to the relevant market; (iv) how the business pays the worker; and (v) the extent to which the worker can realize a profit or loss.

The third test is “Type of Relationship.” Facts that can confirm whether or not the relationship between the employer and the worker is an employment relationship or an independent contractor relationship include: (i) Written contracts describing the relationship the parties intended to create. This is probably the least important of the criteria, since what really matters is the nature of the underlying work relationship. However, in close cases, the written contract can make a difference; (ii) Whether the business provides the worker with employee type benefits, such as insurance, a pension plan, vacation pay, or sick pay; (iii) The permanency of the relationship. If the company engages a worker with the expectation that the relationship will continue indefinitely, rather than for a specific project or period, this is generally considered evidence that the intent was to create an employer-employee relationship; and (iv) The extent to which services performed by the worker are a key aspect of the regular business of the company.

If it is determined the worker is an employee, the employer is required to deduct and pay social security taxes and withhold taxes. If the employer fails to deduct and withhold any tax due to treating the employee as an independent contractor rather than an employee, the employer is liable for:

Withholding Taxes: The amount of the employer’s liability for federal income tax withholding shall be equal to 1.5% of the wages paid to such employee.

Social Security Taxes: In addition, the employer is liable for its share of Social Security taxes (FICA) and an additional penalty of 20% of the FICA that should have been withheld.

Increased Penalties: The penalties apply if Forms 1099 have been completed. If Forms 1099 were disregarded, the penalties increase to 40% for FICA and 3% on wages.

The IRS implemented a Voluntary Worker Classification Settlement Program (VCSP) in 2011. The purpose was to allow employers to voluntarily reclassify workers as employees without going through the examination process and the normal administration correction procedures. The VCSP allows an employer to pay 10% of the employment tax liability that may have been due on compensation paid workers for the most recent tax year, removes penalties and interest on the liability, and provides amnesty to the employer from an employment tax audit on prior years for reclassified workers.

The VCSP requires that employers apply for the VCSP by using Form 8952. The VCSP offers employees a reasonable solution to change their classification of independent contracts to employees. The voluntary penalties could be far less than the results of an audit that reclassifies workers for all open years and requires the payment of back taxes and penalties.

– John M. Stinar, Esq

As an employer, do you need an employee manual? If your business already has an employee manual, when was the last time it was reviewed and revised? If it has been some time since the manual was prepared, you should consider updating it because, among other things, the laws governing employment are constantly changing.

Some benefits of having an employee manual include but are not limited to:

• Without a written manual, the employer is less likely to be able to prove that the employee knew of the rules or policies of the employer;
• Oral representations and unwritten policies may be legally binding on the employer; and
• There is a good chance that someone in a supervisory or management role may inadvertently or unintentionally make a statement to an employee that destroys the “at-will” relationship.

A well-written employee manual can be an effective management tool. In order to be an asset to the employee/employer relationship, the employee manual should, at a minimum: provide consistent corporate policies and procedures, educate the workforce on corporate policies and procedures, ensure management are consistent in enforcing workplace rules, allow for consistent and appropriate application of federal and state laws relating to employment matters including but not limited to: anti-discrimination, Family Medical Leave Act (“FMLA”), Fair Labor Standards Act (“FLSA”), state wage & hourly, National Labor Relations Act (“NLRA”), privacy laws, and workplace safety and bullying; provide a complaint mechanism; outline benefits – insurance, vacation leave, and/or sick leave; leaves of absence; and address the “at-will” employment relationship.

Some essential topics to consider when preparing the manual include but are not limited to:

• Introduction: Welcomes employees and provides an overview of the company, which may include a Mission Statement, Goals and Company Philosophy.
• Disclaimer: This section may include language that: provides for the employer to make changes to the manual, unilaterally; newer versions supersede older versions; the manual is not a contractual relationship between employer and employee; benefits explained therein are summaries; employment with the company is “at-will”; and identifies members of management for guidance and as a point of contact regarding the manual and its contents.
• Categories of Employees: Defines: full-time, part-time, temporary or regular employees; and hourly or salaried employees. Oftentimes, different levels of employees have different policies and benefits. It should include a section that addresses: work hours, paid breaks, and mandatory lunch period – duration and timing; overtime pay – who is eligible, rate of overtime pay, whether prior approval is required; the company’s attendance policy; leaves of absence – family, medical, military, jury, or otherwise; vacation, sick or PTO leave; health insurance – who is eligible, what is paid by employer, and contact information for a member of management to contact with health insurance questions; disability insurance – who is eligible, duration, benefits, etc.; and pension and profit sharing – eligibility, whether matching or not; etc. · EEO POLICY: Outlines anti-discrimination laws and company policies relating thereto, and provides a complaint procedure including a no retaliation provision.
• ADA Policy: Provides an ADA overview; outlines company policies, which may include seeking to provide accommodations that are reasonable, requiring medical care provider participation, and identifying member or members of management to contact when requesting reasonable accommodations.
• Harassment Policy: Defines types of harassment, specifies prohibited conduct, and outlines complaint procedure including a no retaliation provision.
• Timekeeping Policy: May include: timekeeping for employees, stressing the importance of accurate recording of time; policy for dealing with falsification of records; and the requirement to immediately report timekeeping error to supervisor or management.
• Workers’ Compensation: May include: Accident procedure and forms, immediately reporting of accident to supervisory or management, contact information for reporting.
• Safety Policy: Includes: safety measures, policy for mandatory reporting of all workplace incidents and unsafe conditions, expectations that employees are to come to work free of alcohol or drugs; and a zero tolerance policy for violence and weapons in the workplace.
• Disciplinary Policy: May include: Mechanism for disciplinary actions – verbal warnings, written warnings, probation, suspensions, leave with pay, leave without pay, and termination, etc.; and language that reminds employee that nothing in this section changes the “at-will” relationship.
• General Complaint Policy: Steps to take, reasons for taking steps, no time limit on complaints, forms to submit for complaints, and to whom complaints should be addressed.
• Internet or Social Media Policy: Outlines company policies, laws, and other pertinent material relating thereto.
• Receipt for Copy of Manual: May include: a statement acknowledging receipt of manual, with an understanding that the employee must review, restating the at-will employment relationship. Include a signature block and date line for employee. An employee manual is a complicated document, which can have significant legal implications. As such, it is prudent for the employer to allow its counsel to prepare the employee manual for its employment needs.

Jacqueline Gaithe has a varied practice that includes employment law matters.

The Colorado Employment Verification Law (C.R.S. § 8-2-122) requires that Colorado employers affirm the legal work status of a new employee within 20 days of hire and retain copies of the new hire’s identification documents. This requirement is separate and apart from Form I-9, whereby the employer verifies the legal work status of a new hire pursuant to federal law. While many employers seem to be unaware of the Employment Verification Law, the state authorities continue to audit Colorado employers to ensure compliance. Compliance is therefore important for employers to avoid being fined by state authorities.

To what situations does the Employment Verification Law apply?
It applies to any person or entity that transacts business in Colorado and employs a Colorado resident to perform services. Upon hiring a new employee, a Colorado employer has 20 days to affirm that it has examined the legal work status of the new hire. To this end, the Colorado Division of Labor has prepared an “Affirmation of Legal Work Status” form that employers should use. In addition to affirming that it has examined documentation showing that the new hire is legally authorized to work in the United States, the employer must also affirm that it has not altered or falsified the employee’s identification documents, and that the employer has not knowingly hired an unauthorized (illegal) alien.

In addition to filling out that form, Colorado employers must retain for each new hire copies of the identification documents identified in the federal employment verification statute, 8 U.S.C. § 1324, which are also referenced in Form I-9. Employers should note that the state law requirement is in addition to what federal law requires, as it authorizes, but does not require, employers to maintain copies of identification documents.

When must the Employment Verification Form be filled out?
The form must be filled out and signed by the employer, and supporting documents examined, copied, and retained by the employer, within 20 days of new hire. Any failure to do so within the 20-day time limit, or any attempt to post-date the Employment Verification Form, is a violation of the statute and will subject the employer to fines. This requirement is different from Form I-9, which must be completed within three business days.

How long must an employer retain documentation?
The employer must keep either a written or electronic copy of these documents for the term of employment of each employee. This contrasts with Form I-9, which must be kept for the later of three years after the date of hire or until one year after termination of employment.

What is a “Colorado employer” under the law?
Any private or public entity or person that transacts business in Colorado, employs another to perform services, and has control over the payment of wages for such services or is the officer, agent, or employee of the person or entity having control over the payment of wages. This definition includes the officers, agents, and employees of the entity or person, and therefore can lead to personal liability for individuals who act on behalf of another entity or person and recklessly fail to make the required affirmation or keep the required documentation.

What is a “Colorado employee” under the law?
Any person who is a Colorado resident and serves as an employee, regardless of the kind of work or services that person performs. Independent contractors are not included within this definition, but employers must be careful not to misclassify employees as independent contractors simply to avoid complying with the employment verification law. If they do so, in addition to still being liable for a failure to abide by the Employment Verification Law, employers could be subject to liability for failure to pay employment taxes, workman’s compensation, and other costs an employer is legally obligated to pay on behalf of its employees.

How does the state verify compliance? 
The Director of the Division of Labor may audit any Colorado employer at any time to determine if the employer is in compliance with the Employment Verification Law. These audits may be either random or targeted if the Director believes a violation has occurred.

What fines are possible?
If the Director determines that a violation of the Employment Verification Law has occurred, the employer may be subject to a fine of up to $5,000 for the first offense and up to $25,000 for any second or subsequent offense. Each failure to retain documentation constitutes a separate offense.

John P. Gebauer is a partner at the law firm of Colorado Law Group, LLC. He may be reached at (719) 635-4200