Oregon's courts and lawmakers have always frowned on any requirement that an employee not work for a competitor after the employee quits or is fired. But noncompetition agreements -- which restrict employees from going to work for a competitor -- have always been viewed by employers as very useful tools to protect business interests and ensure that secrets are not disclosed to the competition.
Before the 2007 legislative session, Oregon law required that a noncompetition agreement had to be entered into at the very beginning of employment or when the employee received a "bona fide" advancement. It also had to be reasonable in terms of how long and where the employee would be restricted from working, and be supported by a "protectable interest," meaning that the restriction was reasonably justified.
This year, however, the Legislature passed additional restrictions.
The bill, which amends ORS 653.295, says that noncompetition agreements (also called "noncompetes") are not enforceable unless:
- The employer tells the employee in a written job offer at least two weeks before the employee starts work that the noncompete is required, or the noncompete is entered into upon a bona fide advancement.
- The employee is exempt from Oregon minimum wage and overtime laws.
- The employer has a "protectable interest" (access to trade secrets or competitively sensitive confidential information).
- The employee makes more than the median family income for a family of four as calculated by the U.S. Census Bureau (currently about $62,000).
Even if the employee is not exempt and does not meet the salary test, an employer can still obtain an enforceable noncompete if, during the period the employee is restricted from working for a competitor, the employer pays the former employee 50 percent of the employee's salary or 50 percent of the median family income for a family of four, whichever is greater.
Also, noncompetition agreements may not exceed two years.
The requirement that noncompetes only be used with exempt employees presents a challenge to employers because that area of the law is quite complex. Too often, employers think that anyone who is paid a salary is "exempt," but actually, the law requires more. Commonly known as the "white collar" exemptions, executives, administrators, professionals, and outside salespeople generally are exempt employees so long as they meet certain duties tests and are paid a salary. It is apparent that the Legislature intended to limit the use of noncompetition agreements to relatively highly paid employees who receive plenty of notice that one will be required.
Employers should not alter existing noncompetition agreements with employees because those agreements will continue to be governed by current law. The new law will take effect on Jan. 1, and will apply to any agreements entered into on or after that date.
With new hires, employers will have to revamp their hiring practices to make sure that the noncompetition agreement requirement is announced in an offer letter at least two weeks before the employee's start date. It appears that if an employee did not receive notice of the noncompete two weeks before starting, an employer could delay the start date to meet the notice requirement. Employers also must make sure that they are using these agreements with exempt employees who meet the salary test, or be prepared to pay the departed employee to sit on the sidelines during the restricted period.
The new law was much less employer-friendly in its original form, as proposed by Oregon Labor Commissioner Dan Gardner, because it prevented enforcement of a noncompete if the employee was laid off. That restriction is not present in the new law, so employers can prohibit employees from working for the competition whether they quit or are fired.
The new law, like the existing one, only applies to agreements in the employment context and does not apply to noncompetition agreements negotiated in the sale of a business. Importantly, the new law makes it explicit that it does not apply to what are referred to as "nonsolicitation agreements" -- agreements that prohibit an employee from soliciting former customers or former co-workers. Nonsolicitation agreements will become even more important, given the new limitations imposed on the use of noncompetition agreements.
This new law is complex and employers should consult with legal counsel before putting a new noncompete program in place.