Employment Law Alert: Oregon Legislature Limits the Use of Noncompetition Agreements

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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. Before the current legislative session, Oregon statute required that, to be enforced, a noncompetition agreement had to be made with the employee at the very beginning of employment or when the employee received a "bona fide" advancement. The Oregon Legislative Assembly just passed a new law that imposes additional restrictions. We expect Governor Kulongoski to sign the bill soon. It is more important than ever for employers to carefully evaluate their use of these valuable agreements.

Here’s how the new law will work:

A noncompetition agreement (also called a "noncompete") in the employment context* won't be enforced by an Oregon court 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, AND
  • The employee is exempt from Oregon minimum wage and overtime laws, AND
  • The employer has a "protectable interest" (access to trade secrets or competitively sensitive confidential information), AND
  • The employee makes more than the median family income for a family of four as calculated by the 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 departed 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.

Here is a copy of the new law (which also limits the use of employment arbitration agreements). 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.

What must employers do?

Nothing, with respect to agreements you already have in place. The law applies prospectively, not retroactively. It will take effect on January 1, 2008, so any agreement entered into before then will be evaluated under the existing statute. So long as your agreements were enforceable under existing law, you should leave them alone.

But with new hires, employers will have to revamp their hiring practices to make sure that the noncompetition agreement requirement is announced in the offer letter and that the offer letter is given at least two weeks before the employee’s start date. Of course, if this requirement is missed, an employer could delay the start date to ensure that the employee receives the required written notice. 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, much less employer-friendly in its original form, as proposed by Oregon Labor Commissioner Dan Gardner. Originally it prevented enforcement of a noncompete if the employee was laid off. Thanks to the intercession of certain business leaders and groups, the final legislation is not as bad as it could have been.

Although this gives you a general overview, the new law is more nuanced than we have room to discuss here. We urge you to consult us before putting your new noncompete program in place.

* The new law, like the existing one, does not apply to noncompetition agreements negotiated in the sale of a business.

For further assistance on this or other employment issues, please contact your Stoel Rives Labor and Employment attorney.

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