Compass Newsletter - Articles

New Law Makes Noncompete Agreements More Difficult to Enforce

By Michael C. Petersen
(Winter 2008-2009)

A new law that went into effect in 2008 has made it substantially more difficult for employers to have enforceable noncompete agreements with their employees. This article discusses the new requirements and suggests alternative restrictions that may serve employers nearly as well.

Under the new law, a noncompete agreement in an employment relationship is enforceable only under the following conditions:

1. The employer informs the employee in a written employment offer that a noncompete is required for the job. The employee must receive that written notice at least 2 weeks before the first day of employment. Alternatively, the noncompete agreement may be entered into upon a genuine promotion of a current employee.
2. The employee must qualify as white collar exempt under Oregon's wage and hour rules. In general, that means that the person must be employed as an executive, administrator, or highly skilled professional. Among other requirements, the employee must exercise a high degree of discretion on the job and must be paid on a salary basis.
3. The employer must have a “protectable interest.” Under the statute, a protectable interest will exist when the employee has access to trade secrets as defined by the Uniform Trade Secrets Act. Alternatively, a protectable interest will exist when the employee has access to competitively sensitive confidential business or professional information, including product development plans, product launch plans, marketing strategy, or sales plans. Significantly, the legislature omitted client contacts from the list of protectable interests. Under prior law, the mere existence of client contacts could serve as a protectable interest, but contacts alone do not appear to be sufficient under the new law.
4. At the time of termination, the total amount of the employee’s annual gross salary must exceed the median family income for a four-person family as calculated by the U.S. Census Bureau for the most recent period available at the time of termination. Currently, that median salary for Oregon is approximately $70,000.
5. The term of the noncompete may not exceed two years from the time of termination. If the employee is not white collar exempt, the law still allows employers to enforce noncompete agreements. However, to do so, the employer must pay the employee during the term of the restriction the greater of: (1) 50% of the employees gross salary; or (2) 50% of the median family income for a four-person family as calculated by the Census Bureau for the most recent period available at the time of termination.

It is important to note that these new limitations on noncompete agreements do not apply to agreements executed before January 1, 2008. Additionally, these restrictions do not apply to noncompete agreements outside of employment relationships. Consequently, noncompete agreements that are negotiated as part of a business sale or with an independent contractor are not subject to these limitations.

Finally, it is noteworthy that the new law does not restrict non-solicitation and confidentiality agreements. Non-solicitation agreements prohibit a former employee from soliciting existing employees or clients of the former employer. Confidentiality agreements require departing employees to hold the former employer’s proprietary information confidential. Under these agreements, a departing employee may work for a competitor, but he or she may not reveal the former employer’s business secrets or divert the former employer’s employees or business to the new employer. In light of the new restrictions on noncompete agreements, employers should strongly consider implementing confidentiality and non-solicitation agreements instead.