This notebook is a publication of Miller Nash LLP. It is provided for informational purposes only and does not constitute legal advice or legal

opinion about specific situations.

RReaders are urged to consult with legal counsel concerning their own specific facts and circumstances and any specific legal questions. For further information about the contents of this notebook, please contact Miller Nash Client Services by e-mail at clientservices@millernash.com or

by phone at 877.220.5858.

Copyright 2014.

-1-

EARTH TO EMPLOYEE: YOU HAVE RESPONSIBILITIES AND OBLIGATIONS TOO

Megan Starich, Kellen Norwood, and Kathryn L. Kammer

I. REPORTING OBLIGATIONS.

Often the law or an employer policy places affirmative duties on employees to actively report certain matters. An employee’s failure to report on these matters could have legal and/or employment consequences for both the employee and the employer. Below are some examples of employee reporting obligations, the consequences for failing to report, and strategies for ensuring timely and suitable disclosure.

A. Harassment and discrimination.

1. Establish a reporting procedure and communicate it to employees.

Harassment and discrimination are the most common claims made in employee charges and lawsuits. The first and most basic part of prohibiting workplace harassment and discrimination (and part of the employer’s defense to such claims) is to establish a formal, yet easily understood reporting procedure for employees. This procedure should require employees to report incidents of harassment or discrimination. Employees, managers, and supervisors should be educated and trained on their duty to report.

2. False reports.

While employer policies can and should require employees to report discrimination and harassment and employees who make such reports are protected from retaliation, the law does not protect employees who knowingly make false accusations. Note, however, that the standard for proving that an employee was intentionally dishonest or malicious is high. If faced with accusations that may be false, employers still need to be mindful of the duty to investigate thoroughly and the risk of potential retaliation claims by employees who are disciplined or terminated after making reports of discrimination or harassment.

B. Consensual relationships between employees.

Relationships between coworkers can be difficult enough to manage. Relationships of a sexual nature between employees can not only cause disruptions in the workplace, but also lead to sexual harassment claims against the employer and/or the employee(s) involved.

1. Potential legal pitfalls.

The employer and the employee involved may be sued for harassment if a consensual relationship between employees turns sour. The employer’s liability for the harassment depends on several factors:

-2-

a. Coworkers.

When a romantic relationship develops between two coworkers, an employer may be liable for acts of sexual harassment in the workplace if the employer (or its supervisors) knew or should have known of the conduct.1

b. Supervisor/subordinate (no adverse employment action).

When the romance is between a supervisor and a subordinate and results in a hostile-work-environment claim, the employer may have an affirmative defense if it exercised reasonable care to prevent and correct the behavior, and if the complaining employee failed to take advantage of preventive or corrective opportunities provided by the employer.2

c. Supervisor/subordinate (adverse employment action).

When the romance is between a supervisor and a subordinate and ends with the subordinate suffering an adverse employment action (termination, demotion, etc.), the employer will be automatically liable and without a defense.3

2. Require disclosure of consensual romantic relationships between employees.

The employer’s knowledge of harassment is an important part of its legal position in a harassment case. Employers can and should take steps to ensure that they know early with a policy that requires disclosure of a romantic relationship with a fellow employee. If the employer has knowledge of a romantic relationship between two employees at an early stage, the employer can take steps to review the situation and determine whether any changes need to be made to ensure that appropriate safeguards are in place.

a. Note for transfer or reassignment of subordinate.

A transfer or reassignment of a subordinate after reporting a consensual relationship with a supervisor can lead to a retaliation claim. If an employer is considering transfer or reassignment of a subordinate, it should take care to articulate why such an action is supported by legitimate business reasons, e.g., avoiding a conflict of interest.

b. Note for Washington and Oregon employers.

Both Oregon and Washington law prohibit discrimination on the basis of marital status (federal law does not).4 While requiring reporting of a consensual relationship between employees does not run afoul of Oregon or Washington law, taking an adverse action against an employee who is married to another employee because of that relationship may. For example, if

1 Faragher v. City of Boca Raton, 524 U.S. 775, 788 (1998). 2 Id. at 807; Burlington Indus., Inc. v. Ellerth, 524 U.S. 742 (1998). 3 Id. 4 RCW 49.60.180(3); ORS 659A.030.

-3-

the employer terminates the spouse of a current employee after disclosure of the marital relationship and without a specific business necessity, the employer may be liable for marital-status discrimination.5 A specific business necessity can include a situation in which one employee of the couple would have supervisory power over the other.6 Note that these rules do not apply to employees who are simply dating or cohabitating.7

C. Criminal convictions.

1. Preemployment reporting of criminal convictions.

Many employers require job applicants to report any criminal convictions on a job application, and often employers exclude applicants with a criminal history. With the exception of employers within the City of Seattle (explained in further detail below), this practice is not per se unlawful.8 But the Equal Employment Opportunity Commission has issued guidance explaining that before excluding an applicant with a criminal history, an employer should consider: (a) the nature and gravity of the criminal offense; (b) the nature of the job; and (c) how much time has passed since the offense.9 Considering these factors before excluding an applicant based on criminal history may reduce the risk of a disparate-impact discrimination claim.

2. Postemployment reporting of criminal convictions.

Just as many employers require applicants to report criminal convictions in the application process, many employers have policies requiring current employees to report any criminal convictions to the employer in a timely manner. This practice is especially relevant when employees are in safety-sensitive roles or may be required to drive company vehicles as part of their job duties. These policies may set forth consequences for willfully failing to report a conviction, including disciplinary action or termination.

3. Seattle’s “Ban the Box” ordinance.

In 2013, the City of Seattle enacted its “Ban the Box” ordinance, prohibiting employers in the Seattle city limits from requiring job applicants to provide criminal-history information before an offer of employment is made.10 The law also prohibits an employer from taking an adverse employment action solely based on an employee’s or applicant’s arrest or conviction record, unless the employer: (a) holds the position open for two business days; (b) notifies the applicant or employee of the record relied on; (c) gives the employee or applicant an opportunity

5 See, e.g., Wash. Water Power Co. v. Wash. State Human Rights Comm’n, 91 Wn.2d 62, 586 P.2d 1149 (1978). 6 WAC 162-16-250. 7 Waggoner v. Ace Hardware Corp., 134 Wn.2d 748, 953 P.2d 88 (1998). 8 Employers that utilize a third party to conduct the criminal background checks must ensure that their procedures are in compliance with the Fair Credit Reporting Act. 9 http://www.eeoc.gov/laws/guidance/arrest_conviction.cfm. 10 Seattle Municipal Code 14.17.020.

-4-

to explain or correct the information; and (d) has a legitimate business reason for taking the adverse action.11

The Seattle Office of Civil Rights is beginning to target Seattle employers and enforce these provisions. Employers with locations or employees in Seattle should review their job applications and examine their policies and procedures on criminal-history inquiries to ensure compliance with this ordinance.

II. OBLIGATIONS ARISING FROM RESTRICTIVE COVENANTS.

An employer may choose to impose restrictive obligations on its employees to prevent them from engaging in particular activity either during the course of their employment or once their employment has come to an end. This section discusses some of the most commonly used restrictive covenants used by employers.

A. Noncompetes.

Once an employee’s employment ends, he or she may have an obligation to refrain from entering into a profession or trade that would compete with his or her former employer. This obligation arises if the employee entered into a valid and enforceable noncompetition agreement under the requirements set forth by Oregon and Washington law, which are described in more detail below. If a former employee violates a valid noncompetition agreement, the employer may take various steps to enforce the agreement and, if necessary, seek damages from the former employee in a court of law.

1. Oregon.

If an employer seeks to impose a noncompetition obligation on any of its employees, in Oregon, it must comply with the requirements of ORS 653.295 to make sure that the noncompetition agreement is enforceable. Those requirements are as follows:

a. Upon initial employment or bona fide advancement.

The employer must present the noncompetition agreement as part of a “written employment offer” to a job applicant, and the applicant must receive the offer (including the proposed noncompetition and/or arbitration agreement) at least two weeks before the first day of the employee’s employment. In the alternative, a noncompetition agreement may be entered into with an existing employee when the employee receives a “bona fide advancement,” such as a raise in salary, improved benefit package, or some other form of additional compensation or consideration in addition to an actual change in the employee’s job status or duties performed.

b. Salary limitations.

An otherwise valid noncompetition agreement may not be enforced against an employee if the employee’s gross salary and commissions at the time of his or her termination do not exceed the median income for a four-person family in Oregon. 11 Id.

-5-

c. Protectable interest.

The employer must demonstrate that it has a “protectable interest” in order to enforce a noncompetition agreement. A protectable interest exists when, among other reasons, the employee subjected to the noncompetition agreement has access to trade secrets or “competitively sensitive confidential business or professional information that would not qualify as a trade secret, including product development plans, product launch plans, marketing strategy or sales plans.”

d. Time and geographic limitations.

Noncompetition agreements are limited to two years in duration. Any geographic restrictions in a noncompetition agreement must be “reasonable” in terms of limiting a former employee’s ability to compete. Reasonable geographic limitations were decided on a case-by-case basis in the courts.

2. Washington.

In Washington, restrictive covenants are governed by common law, and are more enforceable than in other jurisdictions. To make sure that this obligation is imposed on the employer’s Washington employees, the employer should keep in mind the following:

a. There must be consideration.

Beginning employment is sufficient consideration for restrictive covenants. If the employer wants to have an existing employee sign a restrictive covenant, the employer will need to give additional consideration, such as a bonus or a promotion.

b. There must be something to protect.

The court is not going to enforce an agreement just because the employer does not want to compete with an employee or have the employee move to a competitor. There must be something that the employee gained through employment with the employer that it has the right to protect—for example, lists of clients, marketing strategy, highly specialized training, access to trade secrets.

c. Geographical and temporal limitations must be reasonable.

If the employee worked for the employer only in Seattle, the geographic limitation cannot be the entire United States. The geographical limitation must be reasonably related to the work performed for the employer. Time limitations of one year are common, but longer periods can be appropriate under certain circumstances.

-6-

B. Nonsolicitation.

1. In Oregon, are nonsolicitation and confidentiality agreements bound to the same requirements as noncompetition agreements?

There is some question whether Oregon law restricts nonsolicitation agreements. Although federal courts in Oregon appear to include nonsolicitation agreements under the definition of noncompetition agreements as regulated by ORS 653.295, the terms of the statute explicitly exclude nonsolicitation or confidentiality agreements from the requirements that are imposed on noncompetition agreements. To make sure that nonsolicitation and confidentiality obligations are effectively imposed, the employer should consider having separate noncompetition, nonsolicitation, and confidentiality provisions in any employment agreement. That way, if the noncompetition provision is found to be unenforceable, the employee may still be bound to his or her obligations against solicitation and disclosure of confidential information.

2. What is solicitation?

The courts have acknowledged that there is a difference between covenants not to perform work for former clients and covenants not to solicit former clients.12 A covenant not to solicit former customers or clients does not automatically forbid an employee from performing work for the employer’s clients if the employer’s clients voluntarily follow the employee to his or her new place of employment.

For instance, in Vernon v. Lopez,13 a court reporter agreed with her employer “not to independently solicit any of [the employer’s] clients for two (2) years after performing services for said client.” The court reporter eventually left the employer and began working on her own. She bid on a court-reporting contract with a local hospital that regularly worked with her former employer. When the court reporter won the contract, her former employer sued. Ultimately, the nonsolicitation agreement was found to be enforceable. The court held that “soliciting” and “working for” clients are two entirely different terms. Although the court reporter had not agreed to refrain from working for the employer’s clients, she had agreed not to solicit those clients. By submitting the bid on the project, the court reporter actively solicited the work, in violation of her contractual obligation.

3. Define “solicitation” in employment agreements.

An employer wishing to impose the postemployment duty of nonsolicitation on an employee should think carefully about the kinds of activity that it is trying to prohibit. Often, an agreement will prohibit employees from engaging in “solicitation” of customers or coworkers without defining the term. Without a specific definition of “solicitation,” courts will typically defer to the common meaning of the term as defined in dictionaries. Employers may avoid the potential for uncertainty by defining the term “solicitation.”

12 See Perry v. Moran, 109 Wn.2d 691, 748 P2d 224 (1987). 13 99 Wn. App. 1049, 2000 WL 264369, at *1 (2000),

-7-

C. Confidentiality.

An employee’s obligation relating to the use of information obtained during the course of employment may derive from various sources, including: (1) express and implied obligations owed as part of the contract of employment, (2) fiduciary duties to act in the employer’s best interests and not in the employee’s own interests at the expense of the employer, (3) common-law obligations of confidence, and (4) other confidentiality obligations imposed by law, such as state trade-secrets acts.

1. Contours of the duty of confidentiality.

An employer may impose a duty of confidentiality on its employees during and after employment. This restriction can take many shapes and forms, but will generally prevent an employee from:

publishing or divulging information that was communicated in confidence or under an express or implied contract not to divulge;

generally making an improper use of information obtained in the course of employment; and

using, to the employer’s detriment, information and knowledge obtained during employment.

2. Contractual confidentiality clauses.

The primary legal means by which an employer can impose the duty of confidentiality on an employee is by requiring express prohibitions on the use of confidential information in the employee’s employment contract. It is useful to set out in the employment contract specific descriptions of the information that the employee is forbidden from using (both during and after the term of employment) and how the employee is prohibited from using that information. The obligations relating to confidential information should be tailored to the employee concerned. For instance, a high-level executive in a company may have access to and use of different information than an information technology specialist or an employee involved in product development.

3. Remind employees of their confidentiality obligations in the employee handbook.

It is not appropriate for all employees to have employment contracts. For those individuals not bound to an employment contract, it is helpful to include a short statement about confidentiality and the appropriate use and disclosure of confidential information in the employee handbook. The important thing to remember, however, is that this obligation will end when the employee’s employment ends.

-8-

4. Washington Trade Secret Act.

Washington’s Trade Secret Act allows an employer to seek injunctive relief and recover damages against an individual who misappropriates, uses, or discloses the employer’s trade secrets if that person “knew or had reason to know [that] his or her knowledge of the trade secret was acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use.”14

Under this law, a trade secret is information that “[d]erives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use; and [i]s the subject of efforts that are reasonable under the circumstances to maintain its secrecy.”15 Customer-contact information, pricing information, and marketing strategy can constitute trade secrets. 16

5. Oregon Trade Secrets Act.

Oregon law also imposes a statutory duty on individuals not to disclose trade secrets or confidential information, and this obligation can be applied to employees. The Oregon Uniform Trade Secrets Act,17 (“OUTSA”), prohibits misappropriation of trade secrets by any person. “Misappropriation” is broadly defined in OUTSA to encompass both disclosure of trade secrets to a third party and acquisition of trade secrets through improper means.18 OUTSA provides for injunctive relief to prevent actual or threatened misappropriation.19

OUTSA defines “trade secrets” broadly to include confidential corporate information that derives independent economic value from not being disclosed to or used by the general public. ORS 646.461(4). The confidential information pertaining to the employer, including client lists, confidential pricing and rate structures, employee-related information, and nonpublic financial information, can constitute trade secrets under Oregon law.20

D. Cybersecurity

1. The Computer Fraud and Abuse Act.

The ubiquity of computers has also created avenues for widespread crime and theft of electronically stored information. When cybertheft happens in the workplace, employers

14 Ed Nowogroski Ins., Inc. v. Rucker, 137 Wn.2d 427, 439, 971 P.2d 936 (1999). 15 RCW 19.108.010(4)(a)-(b). 16 See Nowogroski, 137 Wn.2d at 442; IKON Office Solutions, Inc. v. Am. Office Prods., Inc., 178 F. Supp. 2d 1154, 1169-70 (D. Or. 2001), aff’d, 61 F. App’x 378 (9th Cir. 2003). 17 ORS 646.461 et seq. 18 ORS 646.461(2). 19 ORS 646.463. 20 See, e.g., Dial Temp. Help Serv., Inc. v. Shrock, 946 F. Supp. 847, 854 (D. Or. 1996) (nonpublic information about customers that employees agreed to keep confidential constitutes trade secrets under OUTSA).

-9-

may utilize federal law and its remedies to protect themselves and pursue damages against offending employees. The Computer Fraud and Abuse Act (the “CFAA”) is a predominantly criminal statute that establishes seven different computer-related crimes, including trafficking in passwords, accessing a computer without authorization to obtain financial information, and transmitting malicious code that causes damage to protected computers.21 The broadest provision of the CFAA criminalizes "[w]hoever * * * intentionally accesses a computer without authorization or exceeds authorized access, and thereby obtains * * * information from any protected computer."22 In addition to its criminal provisions, the CFAA also permits those who suffer damage or loss in excess of $5,000 by someone who commits one of the crimes listed in the CFAA to bring a civil action against the violator.23

III. OTHER IMPORTANT EMPLOYEE DUTIES.

A. Duty to tell the truth.

1. Job applications and résumés.

Employees who misrepresent their qualifications or other relevant information on job applications and résumés essentially dupe their prospective employer into hiring them. For a variety of reasons, this will limit any claim they might have to continued employment.

a. Voiding the contract.

An employee’s false statements on an employment application or résumé can be grounds for immediate termination, regardless of whether the employee is employed on an at-will or contract basis. If the misrepresentation induces the employer to enter into an employment contract that it would not have otherwise made, the contract is voidable at the employer’s option. In other words, the employer can say, “We never would have hired Employee if we had known about ____, so the contract is no good.”

b. After-acquired evidence in the discrimination context.

Anything that an employer learns about an employee after making the decision to terminate the employee is “after-acquired evidence.” If after being dismissed an employee brings a sex discrimination claim—or any statute-based discrimination claim, for that matter—the employer can rely on after-acquired evidence of misconduct to cut off the employee’s claim for damages. So if, during discovery, the employer learns that the employee lied about his or her credentials in the hiring process, the date on which the information came to light marks the last day for which the employee can claim damages—assuming that the misrepresentation would justify termination.

21 18 U.S.C. § 1030. 22 18 U.S.C. § 1030(a)(2)(C). 23 18 U.S.C. § 1030(g).

-10-

c. After-acquired evidence in the wrongful-discharge context.

In most jurisdictions, an employer can rely on after-acquired evidence only to limit damages—it does not completely bar a claim. But some jurisdictions have ruled that an employee can be completely barred from bringing a wrongful discharge claim, assuming that the employee’s misconduct was severe. The theory is that an employee cannot claim to have been wrongfully discharged from position that he or she had no legal right to occupy. Oregon has not decided whether after-acquired evidence can completely bar a wrongful-discharge claim, but Washington follows the damages-cut off rule discussed above.

2. Falsifying business records.

It is a Class A misdemeanor to falsify business records, which includes time cards, in Oregon.24 This statute covers actual false entry of business records, alteration or destruction of business records, failure to make a true entry when under a duty to do so, and preventing a true entry of a business record. Class A misdemeanors are punishable by up to one year in prison or a fine of up to $6,250. And an employee can be prosecuted for theft based on fraudulent timekeeping under ORS 164.045-.055. An employer may also recover damages from an employee in a tort action, but that may not be worth the cost of litigation.

B. Fiduciary duties and respondeat superior.

An employer and employee exist in a “master-servant” relationship, which means that they each owe the other certain duties. We are focusing here on the duties owed by the employee, but a direct complement of that is the employer’s responsibility for the acts of the employee when executing those duties.

1. Fiduciary duties.

a. Duty of care.

An employee owes his or her employer a duty to act with reasonable care, competence, and diligence. And any special knowledge or skill possessed by the employee will be taken into account when determining what level of care and diligence was due. If an employee claims to possess special knowledge or skills, the employee has a duty to act in reasonable accordance with that knowledge or those skills.

b. Duty of loyalty.

An employee has a duty to pursue the employer’s interest over the employee’s individual interest. That means that an employee may not compete against the employer while employed or use the employer’s property for the employee’s personal benefit. The employee may not take actions that would be adverse to the employer or use his or her position as an employee to gain benefits from third parties. Of course, the employer can allow these behaviors if the employee, in good faith, obtains the employer’s consent.

24 ORS 165.080.

-11-

c. Duty of obedience.

An employee has a duty to comply with all lawful instructions received from the employer and any person designated by the employer to manage the employee. An employee also has a duty to take actions only within the scope of the employment and refrain from conduct that is likely to be harmful to the employer.

2. Respondeat superior.

An employer will be directly liable for the conduct of the employee if the employer has authorized the employee to commit tortious acts, is negligent in hiring, training, or retaining the employee, or delegates a duty to the employee that requires the use of care to safeguard third parties or their property. Additionally, an employer will be vicariously liable for any wrong committed by an employee who is acting within the scope of his or her responsibility. The distinction between “direct” and “vicarious” liability could make a difference under an insurance policy.

C. Arbitrating disputes arising from employment.

Employers are increasingly requiring mandatory arbitration provisions in employment contracts, which create an obligation in the employee to submit to less formal (and much less costly) procedures than litigation to resolve disputes arising from the employment relationship. When executed correctly, an arbitration clause is nearly bulletproof. Unless there is something “unconscionable” about either the negotiation process or the clause itself, courts will require an employee to arbitrate.

1. Why arbitration?

There are more benefits to arbitration than the cost savings over litigation. Arbitration is considerably faster and more convenient, since hearings can be scheduled quickly around the availability of the parties. Additionally, arbitration is confidential, which can protect not only the privacy of the individuals involved, but also trade secrets and other sensitive commercial information. And arbitration is final—binding arbitration eliminates the costs and delays of appeals after litigation.

2. Making an arbitration clause stick.

In Oregon, arbitration clauses are subject to traditional defenses to contract such as fraud, duress, and unconscionability. But if a clause passes muster as an individual contract, regardless of the validity of the overall employment contract, any covered dispute must be arbitrated. Unconscionability is the standard.

a. Procedural unconscionability.

Procedural unconscionability refers to the conditions of the contract formation and focuses on two factors: oppression and surprise. Both elements are both required to invalidate a contract on these grounds. Even if an arbitration clause is contained in an employment contract offered on a take-it-or-leave-it basis (which courts consider evidence of

-12-

“oppression”), an employee must also show some element of deception or surprise to avoid it. To forestall deception or surprise, an arbitration clause can be set off in bold, underlined, and in capital letters, and appear at the bottom of the contract, right above the signature line.

b. Substantive unconscionability.

Substantively unconscionable contract terms are terms that are unreasonably one-sided and unequally favorable to one side. An employment contract could conceivably contain unconscionable terms (e.g., an employer requires an employee to repay triple the amount of a cash-register shortage). But as regards an arbitration clause in particular, there are very few ways to challenge as unconscionable the terms of a garden-variety agreement. Before 2011, class-action waivers were unconscionable in Oregon, but a U.S. Supreme Court decision allowed them in most situations.

SEADOCS:468329.7