No More “No Rehire” Clauses in California Settlement Agreements
In most jurisdictions, it is standard practice to include a “no-rehire” clause when negotiating a settlement agreement in an employment dispute. “No-rehire” clauses bar the departing employee from seeking future employment with the employer or one of the employer’s related entities. If the former employee applies for a job with the employer or a related entity, the “no-rehire” clause allows the employer to reject the former employee’s application or require the former employee to withdraw the application for employment. In some instances, if the former employee is hired inadvertently, the “no-rehire” clause provides the employer a legitimate nondiscriminatory basis to rescind the offer. Although the use of “no-rehire” clauses is a common practice, California recently prohibited the practice and joined Vermont, which banned “no-rehire” provisions in 2018.
On October 12, 2019, California Governor Gavin Newsom signed AB-749 Settlement Agreements: Restraints in Trade, which prohibits “no-rehire” clauses in employment dispute-related settlement agreements. AB-749 specifically “prohibits an agreement to settle an employment dispute from containing a provision that prohibits, prevents, or otherwise restricts a settling party that is an aggrieved person, as defined, from working for the employer against which the aggrieved person has filed a claim or any parent company, subsidiary, division, affiliate, or contractor of the employer.” An aggrieved person is someone “who has filed a claim against the person’s employer in court, before an administrative agency, in an alternative dispute resolution forum, or through the employer’s internal complaint process.”
AB-749 does not prohibit an employer and an aggrieved person from agreeing to end the employment relationship, nor does it require an employer to rehire a former employee if it had a legitimate nondiscriminatory or non-retaliatory reason for terminating the employee’s employment.
Moreover, AB-749 does not prevent employers from including a “no-rehire” clause in (1) a settlement agreement with an employee who has engaged in sexual harassment or sexual assault, or (2) severance or separation agreements unrelated to employment disputes.
AB-749 becomes effective on January 1, 2020, and thus a “no-rehire” provision in a settlement agreement entered on or after January 1, 2020, is void as a matter of law. California employers should aim to finalize all settlement agreements with “no-rehire” clauses by the end of the year and begin reviewing and revising their settlement agreements to comply with AB-749.