News & Updates: Employers May No Longer Include “No-Rehire” Provisions in Settlement Agreements

As of January 1, 2020, California employers may no longer include a “no-rehire” provision in a settlement or severance agreement. A no-rehire provision generally provides that as a condition of the settlement, the employee may not work for the employer or any related entity in the future. The reason employers typically have wanted to include no-rehire provisions in settlement agreements with former employees has been to avoid potential retaliation claims if the employer did not re-hire that employee in the future.

However, advocates of AB 749 asserted that no-rehire provisions placed a burden on employees’ ability to work in their chosen occupations. And for employees who alleged sexual harassment claims, no-rehire provisions could have the impact of discouraging employees from reporting workplace discrimination and harassment, because if they reported and ultimately settled these claims, they could be barred from future employment.

Under the new law, any agreement that settles an employment dispute may not “contain a provision prohibiting, preventing, or otherwise restricting a settling party that is an aggrieved person from obtaining future employment with the employer.” If an agreement contains a no-hire provision after January 1, 2020, that provision will be “void as a matter of law and against public policy.”

The definition of “aggrieved person” is a person who has filed a claim against that person’s employer: (1) in court, (2) before an administrative agency, (3) in an alternative dispute resolution forum, or (4) through the employer’s internal complaint process. However, because “internal complaint process” is not defined, the term “aggrieved person” may apply widely. Thus, in the abundance of caution, employers generally should remove “no-rehire” provisions from all severance or settlement agreements.

Exceptions: There are a few key exceptions to the law. First, if the employer “has made a good-faith determination that the person engaged in sexual harassment or sexual assault,” then an employer may include a no-rehire provision. Second, nothing in the law requires an employer to continue to employ or rehire a person “if there is a legitimate non-discriminatory or non-retaliatory reason” for doing so. Thus, for example, if an employee has embezzled from the Company, there is no requirement for the employer to rehire that former employee, and the employee also may be deemed “ineligible for rehire” in the employer’s own systems.

What should employers do?

California employers should review their standard severance and settlement agreements and remove any “no-rehire” sections or similar language, and not include them in the future.  Additionally, this is a good opportunity for employers to ensure they have updated their agreements with last year’s changes, including: (1) updating the California Civil Code section 1542 waiver language; and (2) ensuring that agreements covering claims related to sexual assault or harassment do not have broad confidentiality and non-disparagement sections, as discussed in last year’s New Developments Newsletter.