New California Law Prohibits "No Rehire" Provisions in Settlements.

California employers had until the end of 2019 to revise their settlement agreements to comply with newly passed legislation. Is your business compliant?


No-Rehire Provisions Are No More in California

Assembly Bill 749 (AB 749), gives California employers until the end of the year to revise their settlement agreements to comply with newly passed legislation and remove any no-rehire provisions.

In most jurisdictions, employment litigation settlement agreements often include a mutually negotiated “no-rehire” provision by which the departing employee agrees not to seek employment with the company in the future. A recently enacted California law will require companies to refrain from including such provisions in most instances. 

Standard no-rehire clauses bar a departing employee from seeking future employment with the employer or any of the employer’s related entities. In an effort to protect victims who come forward with workplace discrimination or sexual harassment claims, the state of California recently reassessed the fairness of these types of settlement provisions. As of January 1, 2020, it is no longer legal for CA employers to include these clauses or provisions in employment dispute-related settlement agreements.

Original Intention of a “No Rehire” Clause

Why include this clause in the first place? The purpose of including these types of clauses was to protect the employer from future allegations of discrimination. The concern is that a former employee could apply for a job with the company again and then allege that they weren't hired due to retaliation for the previous legal issues. By signing an agreement with a "no rehire" clause, the terminated employee agrees not to seek employment with the employer or any of its affiliates again, thereby removing the potential for future lawsuits or accusations. 

Unintended Consequences

However, proponents of the bill say these clauses unfairly punish the victim by restricting future employment options too significantly. Often these provisions are global and prohibit an employee from working at any workplace owned by, operated by, or affiliated with the employer. Depending on the field, this can severely limit an employee’s chance at future employment in their industry or area of residence. This is of particular concern when the employer is a large franchise, chain, or conglomerate.

Some clauses take this a step further, stating that if the victim was rehired by the employer or by one of its affiliates, employment could immediately be terminated without any legal recourse. Furthermore, “no rehire” clauses require an employee who complains of workplace discrimination or sexual harassment to forgo continued employment as part of their settlement, while the alleged offender is allowed to remain on the job.

CA is not the first state to pass this type of ban

For the past decade, the Equal Employment Opportunity Commission (EEOC) has warned employers that “no rehire” clauses could be viewed as retaliation against employees who come forward with claims of harassment or discrimination. However, federal case law routinely upheld such clauses as legal - making this a legally uncertain area for employers to navigate.

Vermont was the first state to approach this issue through direct legislation. The state banned “no rehire” clauses that bar workers who settle discrimination and harassment cases from working for that employer again. The provision was part of a larger law addressing sexual harassment protections for employees that was passed in July of 2018. In the state of Vermont: “An agreement to settle a claim of sexual harassment shall not prohibit, prevent, or otherwise restrict the employee from working for the employer or any parent company, subsidiary, division, or affiliate of the employer.” Such a clause was rendered “void and unenforceable” by the 2018 Vermont law.

California is the second state to ban these provisions. With the increased public discourse in recent years placing more emphasis on workplace protections and targetting workplace harassment, more states likely to follow in years to come.

The Law: What It Means for Employers

Through the newly created California Code of Civil Procedure section 1002.5, AB 749, provisions in settlement agreements entered into on or after January 1, 2020, that prevent employees from obtaining future employment with the settling employer or its affiliated companies, are void as a matter of law and against public policy.

What does the law explicitly do?

  • Prohibits any provisions in a settlement agreement that bars an employee from obtaining future employment with the employer if the employee has filed a claim or civil action against the employer; this includes any claims made through the employer’s internal complaint process
  • Specifically allows for “no-rehire” agreements where the employer has made a good faith determination that the employee engaged in sexual harassment or sexual assault
  • Allows for “no-rehire” agreements where the severance or separation agreements are unrelated to employment disputes

These provisions are intended to protect victims of sexual harassment or assault, while still giving the employer recourse if the employee is the perpetrator. It also allows for mutual "no-rehire" agreements in cases where there is no litigation or dispute between the employee and employer.

Here’s what the law does NOT do:

  • Does NOT prevent an employer and/or employee from terminating a current employment relationship
  • Does NOT prevent an employer from terminating an employee who engaged in wrongful conduct
  • Does NOT require an employer to rehire an employee “that the employer has already determined was unsuitable for the job”
  • Does NOT require an employer to continue to employ or to rehire an employee who has settled a dispute if there is a legitimate, non-discriminatory and non-retaliatory reason for wanting to terminate the employee relationship

Employers are still able to control who is hired, not hired, or terminated. It's important to note that employers are NOT required to rehire employees under the new legislation - they are only barred from including "no rehire" provisions in settlements as a matter of course.

What does that mean for employers?

If you are a California employer, and you haven’t already, you’ll need to review and revise the language in your settlement and severance agreements to comply with AB 749.

This means:

  • Remove “no-rehire” provisions from your template for settlement and severance agreements; OR
  • Explicitly incorporate language into the provision with regards to the exceptions when “no-rehire” provisions may be used. These exceptions include:
    • When there is “a legitimate non-discriminatory or non-retaliatory reason” for termination; AND
    • When the employer has a good-faith belief the employee engaged in sexual harassment or committed sexual assault.

If you have any questions about what this means for your business you’ll want to speak with your legal team to clarify how this new legislation affects you specifically.

For non-California employers, you may want to consider revising your settlement template language as well. While you are not legally compelled to make changes yet, California is likely not to be the last state to pass these types of laws. And, as mentioned, the EEOC has been warning about the potential risks of these provisions for employers since early 2006. It may be in your best interest to avoid these types of provisions altogether.

In closing...

Employment law can be difficult to navigate as a business owner. Laws are always changing and penalties for non-compliance can be steep. In light of this new legislation, as an employer, you may want to update your settlement agreement forms and review your rehiring standards. Be sure to speak with an HR professional or your legal team if you are unsure of what your next steps should be.

Lastly, we know that hiring is only the first step in managing your employees and employment law is only one of the many complexities that you face when running a business. At Roosted we value data-based solutions - including employee performance metrics.

Roosted helps you avoid these issues by maintaining your records on past employees, so you are never surprised by an previous employee. Contact a Client Success Engineer for more information on how we can support your business.