Mark your calendars for a new law prohibiting “no-rehire” provisions in settlement agreements. California Governor Gavin Newsom signed Assembly Bill No. 749 into law on October 12, 2019. Effective January 1, 2020, “no-rehire” provisions are void as a matter of law in California.

AB 749 is further legislative progeny of the #Metoo movement. As noted in the discussion for this bill, when employees settled claims against their employers, it was increasingly common for a settlement agreement to contain a “no-rehire” provision. However, sometimes these provisions were global and prohibited an employee from working at any workplace owned by, operated by, or affiliated with the employer. Further problems with “no-rehire” provisions came into sharp focus when employees discovered some provisions required the employee who had complained of discrimination or sexual harassment to forgo continuing employment, while the alleged offender remained on the job.

“No-Rehire” Provisions Void as a Matter of Law

Now, through the newly created California Code of Civil Procedure section 1002.5, AB 749 makes 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, void as a matter of law and against public policy.

The Rule, And Exceptions to the Rule

This law:

  • Prohibits and makes unenforceable a provision in a settlement agreement that prohibits an employee from obtaining future employment with the employer if the employee has filed a claim, including through the employer’s internal complaint process, or civil action against the employer;
  • Does not prevent an employer and employee from mutually agreeing to terminate a current employment relationship;
  • Does not require an employer to continue an employment relationship or refuse to rehire an employee who has settled a dispute if there is a legitimate, non-discriminatory and non-retaliatory reason for doing so;
  • Specifically authorizes “no-rehire” agreements where the employer has made a good faith determination that the person engaged in sexual harassment or sexual assault;
  • Does not prevent an employer from terminating an employee who engaged in wrongful conduct; and
  • Does not require an employer to rehire an employee “that the employer has already determined was unsuitable for the job.”

While California is one of the first states to pass such legislation, it likely will not be the last. Though the EEOC has been warning employers since at least 2006 that “no-rehire” clauses could be viewed as retaliation against employees who come forward with claims of harassment or discrimination, federal case law tended to routinely uphold such clauses. However, citing the #Metoo movement as having made clear some of the more egregious problems of “no-rehire” provisions, Vermont passed a law prohibiting such provisions, effective July 2018. A little over a year later, California has now followed suit.

Key Takeaways

A “no-rehire” provision in a settlement or severance agreement entered on or after January 1, 2020 will generally be void as a matter of law. However, there are notable exceptions and California employers may take the following steps now to ensure compliance with this new law:

  • Finalize all settlement agreements with “no-rehire” clauses by the end of the year;
  • Review and revise the language in template settlement and severance agreements to comply with AB 749, including:
    • Either remove “no-rehire” provisions from template 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. Arguably, this exception is large enough to swallow the rule as it would likely apply to any termination; and
      • When the employer has a good-faith belief the employee engaged in sexual harassment or committed sexual assault.