California Now Prohibits No-Rehire Provisions in Certain Employee Settlement Agreements

Q: My Company’s standard employment settlement agreement includes a no-rehire provision. Can I continue to include that provision for California employees?

A: If the agreement settles an employment dispute with an “aggrieved person,” you may no longer include a no re-hire provision in the agreement for California employees. Assembly Bill No. 749 (“AB 749”), which amends the California Code of Civil Procedure, became effective January 1, 2020 and provides that if an unlawful no-rehire provision is included in a settlement agreement, the provision is void as a matter of law. An “aggrieved person” is defined as a person who has filed a claim against the employer in court, before an administrative agency, in an alternative dispute forum, or through the employer’s internal complaint process.

AB 749 provides an exception if the employer has made a good faith determination that the settling employee engaged in sexual harassment or sexual assault. Moreover, the law also does not require an employer to continue to employ or rehire a person if there is a legitimate, non-discriminatory or non-retaliatory reason for terminating the relationship or refusing to hire the person.

The new law impacts many employers, as most settlement agreements with employees include no rehire provisions. It is common for these provisions to be an essential term for many employers, especially when the employee’s separation from employment and/or the litigation of the claim was contentious. Now that companies can no longer include no rehire provisions in settlement agreements, they should consider how much value they would place upon such a provision and adjust the settlement amount accordingly.

Employers should also ensure compliance with the new law by providing training to appropriate HR personnel, especially those who are not based in California but whose role includes working on California employment issues.

Lastly, because AB 749 provides that employees still may terminate employment and/or refuse to rehire a person if there is a legitimate, non-discriminatory reason, it is even more important for employers to properly document performance concerns and other issues that could lead to discipline and/or termination. For example, if an employer will not rehire a former employee because the employee had poor performance during his/her employment, it is essential for the employer to have good documentation, such as performance reviews and/or other performance metrics, to support that assertion.

Jessica Rothenberg