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

Confidential Harassment Settlements No Longer Subject to Tax Deduction

Q.  Has the #MeToo Movement led to any changes on how companies settle harassment complaints?

A.  While there are numerous legislative initiatives on the horizon intended to change how employers handle harassment complaints in light of the #MeToo Movement, the most significant federal change is a little known revision to the Tax Code recently enacted.

The Tax Cuts & Jobs Act prohibits either the employer or the employee from taking a tax deduction for (1) any settlement or payment related to a sexual harassment claim that is the subject to a non-disclosure agreement; and (2) attorneys’ fees related to such settlement or payment. The intent of the statute is to discourage parties from keeping harassment claims secret and thereby reduce the risk that the alleged harasser will strike again.

The term “related to” is not defined in the statutory language. It is possible that the settlement proceeds for any claim that merely mentions the word “harassment” may not be deductible, even if the majority of the allegations involve other issues.  However, we believe that the IRS likely will allow parties to allocate the portion of the proceeds that is for settlement of harassment allegations in those cases in which harassment is part of a larger suit involving other disputes.

The impact of the deduction for attorneys’ fees also is significant. Most claimants pay their attorneys on a contingent fee basis, meaning that the settlement proceeds are split between the claimant and the attorney, often as high as 60 percent claimant/40 percent attorney.  Since proceeds from an agreement containing a nondisclosure provision cannot be deducted, this means that the employee may not be able to deduct even that part of the proceeds that goes directly to his or her attorneys.  This is true regardless whether the employer pays the attorney directly, or pays the proceeds to the employee who then pays his or her attorney.

The new rule may have several detrimental consequences to both parties and the public. As a confidentiality provision is an important component of most settlement agreements, the new tax burden will make settlements more costly.  Employers may be less interested in pursuing such settlements, resulting in harassment claims clogging the courts.  Additionally, employees who would rather keep their claims private due to the sensitive nature of the allegations will have to face the public eye.

While it remains to be seen how the IRS interprets this new provision, both employers and employees must consider the tax consequences of any agreement that they seek to keep confidential.

–Tracey E. Diamond