When an employee separates from a company – whether voluntarily or involuntarily – employers generally don’t want that employee to apply for work again, or to have any chance of dealing with a subsequent lawsuit or claim for “failure to hire.” When paying severance or separation pay, or when settling with an employee, employers want to “pay for peace” and not have to deal with the employee ever again.
However, employers’ desire for peace is now in jeopardy by a new California law signed by Governor Newsom – AB 749, which makes most “no rehire” clauses illegal restraints of trade. Thus, effective January 1, 2020, employers will be banned from inserting no rehire clauses in separation, severance, and settlement agreements between the employer and an “aggrieved person.”
The “Aggrieved Person” Requirement
But, who is an “aggrieved person”? Generally, an aggrieved person is anyone who has filed a claim against an employer in court, before an administrative agency, in any alternative dispute resolution forum (such as arbitration or mediation), or through the company’s internal complaint process. This final provision – relating to “the company’s internal complaint process” – throws a surprisingly wide net and will likely make many departing employees “aggrieved persons,” thus making the use of a no rehire clause illegal.
So, even after January 1, 2020 (when AB 749 takes effect) an employer can still use a no rehire clause in an employee’s separation agreement provided the settlement agreements results from an employment dispute that has not already been initiated or filed by that employee. Why? Because there is no “aggrieved person” in the transaction.
The #MeToo Exceptions to AB 749
AB 749 contains one important exception that applies regardless of whether there is an “aggrieved person” or not — that is, even after AB 749, an employer is still allowed to use a no rehire clause in a separation agreement if (1) the employer has made a good-faith determination that the person signing the release engaged in sexual harassment or committed sexual assault, or (2) there is a legitimate non-discriminatory or non-retaliatory reason for terminating the employment relationship or refusing to rehire the person.
Going forward, employers should be very careful with their separation, severance, and settlement agreements with departing employees. If the employer wants to use a no rehire clause in a final agreement with that departing employee, the employer should either (1) get the agreement negotiated and signed before the employee initiates any internal complaint or brings any claim, or (2) rely one of the two exceptions mentioned above and quote the specific exception language from AB 749 in the agreement.
You can read the full text of AB 749 here.