For years, employers settling with former employees have included a clause saying that the employee would never reapply and was not eligible for rehire. The rationale is obvious. After litigating, sometimes for years, no employer wants to bring the employee back and potentially start the process over.
However, there was never clear authority saying those clauses were permissible. They could arguably be retaliatory. I’m refusing to rehire you because you sued me. Protected activity, adverse action, causal connection – the elements of a retaliation claim.
Now, the Ninth Circuit is asking whether the no-rehire clause is also an unlawful restraint of trade. California is very protective of employees’ rights to compete. Business & Professions Code sec. 16600 states quite simply that:
Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.
In Golden v. California Emergency Physicians Medical Group, et al., a doctor refused to finalize a settlement containing a no-rehire clause. He argued that his former employer (CEP) was a major player in his field with plans to grow by acquiring other practices. As written, the provision would not only preclude him from applying to practices affiliated with CEP, but to resign from practices with no such affiliation if CEP later acquired them.
Two judges on the panel concluded that the settlement agreement was a contract restraining plaintiff from engaging in a lawful profession, trade, or business. They decided to send the case back to the trial court to decide if the restraint was “substantial.” A dissenting judge thought the clause was permissible and, if it was later used for improper ends, should be challenged at that time. So more guidance may be forthcoming.
Here’s your “takeaway”: The law is still developing here. More risk-averse employers may want to avoid no-rehire clauses for the time being. Sometimes, however, litigation creates so much antagonism, that the employer may find the risk of the clause being held unlawful to be more attractive than the risk of having to potentially rehire the person. After all, rehiring someone who’s already sued you is fraught with its own risks.