As employers and their managers celebrated the arrival of the New Year, yet another law inspired by the #MeToo movement, AB 749 – prohibition of no-rehire provisions in settlement agreements – went into effect on January 1, 2020. The idea behind the legislation, sponsored by the California Employment Lawyers Association and Equal Rights Advocates, and now codified as new Code of Civil Procedure (“CCP”) Section 1002.5, is that no-rehire provisions punish victims of harassment or discrimination and dissuade people from reporting issues in the workplace. No-rehire provisions, particularly those that encompass an employer’s subsidiaries or other related entities, have also been seen by their critics as imposing restraints on trade, which have long been frowned upon by the California legislature and prohibited under Business and Professions Code Section 16600.
CCP Section 1002.5 upends the longstanding and common practice of employment attorneys to include no-rehire clauses in agreements resolving employment disputes between employers and their former or soon-to-be former employees. Such clauses prohibit settling employees from subsequently applying for employment with the employer, and generally allow the employer to automatically terminate employment if the former employee is hired by chance unbeknownst to the employer. The new law specifically prohibits no-rehire provisions in settlement agreements “entered into on or after January 1, 2020,” and makes provisions violating Section 1002.5, with limited exceptions, void as a matter of law. In practical terms, the new law extends to disputes that arose before January 1, 2020 as long as the dispute was resolved and the terms of the settlement memorialized on or after that date.
Section 1002.5 refers to the settling former employee as an “aggrieved person,” defined as anyone who has “filed a claim against the . . . employer in court, before an administrative agency, in an alternative dispute resolution forum, or through the employer’s internal complaint process.” The broad scope of the definition raised criticism among the opponents of the bill, including the California Chamber of Commerce, but the language made its way into the Code unaltered.
The new law makes an exception for prohibiting or otherwise restricting the aggrieved person from obtaining future employment with the employer when “the employer has made a good faith determination that the person engaged in sexual harassment or sexual assault.” Section 1002.5 also allows the employer to sever its employment relationship with or refuse to rehire a person when “there is a legitimate non-discriminatory or non-retaliatory reason for terminating the employment relationship or refusing to rehire the person.” However, neither AB 749 nor CCP Section 1002.5, provide guidance as to what constitutes a “good faith determination,” or how it will be determined if such a “legitimate, non-discriminatory or non-retaliatory reason” exists. It appears that guidance will be left for the courts to provide when lawsuits alleging a violation of Section 1002.5 begin to trickle in.
It is important to note that Section 1002.5 does not eliminate an employer’s and current employee’s ability to enter into a severance agreement. However, since Section 1002.5 speaks only of “[a]n agreement to settle an employment dispute,” it is not entirely clear whether the prohibition of no-rehire clauses also applies to severance agreements. As a precautionary measure, we advise employers to treat severance agreements as falling within the purview of the new law.
Given the commonplace of no-rehire provisions in settlement agreements, we recommend that employers review the language in their standard settlement (and severance) agreements to determine whether they contain such clauses. If an employer has a good-faith belief that the employee engaged in sexual harassment or committed sexual assault, or there is “a legitimate non-discriminatory or non-retaliatory reason” for termination or refusal to rehire, employers may consider explicitly incorporating such language in their settlement and severance agreements if they wish to keep no-rehire provisions without running afoul of the new law.
Employers may also want to update their performance review and documentation practices in light of Section 1002.5, including a summary in a terminated employee’s personnel file of all performance issues, and ensuring the employment application form contains a question if the job applicant has ever worked for the company before. If the question is answered in the affirmative, the employer is within its rights to review the applicant’s prior employment history and decline to rehire on that basis.
Finally, when settling disputes with former employees, or negotiating severance agreements with current employees, employers should be prepared for the new reality that these employees could reapply for employment the day after cashing their settlement checks even if to have another bite at the apple through the new law.