New California Law Prohibits Use of “No-Rehire” Provisions in Certain Settlement Agreements

February 6, 2020
As of January 1, 2020, California law limits an employer’s ability to include a “no-rehire” provision in agreements settling employment disputes.  Under this new law, absent certain specified circumstances, California employers cannot include any clause that prohibits, prevents, or otherwise restricts the settling-employee from working with the employer or one of its related entities in the future. 

AB 749
In October 2019, Governor Gavin Newsom signed into law Assembly Bill 749 (“AB 749”), which adds Section 1002.5 to California’s Code of Civil Procedure and affects agreements settling employment disputes.  AB 749 specifically “prohibits an agreement to settle an employment dispute from containing a provision that prohibits, prevents or otherwise restricts a settling party that is an aggrieved person, as defined, from working for the employer against which the aggrieved person has filed a claim or any parent, company, subsidiary, division, affiliate, or contractor of the employer.”  Cal. Civ. Code § 1002.5(a).  The bill defines an “[a]ggrieved person” as someone “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.”  Id. § 1002.5(c)(1).   
AB 749 does not prohibit employers from including a “no-rehire” provision in (1) a settlement agreement with an employee whom the employer, in good faith, has determined engaged in sexual harassment or sexual assault (see id. § 1002.5(b)(1)(B)); or (2) a severance agreement that is unrelated to a claim filed by the employee against the employer.  See id. § 1002.5(b)(1)(A).
AB 749 expressly provides that an employer is not required to rehire a person “if there is a legitimate non-discriminatory or non-retaliatory reason for terminating the employment relationship or refusing to rehire the person.”  See id. § 1002.5(b)(2). 
AB 749 went into effect on January 1, 2020 and applies to agreements settling employment disputes entered into on or after that date.