Settlements: No-rehire clauses may be illegal

When you settle an employment discrimination complaint or lawsuit, you likely include a “no-rehire” provision. Essentially, you trade some settlement dollars for the former employee’s promise not to apply for work at your company in the future. It’s a way to prevent future failure-to-hire lawsuits.

Until now, everyone thought such common settlement provisions were legally valid and enforceable.

But now a recent case has cast doubt on that premise by looking at California’s broad prohibitions on restrictive covenants in the Business and Professions Code Section 16600.

Recent case: Donald, an emergency room doctor, sued a consortium of ER physicians after losing his staff privileges at a hospital. He alleged racial discrimination. The consortium staffed many emergency rooms and clinics in California and other Western states.

Donald’s attorneys negotiated a settlement agreement in which Donald would receive a significant financial payment (and the attorneys a large contingent-fee payment). The agreement included a “no-rehire” clause in which Donald had to promise he would never apply for a position with the consortium. It gave the consortium the right to fire Donald should it acquire or subcontract to staff a facility where he worked.

Hiring for Attitude D

Donald balked at signing the agreement and argued that the no-rehire provision violated the prohibition on restrictive covenants in the Business and Professions Code Section 16600. He filed an appeal and argued that the provision made the agreement unenforceable and therefore he should not be forced to sign.

The appeals court agreed that the no-rehire clause may violate the provision and sent the case back to the trial court to determine whether the no-rehire provision is a substantial restraint on Donald’s medical practice. (Golden v. California Emergency Physicians Medical Group, No. 12-16514, 9th Cir., 2015)