The only thing worse than being sued by a disgruntled former employee is to be sued later for refusing to re-hire the same employee. To avoid this situation, employers often require, as a condition of agreeing to settle a claim, that former employees agree to forego the right to seek reemployment in the future. Although these “no rehire” provisions are helpful in avoiding future litigation, employers should be thoughtful as to their scope. In fact, a provision that is so restrictive as to potentially bar a former employee from engaging in her chosen trade or profession may itself lead to litigation.

The Purpose of No-Rehire Clauses

Disputes with former employees can be time-consuming, disruptive, and costly. Employers often decide to settle these claims simply to avoid their ongoing cost and distraction. In agreeing to settle, employers most of all seek closure—they want to buy a permanent peace with the unhappy employee.

But what happens when a former employee accepts a cash settlement to resolve his claim and then later re-applies for work with the same employer? Of course, most employers would naturally refuse to rehire the disgruntled former employee. Unfortunately, if the employer takes that approach, the employee will now have a potential new claim: retaliation for the employee’s prior claim.

Employers often include language in settlement agreements to avoid this scenario. However, a settling employer cannot require that an employee forego her right to sue for future retaliatory acts. Settlement agreements can only address past and present events, not future ones. Settlement agreements typically sidestep this issue by not insisting that the settling employee forego her right to sue for future acts of retaliation, but rather prohibit the employee from seeking re-employment.

The scope of no-rehire language can vary considerably. Some provisions simply prevent the employee from seeking re-employment with the settling employer, while others extend the prohibition to the employer’s affiliates and subsidiaries and sometimes, to the employer’s future acquisitions. In some cases, these clauses require that the employee resign from an organization should it be acquired by the settling employer any time in the future.

Restraint on Trade Concerns

A recent court case suggests that an expansive “no-rehire” clause may be challenged as an unlawful restraint on trade. California law prohibits parties from entering into agreements that pose a potential restraint on an individual’s right to engage in a profession, trade, or business. For example, California courts routinely refuse to enforce pre-employment agreements in which an employee agrees not to compete against her employer upon termination or resignation.

Earlier this year, a federal appellate court examined whether a “no rehire” clause in a settlement agreement constituted a similar unlawful restraint on trade. In Golden v. CEP Medical Group, the plaintiff, an emergency room physician, sued for employment discrimination. He later agreed to accept a cash settlement in return for his agreement not to be employed at any medical facility that might later contract for services with CEP. After agreeing to the settlement in court, the doctor got buyer’s remorse and refused to sign the written agreement. The doctor’s own (former) attorney eventually successfully petitioned the district court to enforce the settlement agreement.

On appeal, the doctor argued that the no-rehire provision in the settlement agreement effectively acted as a restraint on his future ability to practice his profession. The appellate court found that such a claim potentially could be valid, and sent the issue back to the trial court for future factual hearings. Unfortunately, the appellate court failed to provide any clear guidance to the lower court or future drafters of settlement agreements on this issue, stating only that restraints of a “substantial character” in a settlement agreement may be potentially objectionable. The court left unanswered what constitutes a restraint of a “substantial character.”

Tips for Employers

Until the law in this area is more settled, employers should be careful when drafting “no-rehire” clauses as part of settlement agreements with disgruntled former employees. These provisions should be tailored to the particular situation presented.

It seems unlikely that a “vanilla” restriction on an employee’s right to seek re-employment will be subject to successful challenge. Indeed, legitimate purposes are served by such agreements, namely the need for finality and closure. An employer that agrees to pay money to settle a former employee’s disputed claim should have the right not to be forced to consider the individual for re-employment in the future.

However, broadly drafted “no-rehire” clauses may be more susceptible to challenge. This may be particularly true in highly specialized professions, and where the employer has a dominant market position in a particular industry.