“No Rehire” Rules Called into Question

Often when a company enters into a separation agreement or settles a case with an employee, the company includes language stating that the employee is not eligible for rehire with the company. In these situations, the company and the worker may have a contentious relationship, and the company may feel it’s time for the parties to go their separate ways, now and in the future.

Such “no-rehire” clauses often prevent the employee from working at the specific job site where he/she worked before, and also at any other company location, subsidiary or affiliate.

But are no-rehire provisions lawful? Recently, a Ninth Circuit Court of Appeal decision called into question the legality of such provisions (Golden v. California Emergency Physicians Medical Group, 2015 WL 1543049 (9th Cir. 2015)).

Doctor Attempts to Set Aside Settlement Agreement

In this case, Dr. Golden, an emergency room physician, sued the California Emergency Physicians Medical Group (CEP) for discrimination. CEP is a large consortium of physicians that manages or staffs emergency rooms, clinics, and other facilities in California and other states.

Before trial, Dr. Golden appeared before the lower court judge and agreed to settle his case. However, Dr. Golden refused to sign the eventual written agreement, taking issue with a clause that required him to “waive any and all rights to employment with CEP or at any facility that CEP may own or with which it may contract in the future.”

The lower court ordered Dr. Golden to sign the agreement. Dr. Golden appealed to the Ninth Circuit, claiming that the no-rehire clause violates California laws that protect an employee’s right to lawfully practice his/her profession.

Restraints on Employment Generally Prohibited

California Business and Professions Code section 16600 provides that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.”

Generally, this law has been applied to invalidate non-competition agreements that prohibit an employee from working for a competitor after completion of his/her employment or imposing a penalty for doing so, unless the agreements are necessary to protect trade secrets.

CEP argued that since the settlement agreement did not prohibit Dr. Golden from working with competitors of CEP, it was not unlawful under section 16600.

The Ninth Circuit disagreed with CEP, concluding that section 16600 was not just limited to non-compete agreements. The court took a broad view of section 16600, noting that it applies to every contract that restrains someone from engaging in their profession.

The court noted that prior decisions by the California Supreme Court also argue for a broad interpretation of the law: California strictly prohibits any type of agreement restricting an employee’s ability to pursue similar employment after leaving a job.

Court Leaves the Question Open

The Ninth Circuit did not decide specifically whether the settlement agreement’s no-rehire clause was invalid. Instead, the Ninth Circuit sent the case back to the lower circuit to determine whether the no-rehire clause was a “substantial restraint” on Dr. Golden’s medical practice.

Best Practices

Given this case, California employers should use caution when seeking to include no-rehire clauses in separation or settlement agreements. As always, consult an attorney regarding these agreements.

  • Remember that California law strictly prohibits anything that infringes on an individual’s ability to work or make a living. You can’t force employees to stay with you nor may you prevent them from earning a living if they choose to leave the company.

You can use other methods to protect trade secrets, such as customer lists or pricing information; again, consult an attorney.

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