Bans on Re-employment In Settlement Agreements May be Unenforceable -- Golden v. California Emergency Physicians Medical Group
Employers prefer to include a "no re-hire" provision in their settlement agreements with former employees. This provision usually states that the former employee will agree never to re-apply for employment and, if he does, the employer will be entitled to reject his application.
The rationale for these clauses is that any refusal to hire the plaintiff in the future could be characterized as "retaliation" for having raising protected complaints in the prior lawsuit. And why would an employer want to settle one lawsuit only to set itself up for another?
But the validity of such "no re-hire" clauses has been cast in doubt by the Ninth Circuit opinion in Golden v. California Emergency Physicians Medical Group. As the Ninth Circuit explained, the problem with these provisions is that they may be at odds with section 16600 of the California Business and Professions Code, which 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.”
In reviewing the case law interpreting section 16600, the Ninth Circuit found that California's ban on employment restraints is extremely broad in its scope and extremely "stark" in its prohibition. As a result, the statute does not merely ban traditional "non-compete" agreements in which an employee is precluded from working for a competitor. Rather,
[T]he crux of the inquiry under section 16600 is not whether the contract constituted a covenant not to compete, but rather whether it imposes “a restraint of a substantial character” regardless of “the form in which it is cast.
Having articulated this standard, the Court declined to apply it to the specific agreement before it, which involved a settlement agreement by a physician that bound him to never again work for "a large consortium of over 1000 physicians." Instead, it remanded to the district court with directions to determine if the restraint was "of a substantial character," and therefore void.
It is unclear how this "substantial character" standard may be fleshed out over time. However, relevant factors would presumably include the market share of the employer, the number of viable alternative employment opportunities in the market, and the employee's degree of specialization. If the foreclosed employment opportunities, in the context of the specific employee and industry, are "substantial" then any "no re-hire" agreement will be void.