How a No-Rehire Agreement Unraveled

Settlement agreements with employees often contain a “no-rehire” clause, stating that the employee waives the right to any future employment with the company, and the company cannot be held liable if it later rejects a job application from that individual. Recently, a federal appeals court held that an overly broad no-rehire provision in a settlement agreement can, in some cases, be an unlawful restraint of trade. In Golden v. California Emergency Physicians Medical Group, the Ninth Circuit voided a settlement agreement between a physician and his former employer because one provision imposed a restraint of trade in violation of California’s strict prohibition on non-compete and related covenants — Business & Professions Code Section 16600.

The Ninth Circuit ruled that if a contractual provision is material or significant enough that its enforcement would implicate the policies of open competition and employee mobility that animate Section 16600, it will qualify as a substantial restraint on trade.

Employers and businesses should take note of the Golden decision. Settlement agreements that contain overly expansive language or language that is too aggressive can give employees (and courts) more at which to take aim. Such language may provide a legal basis to invalidate the settlement agreement in its entirety. Having a settlement agreement go awry for this reason is an avoidable outcome. Settlement agreements must be carefully crafted. Old templates should not be used without scrutinizing the language of every sentence to ensure continued legality of all the terms.