New California laws could make it more difficult for employers to enforce employment arbitration agreements and now prohibit “no rehire” language in settlement agreements involving employment disputes. 

Arbitration Agreements

The enforceability of employment arbitration agreements has long been under attack in California.  Yet, many California employers still seek to impose arbitration agreements upon employees, including agreements requiring employees to waive certain rights.

As of Jan. 1, 2020, Assembly Bill 51 (AB-51) added section 432.6 to the Labor Code making it unlawful for any person to require a job applicant or employee to waive, as a condition of employment or continued employment, any “right, forum, or procedure for a violation of any provision of the California Fair Employment and Housing Act … or [the Labor] code, including the right to file and pursue a civil action or a complaint with, or otherwise notify, any state agency, other public prosecutor, law enforcement agency, or any court or other governmental entity of any alleged violation.”  Labor Code section 432.6 also bans discrimination and retaliation against any applicant or employee who refuses to sign an arbitration agreement that waives rights protected by this law.

Employers seeking to enforce existing arbitration agreements should note the new law only applies to agreements entered on or after Jan. 1, 2020, and it does not apply to severance agreements or negotiated settlement agreements.  In addition, the new law does not invalidate agreements otherwise enforceable under the Federal Arbitration Act (FAA). 

Employers with mandatory arbitration agreements should review them for compliance with this new law. 

Settlement Agreements

California law has long prohibited any contract that restrains a person from engaging in a lawful profession, trade, or business.  Any such contract is void against public policy and the law. 

In enacting Assembly Bill 749 (AB-749), the California legislature analyzed the effect that “no rehire” language, which is often included in settlement agreements involving employment disputes, has on a person’s ability to pursue their lawful profession, trade, or business.  The legislature concluded that such provisions violate existing California law. 

This new law (Section 1002.5 of the Code of Civil Procedure) voids any provision in a settlement agreement entered on or after Jan. 1, 2020, that prohibits, prevents, or otherwise restricts an “aggrieved person” from obtaining future employment with the employer against which the person has filed a claim, or any parent company, subsidiary, division, affiliate, or contractor of the employer.  For purposes of this new law, “aggrieved person” means a person who has filed a claim against the person’s employer in court, before an administrative agency, in an alternative dispute resolution forum, or through the employer’s internal complaint process. 

The new law clarifies “no rehire” language is permissible in a settlement agreement when the settling employer has made a good-faith determination the employee engaged in sexual harassment or sexual assault. 

Nothing in this new Code section requires an employer to continue employing or to rehire a person if there is a legitimate non-discriminatory or non-retaliatory reason for terminating the employment relationship or refusing to rehire the person.

In 2020, employers should be mindful of this new law when drafting settlement agreements and should document any non-discriminatory reasons for separation.