When settling employment disputes, employers and employees often seek to go their separate ways and avoid crossing paths in the future.  Settlement agreements often include a “No Re-Hire” clause in which employees agree they will not be eligible for re-hire; however, what happens when a former employee challenges the “no re-hire” clause as an unlawful restraint on trade?  And what happens when the employee seeks to invalidate the entire settlement agreement on the basis that the “no re-hire” clause was a material term of settlement?

These issues recently were before the Ninth Circuit as a matter of first impression in Golden v. California Emergency Physicians, 2015 U.S. App. LEXIS 5642 (April 8, 2015).  A divided Ninth Circuit panel recently held that such clauses may constitute an unlawful restraint of trade under California law.  This result should give employers pause before including a pro forma “no re-hire” provision in separation or settlement agreements as a standard practice.

In Golden, a physician challenged enforcement of a settlement agreement containing a “no re-hire” provision.  He previously had agreed to settle a discrimination claim against California Emergency Medical Group (“CEP”), and as part of that settlement, he waived his right to employment with CEP or any facility owned by CEP or with which CEP may contract in the future.  The district court enforced the “no re-hire” provision, and Dr. Golden appealed.  Dr. Golden argued the “no re-hire” clause was a material term of the settlement, and that finding it void would make the entire agreement unenforceable, which would then allow him to pursue a discrimination action.

The Ninth Circuit panel examined the arguments under California Business and Professions Code section 16600, which provides that every contract that restrains a person from engaging in a lawful profession, trade, or business of any kind is void.  Section 16600 was traditionally interpreted to apply to contracts that prohibit competition with a former employer.  This case is the reverse of the typical situation.  The “no re-hire” clause allows employment at competitors and non-affiliated facilities, but disallows future employment with the employer or its affiliates.  The divided panel determined that the district court erred in applying a “categorical” exclusion of “no re-hire” provisions to Section 16600, finding that Section 16600 should be interpreted broadly and should not be restricted to non-compete agreements.  The legislature could have, but did not, carve out exceptions that would lead to a more narrow interpretation of the statute.  To support its broad interpretation, the Ninth Circuit panel also cited California cases where Section 16600 applies to any contractual limitation to practice a profession.  Edwards v. Arthur Andersen LLP (2008) 189 P.3d 285; City of Oakland v. Hassey (2008) 163 Cal.App.4th 1447.  The panel declined to address whether the clause in Dr. Golden’s settlement was actually void; instead, the panel remanded for further development of the record by the district court.

The panel majority made these findings as a matter of first impression, aware that the California Supreme Court has not addressed this issue directly.  The panel’s holding reflects its attempt to predict how the California Supreme Court would rule.  The Ninth Circuit’s broad interpretation — the first of its kind in California — is likely to result in further litigation of this issue at the state court level.

Though the Golden decision does not clearly establish whether “no re-hire” provisions are void, the decision forces the issue to the forefront of public discussion, and may be a tool utilized by attorneys seeking to invalidate a settlement agreement.  Until this issue is finally resolved in the courts, employers should give careful thought to whether a “no re-hire” provision should be included in agreements.  Employers seeking to use a “no re-hire” provision should first consider whether there is any practical need to forbid rehiring of the employee.  Some departing employees may never seek to be rehired.  Large employers should carefully look at the potential restraint of trade and the effect on employees’ ability to engage in their chosen profession.  All employers should weigh the practical benefits of such a provision against the risks of unenforceability on a case-by-case basis.