Do you typically include a “no rehire” clause in your settlements with soon to be former employees? How about agreements with other companies that you will not “poach” each other’s employees? If your answer to either of those questions is yes, you should keep an eye on some New York legislation that could impact those practices.
One prospective New York bill would prohibit employer defendants from including clauses in settlement agreements that prevent employees from applying for, accepting, or engaging in future employment with the company. Such a clause would be deemed unenforceable although the rest of the settlement agreement would remain intact, so you would still be bound to pay the consideration promised. The bill is before the full state senate now. If enacted, it will take effect 60 days after enactment and would apply to all public and private employers.
New York would not be the first state to restrict no-rehire clauses. Vermont, for instance, provides that an agreement to settle a claim for sexual harassment cannot prohibit or restrict the employee from working for the employer or any parent company or affiliate. Likewise, California law 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 2018, the Ninth Circuit held that the California law survived to the extent it prevented an employee from working at facilities owned or operated by the employer, but failed to the extent it (1) prevented the physician from working for employers that have contracts with employer, or (2) permitted the employer to terminate the physician from existing employment in facilities not owned by the employer.
The EEOC hates no-rehire clauses, taking the stance that it is illegal and potentially retaliatory to include them in settlement agreements related to discrimination or harassment claims. In spite of the EEOC’s position, federal courts have upheld such no-rehire clauses if there is no statute prohibiting it and the plaintiff cannot show pretext (e.g., the Tenth Circuit, the D.C. Circuit).
Many employers include no-rehire clauses in their separation and settlement agreements that typically require the former employee to refrain from applying for or seeking employment or reemployment and waive any such right. The risk of not including a no-rehire clause in a separation agreement can be the gift that keeps giving — as a disgruntled former employee could conceivably file a new claim as to each open position for which an application is denied.
Most employers want to include no-rehire clauses in their separation agreements. If this is important to you, be careful and balance the potential scrutiny you may face. If you are in certain states, including New York in the near future, such provisions may be outright invalid. Although the no-rehire provision is common in settlement agreements, you should be aware of the risks and examine the particular state laws to check that such provisions will be enforceable.
A separate prospective New York bill would prohibit agreements between franchisors and franchisees that restrict them from hiring current or former employees of the franchisor or other franchisees or soliciting such employees for hire. Under this bill, any such agreements would be void. An aggrieved employee would have a private right of action under the no-poach agreement to pursue compensatory and punitive damages, along with attorneys’ fees. The bill is also before the full state senate now and would take effect as soon as the governor signs it.
Restrictions on no-poach agreements are not new either. In January 2021, the U.S. Department of Justice issued its first indictment for such an agreement under antitrust laws. The DOJ previously issued guidance in 2016 warning of the antitrust risks with these types of no-poach agreements, stating that someone likely breaks antitrust laws when he or she “agrees with individual(s) at another company to refuse to solicit or hire that other company’s employees (so-called ‘no poaching’ agreements).” Even if there is no actual law prohibiting such activities, employers could be exposed to potential class actions.
If you have offices or employees in New York, keep an eye out for these potential restrictions. It will be interesting to see if other states follow suit. The next time you are preparing a settlement or severance agreement, or someone suggests that we won’t hire employees from each other, have your antennas up and make sure these suggested provisions aren’t prohibited in your state.