Why California Employers Should Avoid Re-Hire Clauses [e184]

May 1, 2015

Nasir and Matt cap off the week by discussing re-hire clauses in employer-employee settlement agreements and why they may be invalid as restrictions against non-compete agreements.


NASIR: All right. Welcome to our podcast where we cover business in the news and add our legal twist to that business news. My name is Nasir Pasha.
MATT: And I’m Matt Staub.
It’s actually raining here right now which is pretty unique for San Diego.
NASIR: Oh, I heard it was cloudy because I know the International Space Station was visible last night in San Diego for a period of time, but I wasn’t sure if it was going to have cloud cover or not.
MATT: Well, I didn’t know that.
NASIR: Missed it out! I think it was last night.
MATT: I thought you were going to make some joke about it’s cloudy here, dark skies because of the Chargers possibly leaving going to LA.
NASIR: That’s not for sure, is it?
MATT: No, but there’s more stuff this week that they’re trying to push it forward. It’s definitely it wasn’t a step in the right direction.
NASIR: I swear, like, six months ago or three months ago was the opposite news. Like, it’s more likely that they’re going to stay.
MATT: It’s so back and forth. I mean, it’s not even almost worth following.
NASIR: In fact, yeah, I thought there was some kind of deal where the county and the city would split fees for it and Qualcomm didn’t want to put much money, if at all, in it. But it was going to be at the current location.
MATT: Well, this was something in LA. They agreed to push forward with something without a vote for the public. I don’t know. I barely looked into it. Not a good summary for me.
NASIR: Well, let’s get to our story today then.
MATT: Yeah. So, what we were going to talk about today is something you might not even think about because you would think that it might not ever come up in a situation like this, but we’re talking about re-hiring clauses. So, when you have an employee and employer, once they agree to part ways, it might have some sort of settlement agreement. And so, one clause that’s been put in some of these settlement agreements is this no re-hire clause which essentially states that the employee is not eligible to be re-hired by the employer. Okay. The reason this is getting brought up right now is there is a recent decision that I don’t want to think really putting sort of clear-cut answer to the issue.
NASIR: Let me first specify that this no-hire clause is kind of a big business problem. It doesn’t really apply to most of our listeners. It’s an interesting topic nonetheless because, if you think about it, if you have a disagreement with an employee, you’re just not going to hire them again and, most likely, they’re not going to go to you if you’re a small or medium-sized business. But, when it comes to these big enterprises that not only have a lot of different subsidiaries and side businesses and also affiliates and also they plan to acquire other businesses, these no-hire clauses actually try to expand it to the widest scope possible. It’ll end up even being not only the business’ affiliates but businesses that they may acquire in the future. So, in theory, if you have this no-hire clause and an employee signs this and it’s enforceable, an employee works for a competitor and then that same business acquires that competitor, then the acquiring company would say, “Hey, you can’t work here because of this agreement and you’re fired.”
MATT: I guess that’s the concern because what the specific clause, the idea is you’re not going to be able to be eligible to be re-hired by this company that we’re doing the settlement agreement with. Okay, that’s fine. But, looking at it, it’s not preventing you from leaving the industry as a whole. It’s not preventing you from going to a competitor right then and there. But, yeah, down the road, if there is some sort of merger or acquisition, something like that, it’s a different story because I think it was a medical-based case, wasn’t it? Or at least the case that recently came down. It was someone in the medical industry.
NASIR: Which may make sense because, you know, in that kind of industry, there’s not that many players and they’re usually pretty big, you know, especially if it’s a hospital or something like that. So, that may have some reasoning behind it. But, in California, there’s the Business and Professions Code, and I think everyone should be aware of this – small to large businesses. Business and Professions Code Section 16600, it specifies that, unless there is an exception, every contract that restricts the trade or lawful profession of any individual is void to the extent it is void. And so, that’s the default. You have to find an exception and there’s not that many. You know, the exceptions go to, like, if you sell the good will of a business or business acquisition, that might be enforceable, or between a partner or dissolution of a partnership, things like that, which it makes sense but not in a typical employer-employee capacity.
MATT: I guess I’m just struggling with I don’t know why, I understand the employer is probably not happy about the situation but I don’t know why this even needs to be in the agreement at all from the get-go. I mean, if they really don’t want to re-hire them, just don’t re-hire them down the road. I guess you have the argument that it circles back around and they try to get re-hired and they’re the most qualified candidate and then they’re saying, “Well, you’re discriminating against me based on blah blah blah,” and so that’s the problem. But they don’t need to explicitly put this in the agreement or in the settlement, my opinion, just because, if they don’t want to re-hire them, just don’t re-hire them.
NASIR: I agree and it just seems as though that’s why I call this a big business problem because you would only put that in there if you’re concerned somehow that your company is so big that you’d have to create a blacklist that is spread out companywide and to your affiliates that, “Hey, don’t hire this person,” instead of having to put this into an agreement. It just seems very strange to even have it come of issue.
MATT: I think you’re right about that. Just to clarify earlier, the rule or the test is whether it’s a restraint of substantial character. So, like all law-related things, very easy test to figure out because it’s very cut and dry whether something’s a restraint of substantial character.
NASIR: And I think, as a business owner, it’s important to know, a lot of times, we get calls of California employers that are trying to find some way to restrict their employees after the employee leaves or is terminated and I think it’s important. This case demonstrates that the courts are going to try to find a way to void any kind of term that has any kind of restriction and so the employee is always going to be in favor in this position. So, even if you think you’ve found some kind of loophole, most likely a court is going to interpret or going to try to interpret it in a way that’s against you. And so, there’s not a lot of options. I should say there are some things that you can do to restrict the things that you are concerned about like trade secrets and things like that. But, from a general perspective, California, don’t even bother with it. Just assume that no non-compete is enforceable.
MATT: If you’re looking to expand or broaden the definition of a non-compete then, yeah, this could fall under that umbrella. Maybe not a normal-sized umbrella but definitely like a golf umbrella which is bigger.
NASIR: Yeah, golf umbrellas are fairly large which I don’t understand why that’s the standard because I don’t know. Do you know the reason? It seems strange to me.
MATT: Why those umbrellas are bigger? Yeah, because it’s got to go over their clubs so it’s got to protect that and then the golfer then I guess the caddy, if he wants to be under there as well. But it’s really because a normal-sized umbrella, if it’s rainy and windy, the umbrella needs to be sufficient to cover enough ground where the wind can’t blow the rain and hit the clubs.
NASIR: But it’s not like you’ll be swinging a club with an umbrella in your hand. In either case, you’re going to have to be exposed to the rain and I’m just saying it’s a strange standard and I think it needs to stop.
MATT: You’re against golf umbrellas?
NASIR: It’s ridiculous. I mean, those things are huge.
MATT: Ah. I mean, I will agree that it’s ridiculous when people walk around on the streets with a golf umbrella.
NASIR: Now, that I don’t mind. I think, when we have it on a golf course, it just makes it pretentious.
MATT: Oh, it’s good to know your thoughts on that.
NASIR: I’m very passionate about it. Anyway, obviously, I’m trying to make a pretty straightforward topic a little light here. I mean, we’ve talked about non-competes in the past but this is a little subtle. I think the big picture here for our listeners is that courts are going to find ways to strike down your non-competes and there can be penalties if you just outwardly put it in there or if you require your employee to sign a non-compete and they don’t and you fire them for it, there could be repercussions for that. So, keep it in mind.
MATT: Yeah, especially in California where it’s so – I think you mentioned this earlier – it’s such a hot topic of voiding them at all costs basically.
NASIR: If you’re in Texas, New York, and other states, I mean, this is not even an issue. I mean, I shouldn’t say that. I should say that the restraints of trade are tolerated there and so I think a no re-hire or I should say a re-hire clause is going to have a much different analysis for sure.
MATT: Yeah, I’m trying to think of another way they could go about this no re-hire clause.
NASIR: Yeah, just don’t re-hire them.
MATT: Yeah, like I said before.
NASIR: You don’t have an obligation to hire anyone. In fact, you can’t discriminate but a protected class, for example, is not someone that you don’t like or that has caused you trouble in the past. And so, you can discriminate based upon that reason.
MATT: Yeah, it’s not a protected class of people you don’t like or based on past experiences.
NASIR: Unless you only dislike people of a certain race.
MATT: Yeah, like, “Why did you terminate them in the first place?” “Oh, just strictly based on their race, yeah.”
NASIR: Or, “Yeah, I just didn’t like them.” “Okay. Well, that’s fine.” “Yeah, well, I didn’t like them because they were of this race, you know?”
MATT: Yeah.
NASIR: Exactly.
MATT: Then, that’ll be an issue, yeah. I agree with that.
NASIR: You concur. All right. Well, I think that’s our episode. Thanks for joining us everyone and we’ll see you next week through the microphone.
MATT: Keep it sound and keep it smart.

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Legally Sound Smart Business

A business podcast with a legal twist

Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
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