May 25, 2017
When an employee is involuntarily terminated, hard feelings are likely to arise on both sides, particularly if the employee asserts some claim in connection with the termination. It is therefore common, whether in the context of a general severance agreement or in connection with the settlement of a particular claim, for the employer to require that the former employee waive any right to seek future employment with the employer. “No future employment” (“NFE”) clauses may make sense as a matter of psychology, with the employer wanting to make a clean and permanent break with the former (and possibly litigious) employee, but such provisions are not without legal risk.
There have been instances in which the legal validity of an NFE clause was subject to challenge. For example, in Golden v. California Emergency Physicians Medical Group, 782 F.3d 1083 (9th Cir. 2015), the plaintiff argued that the “no future employment” provision in his settlement agreement constituted a restraint on the lawful practice of a profession and was a material term of the agreement, and as a result, the entire settlement agreement should be voided under California law. While refusing to hold that the NFE clause was per se unlawful, the U.S. Court of Appeals for the Ninth Circuit did remand the issue to the lower court to make a factual determination as to whether the NFE clause unlawfully restrained the plaintiff’s medical practice.
NFE clauses are particularly problematic if an administrative agency such as the Equal Employment Opportunity Commission or the Department of Labor is involved in the dispute. Administrative agencies such as these may view a blanket waiver of future employment in connection with the settlement of a federal claim as retaliatory or otherwise in violation of the employee’s rights. Moreover, NFE provisions in settlement of wage and hour claims under the Fair Labor Standards Act, which must be approved by the court, have been struck down. Some courts have found that a waiver of future employment amounts to an “unconscionable” punishment for asserting FLSA rights. See, e.g., Nichols v. Dollar Tree Stores, Inc., No. 1:13–cv–88, 2013 WL 5933991, at *5–6 (M.D. Ga. Nov. 1, 2013).
An NFE clause is less likely to be viewed as punitive if it is narrowly drawn and does not materially impact the employee’s right to earn a living. Putting in an expiration date after which the employee could re-apply for a job is one way of narrowing the clause. Another is to carve out consulting, vendor, customer or other types of relationships from the prohibition. The parties can also agree that the NFE clause would not apply if the employee joins a new company that either acquires or is acquired by the old employer. Finally, the NFE provision should permit the employer to change its mind, so that if the relationship improves, the employer is free to waive the clause and welcome the employee back into the fold.
This article is intended only as a general discussion of these issues. It is not considered to be legal advice or relied upon. For more information regarding employment law, please contact Reavis Parent LLP Partner Alice K. Jump, who is a part of the firm’s litigation group and counsels clients on employment, real estate, corporate and business matters. Ms. Jump is admitted to practice in New York and before the U.S. District Courts for the Southern and Eastern Districts of New York and the U.S. Court of Appeals for the Second Circuit.