May 28, 2022

Volume XII, Number 148

Advertisement
Advertisement

May 27, 2022

Subscribe to Latest Legal News and Analysis

May 26, 2022

Subscribe to Latest Legal News and Analysis

May 25, 2022

Subscribe to Latest Legal News and Analysis
Advertisement

California Labor Code Section 925 and How Employers Can Avoid It

California Labor Code Section 925 prohibits employers from requiring employees who reside and work primarily in California, as a condition of employment, to agree to any provision that would require the employee to litigate outside California any claim arising in California, or that would deprive the employee of the benefit of California law with respect to any claim arising in California.  Under Section 925, any such provision is voidable by the employee and if the employee exercises her right to void the provision, then any such claim shall be adjudicated in California under California law.[1]

The issue of whether Section 925 does or does not apply can be significant because employers often include non-California choice of law and/or venue provisions in employment agreements that may be more favorable to employers than California law and courts.  For example, non-compete agreements are enforceable in Delaware provided their duration is reasonably limited in time and geographic scope, their purpose is to protect a legitimate economic interest of the employer, and their operation reasonably protects that interest.[2]  By contrast, non-compete covenants are generally unenforceable in California unless necessary to protect the misappropriation of an employer’s trade secrets or in connection with the sale of the goodwill of a business or substantially all the assets of a business to a buyer who will carry on the business.[3]

Employers and employees have advanced multiple arguments for why Section 925 should or should not apply and that the choi ce of law and/or venue provisions in their employment agreements should or should not be enforced, with mixed results.

Arguments Against Application of Section 925

Employees Who Do Not Reside and Work Primarily In California.  To start, Section 925 does not apply to claims arising outside California or to claims by plaintiffs who do not primarily reside and work in California.[4]  In one case, for example, the Court refused to void a Michigan forum selection clause under Section 925 because only 20% of the plaintiff-employee’s work for the defendant occurred in California.[5]

Prior to January 1, 2017.  Additionally, Section 925 only applies to employment agreements “entered into, modified, or extended on or after January 1, 2017.”[6]  Seizing on this language, the employee-plaintiffs in one case argued that, even though their original employment agreements were entered into prior to January 1, 2017, they had been modified or extended beyond January 1, 2017 via pay raises.[7]  However, the Court in Rafeh observed that the employment agreement “did not address the issue of pay, so it is a stretch to argue that pay-raises resulted in its modification or extension.”[8]  Instead, both plaintiffs’ agreements had been executed prior to the effective date of Section 925, and there was “no evidence of subsequent modification.”  Accordingly, the Court held that Section 925 did not apply and enforced the parties’ Michigan forum selection clause.[9]

Was The Employee Represented by Counsel?  Section 925 also does not apply “to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum” of a controversy arising under the agreement “or the choice of law to be applied.”[10]  In NuVasive v. Miles, for example, the Delaware Court of Chancery ruled in an unpublished opinion that despite California’s strong public policy against non-competition agreements, Section 925 could be invoked to enforce a non-competition clause in an employment agreement governed by Delaware law because the employee was represented by counsel in the negotiation of the agreement.[11]  Conversely, in DePuy Synthes Sales, Inc. v. Stryker Corp, the employee had signed an agreement containing non-competition and New Jersey choice of law provisions as a condition of his employment with his former employer.[12]  But the employee was not represented by counsel in connection with the negotiation of his employment agreement.  Accordingly, Section 925 applied and the New Jersey choice of law provision was void and unenforceable.[13]

Independent Contractors vs. Employees.  Employers have also argued that Section 925 does not apply when the plaintiffs are independent contractors, as opposed to employees.  Under the so-called ABC or Dynamex test, however, a worker is presumptively considered an employee for purposes of Section 925.  In order to conclusively establish independent contractor status, the employer must show that (1) the worker is free from the control and direction of the hiring entity in connection with the work; (2) the worker performs work outside the usual course of the hiring entity’s business; and (3) the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed.[14]

Condition of Employment.  Some employers have also attempted to avoid application of Section 925 by arguing that the employee’s agreement to the non-California choice of law or forum provision was not required as a “condition of employment.”  In Focus Financial Partners, LLC v. Holsopple, for example, the employer argued that the long-term agreement containing the Delaware choice of law and forum provision was not required as “a condition of plaintiff’s employment because the employee had already been hired when the long-term agreement was signed, and there was no evidence that the employee was threatened with termination if he did not sign it.[15]  While that may have been “narrowly true,” the Court observed that when the employee (Holsopple) joined Focus in 2015, his compensation consisted of a base salary of $220,000 plus a “Potential Annual Bonus” of between $100,000 and $200,000 that would be “Paid in a Combination of Cash and Focus Incentive Units.”[16]  Additionally, Holsopple’s offer letter included a “Sign On Bonus” consisting of 40,000 units and $75,000 cash.  Because “major portions” of Holsopple’s compensation were contingent upon his signing a Unit Agreement, the Court concluded that Holsopple’s agreement to the Unit Agreement was effectively required as a condition of employment and that Section 925 thus applied.[17]

Conversely, in another case, the plaintiff’s employment agreement required the plaintiff-employee’s signature as a condition of employment.  However, the employment agreement did not contain any forum selection clause; instead, the Ohio choice of law and venue provision was contained in a shareholder agreement to which the plaintiff was not a signatory and to which the plaintiff’s agreement was not required as a condition of employment.  Accordingly, the Court found that Section 925 did not apply.[18]

Use of Affiliates.  Additionally, it does not appear that employers can avoid Section 925 by restructuring employment agreements among one or more affiliates or subsidiaries.  In Focus, for example, the employer argued that the Long-Term Agreement and Omnibus Agreement were not conditions of Holsopple’s employment because Focus Sub was Holsopple’s employer, whereas the Long-Term and Omnibus Agreements containing the forum selection clauses were with Focus Parent, a non-party to Holsopple’s employment agreement.  The Court, however, rejected this argument and reasoned that Section 925 “encompasses a provision in any agreement that is presented as a condition of employment,” a reading that fulfills the public policy underlying Section 925 and protects the statute from being easily circumvented.

Takeaways

California Labor Code §925 presents a major but not insurmountable hurdle to the enforcement of non-California choice of law and venue provisions in employment contracts.  Experienced counsel should be consulted in connection with any potential implementation of foreign choice-of-law and venue provisions as to California employees.


FOOTNOTES

[1] Cal. Labor Code §925(b).

[2] See, e.g., Tristate Courier & Carriage, Inc. v. Berryman, No. 20574-NC, 2004 WL 835886, at *10 (Del. Ch. Apr. 15, 2004).

[3] Cal. Bus. & Prof. Code §16601; D’Sa v. Playhut, 85 Cal. App. 4th 927, 934 (2000).

[4] See, e.g., Mechanix Wear, Inc. v. Performance Fabrics, Inc., No. 16-cv-09152-ODW, 2017 WL 417193, at *7 (C.D. Cal. Jan. 31, 2017) (enforcing the employer’s forum selection clause despite Section 925 because the plaintiff “never worked for Defendant in California.”); Felley v. America Fujikura Ltd., No. 17-cv-02204-MCE, 2018 WL 3861574, at *2 (E.D. Cal. Aug. 14, 2018) (transferring case to South Carolina and giving plaintiff’s choice of forum minimal weight because the alleged sexual harassment occurred when plaintiff was stationed in South Carolina).

[5] Bromlow v. D & M Carriers, LLC, 438 F. Supp. 3d 1021, 1029 (N.D. Cal. 2020).

[6] Cal. Labor Code §925(f)).

[7] Rafeh v. Gold Star Mortgage Fin. Group, Corp., No. 19-cv-00157-ODW, 2019 WL 3067199, at *5 (C.D. Cal. Jul. 12, 2019).

[8] Id.

[9] Id.

[10] Cal. Labor Code §925(e).

[11] NuVasive, Inc. v. Miles, No. 17-cv-720-SG, 2018 WL 4677607, at *6 (De. Ch. 2018).

[12] DePuy Synthes Sales, Inc. v. Stryker Corp., No. 18-cv-1557-FMO, 2020 WL 6205702, at *8 (C.D. Cal. Sep. 29, 2020).

[13] Id. at *8.

[14] Dynamex Operations W. v. Superior Ct., 4 Cal. 5th 903, 955 (2018).

[15] Focus Financial Partners, LLC v. Holsopple, 241 A.3d 784, 816 (Del. Ch. Ct. 2020).

[16] Id. at 817.

[17] Id.

[18] Down-Lite Intl v. Altbaier, No. 19-cv-627, 2019 WL 3562068, at *3 (S.D. Ohio Aug. 6, 2019).

 

Copyright © 2022, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 88
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement
Advertisement

About this Author

Jennifer Redmond, Labor and Employment Lawyer, Sheppard Mullin
Partner

Jennifer Redmond is a partner in the Labor and Employment Practice Group in the firm's San Francisco and Palo Alto offices and is co-chair of the firm's Noncompete and Trade Secrets Team.

Areas of Practice

Jennifer Redmond specializes in executive disputes and negotiations, negotiating and litigating restrictive covenants, trade secrets litigation, and whistleblower litigation. She writes regularly on the topic of restrictive covenants in California and assists in the structuring of transactions and relationships to support the use of restrictive covenants....

415.774.2910
James Fazio Intellectual Property Attorney Sheppard Mullin Law Firm
Special Counsel

James Fazio is special counsel in the Intellectual Property Practice Group in the firm's San Diego (Del Mar) office.

Areas of Practice

James focuses on intellectual property and business litigation. He represents public and private companies in disputes such as those involving patent and trademark infringement, theft of trade secrets, fraud, breach of contract, unfair competition, false advertising and various business tort claims. James has more than 24 years of litigation experience and was selected by his peers among the top ten intellectual property...

858.720.7418
Advertisement
Advertisement
Advertisement