California Reigns In Employers’ Use Of Forum-Selection and Choice-of-Law Clauses to Avoid California Law: My House My Rules
Last week, California Governor Jerry Brown signed into law Senate Bill 1241 (“SB 1241”). The new law (available here), which takes effect on January 1, 2017, adds section 925 to the California Labor Code (“Section 925”). In general, Section 925 will prohibit employers from requiring California-based employees to enter into agreements requiring them to: (1) adjudicate claims arising in California in a non-California forum; or (2) litigate their claims under the law of another jurisdiction, unless the employee was represented by counsel. Section 925 represents a considerable limit on parties’ rights to contract and may be the end of forum-selection and choice of law provisions, currently common in employment agreements.
For years, employers based outside of California have incorporated forum-selection and/or choice-of-law provisions in agreements with their California employees. Some employers used these provisions to create company-wide uniformity among their workforce. Others used forum-selection and choice-of-law provisions to avoid some of California’s more rigid rules about restrictive covenants. Whatever the motivation, forum-selection and choice-of-law provisions have become commonplace in employment and arbitration agreements.
Despite their prevalence, out-of-state employers sometimes faced hurdles in securing enforcement of forum-selection and choice-of-law provisions with California employees. In some instances, California state and/or federal courts upheld choice-of-law clauses, although almost never in the case of post-employment restrictive covenants. Several federal district courts and some California state courts were willing to uphold combined forum-selection and choice-of-law clauses, including in situations involving restrictive covenants, but generally speaking, the law in this area has been unclear and long unaddressed by the California Supreme Court. That is no longer the case.
Under Section 925, an employer is prohibited from requiring “an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following: (1)…adjudicate outside of California a claim arising in California[;or] (2) [d]eprive the employee of the substantive protection of California law with respect to a controversy arising in California.” Section 925 provides that any provision of a contract that violates either of the above rules is voidable by the employee and any dispute arising thereunder shall be adjudicated in California under California’s substantive law. Section 925 provides that, in addition to injunctive relief and any other form of relief available to the employee under the substantive law, an employee enforcing his or her rights under Section 925 is entitled to recover reasonable attorneys’ fees. Importantly, Section 925 makes explicit that it also applies to both litigation and arbitration. Thus, employers cannot avoid this law through private arbitration agreements that purport to invoke the law or forum of another jurisdiction.
Although the law is sweeping in nature, it does not apply retroactively. However, it takes effect on January 1, 2017 as to contracts entered into, modified, or extended on or after that date. Thus, to the extent preexisting contractual relationships automatically renew on a set basis, Section 925 will cover them as of January 1st.
There is one narrow exception to Section 925: it does not apply to any contracts with an “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 in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.” Thus, in the case of more senior, executive-level employees, who often retain independent counsel to negotiate employment agreements, employers may still be able to make use of forum-selection and/or choice-of-law provisions.
Unfortunately, Section 925’s language leaves some questions unanswered. For instance, the statute fails to define what it means for an employees to “primarily” reside and work in California. This may become particularly problematic for employees who entered into such agreements during their employment in another state, who then relocate to California. Further, it is unclear what Section 925 means by the “substantive protection of California law,” and, in particular, whether California courts would object to application of equally- or more-protective laws of other jurisdictions.
For now, employers should take note of this new legislation and take it into account when entering into new or renewing preexisting employment agreements with California-based employees.