California Law Limits the Inclusion of Choice of Law and Forum Selection Provisions in Employment Contracts

Paula Lopez, September 29, 2016.

On September 25, 2016, California Governor, Jerry Brown, signed into law legislation that voids contract provisions in any agreement entered into between an employer and a California resident that requires, as a condition of employment, that an employee agree to have disputes adjudicated (includes litigation and arbitration) outside of California and under the laws of another state.

The law, known as Senate Bill 1241[1], will apply to contracts entered into, modified or extended on or after January 1, 2017.  Key provisions of the law prohibit employers from requiring employees who primarily work and reside in California, to adjudicate a claim that arose in California outside of California and to deprive the employee of the protection of California’s laws, which are often viewed as favorable to employees.   Under the new law, any contract provision in violation of the law is voidable, at the employee’s request, and the dispute will be adjudicated in California and under California law.

An employee who challenges a contract provision under S.B. 1241 is entitled to recover injunctive relief and reasonable attorney’s fees.  However, the law does not apply to employment contracts containing venue, forum selection and choice of law provisions, where the employee was represented by counsel in negotiating the terms of the agreement.  The proponents of the law tout its effect in preventing national companies doing business in California from circumventing California’s robust labor laws.

It is not surprising for California to enact this new law as the trend in California’s courts has been to invalidate forum and choice of law provisions that restrict employees from pursuing unwaivable California employment law rights, like wage and hour violations.  Last year, in Verdugo v. Alliantgroup L.P., a wage and hour class action filed by an employee in California against a Texas employer, the California appellate court refused to enforce forum selection and choice of law contract provisions invoking Texas court and law.  In asserting the forum selection clause and seeking to stay the action, the employer had the burden of showing that the provisions did not diminish the plaintiff’s “unwaivable Labor Code rights.”  The court suggested that Alliantgroup L.P. stipulate to have the Texas court apply California law but the employer refused to do so, arguing that Texas would likely apply California law.  The appellate court determined this to be an insufficient protection of the employee’s substantive rights afforded by California law, refused to enforce the contract provisions and allowed the action to proceed in California.

Also in California, class waivers in arbitration agreements between employers and employees have come under attack.  Last month, the Ninth Circuit, having appellate jurisdiction over Federal District Courts in California and 12 other states, ruled in Morris v. Ernst & Young LLP that class action waivers in arbitration agreements are invalid because they violate Sections 7 and 8 of the National Labor Relations Act (NLRA). The court found that the rights afforded under the NLRA—right for employees to engage in concerted activity in pursuing work-related claims is a federal substantive right and the Federal Arbitration Act, while favoring arbitration, does not mandate the enforcement of contract terms that waive substantive federal rights. The Ninth Circuit’s ruling conflicts with rulings from a number of circuits courts holding that class action and collective action waivers in employment agreements are valid. Ernest & Young has requested the U.S. Supreme Court to review the Ninth Circuit’s ruling.

The enactment of S.B. 1241 is merely a continuation of the protective trend in California in favor of employees and to ensure that California law takes precedence over the laws of other states even if it curtails parties’ freedom of contract. This can end up being a significant burden on large corporations with multiple offices and headquarters outside of California who include choice of law and venue and forum selection clauses to streamline the litigation process within their home state.  Companies with a workforce in California, regardless of where their headquarters are based, should review their employment agreements to ensure compliance with the law.

[1] To be codified as Section 925 of the California Labor Code.