New California Law Limits Forum Selection, Choice of Law in Employment Agreements

By Sutton Hague Law Corporation on September 29, 2016 in Legal Update

Gov. Brown signed SB 1241 into law on September 25, 2016, which “prohibit[s] an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would require the employee to adjudicate outside of California a claim arising in California or deprive the employee of the substantive protection of California law with respect to a controversy arising in California.”  (SB 1214 Legislative Digest) That’s a lot of words, but what does it mean?

New Labor Code section 925 will apply to contracts entered into, modified, or extended on or after January 1, 2017 by California employees as they relate to California claims. The first provision is relatively simple: employees cannot be required to agree to adjudicate their California claims outside of California. For example, a Nevada-based company with California workers could not require arbitration of California employment claims in Nevada. These types of forum selection provisions will be void and the venue for such a hearing must be in California.

The second provision prohibits an employer from “depriv[ing] the employee of the substantive protection of California law.” It is unclear what effect this provision will have for employers. Some protections – like the minimum wage – cannot be waived by private agreement (See LC 1194), so a California court probably would not enforce a contract that denies that protection in the first place. However, an arbitration agreement could apply another state’s law in order to make the employee pay for the arbitration, contrary to the California rule that the employer must pay for arbitration. It is also possible that a choice of law provision could be used to try to enforce a “non-compete” agreement, which is illegal under California law. These types of provisions appear to deprive the employee of “substantive protection of California law” and will be invalid and unenforceable under Section 925.

At this point, it seems that Section 925 will mostly affect arbitration agreements and employment contracts for specific employees. The latter tends to affect high ranking or sought-after employees, like CEOs and other executives. Section 925 does not apply when the employee was represented by legal counsel in the negotiation of the agreement, so the exception is more likely to apply to high ranking and sought-after employees who negotiate the details of their contracts. For all other employment agreements for California employees, employers should avoid out-of-state forum selection and choice of law provisions.

Employers are encouraged to consult qualified legal counsel regarding this new law and how it affects their employment agreements.