California Places Limits on Forum Selection and Choice of Law Provisions in Employment Agreements

Employees who primarily reside and work in California will soon have additional grounds to void forum selection and choice of law provisions included in employment-related agreements. 

Senate Bill 1241

Under Senate Bill 1241, which California Governor Jerry Brown signed on September 25, 2016, employers “shall not” require any “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 a claim arising in California in a foreign venue or that would deprive the employee of the substantive protection of California law with respect to such controversy. “Adjudication” is expressly defined to include litigation and arbitration. The bill amends California Labor Code Section 925 and applies to any contract entered into, modified or extended on or after January 1, 2017.  

Previously, California employees could assert that such foreign forum selection or choice of law provisions were unenforceable based on a variety of arguments, including that such provisions were unconscionable or that following such provisions could lead to results at odds with California public policy. The new law gives employees direct, statutory-based grounds to void such provisions. And, importantly, it gives employees who are successful in voiding such forum selection and choice of law provisions the right to recover reasonable attorneys’ fees as well as obtain injunctive relief and receive other remedies that may be available. Although the law has some exceptions and ambiguities that will no doubt be tested in court, employers who continue to routinely include such provisions in their employment-related contracts with California-based employees either as a policy or practice will now face material exposure, including possibly on a class basis.

There is one key carve-out included in the new law that seems to be aimed at high-level or executive employees: it 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. . . .” The “in fact” requirement indicates that it would not be sufficient for an employer to simply include language allowing for an employee to consult with counsel before signing the agreement; rather, the employee must actually have legal representation with respect to negotiating the terms of the agreement.

Open Questions

There are several open questions related to the new law. One issue is what constitutes “as a condition of employment.” For example, if an employee is not required to sign the agreement as a condition of continued employment but instead as a condition to become eligible to receive some discretionary compensation — such as a discretionary bonus — or other voluntary benefit, an employer may be able to argue that the forum selection and choice of law provisions in such agreement are not voidable by the employee under California Labor Code Section 925. But even if this argument is successful, the employee may be able to assert other grounds for not enforcing the forum selection and choice of law provisions.

Another issue is under what circumstances a claim or controversy “arises” in California. For example, if an employee who primarily resides and works in California also works in other states, the new law does not appear to preclude the employer from specifying in an agreement with the employee that a claim or controversy arising outside of California will be resolved in a forum outside of California and by the application of another state’s law. Again, the employee may be able to assert other reasons for not enforcing these types of limited forum selection and choice of law provisions, but they nonetheless appear to be a viable approach given the new law’s focus on claims and controversies “arising in California.” 

Finally, the new law does not declare that any forum selection or choice of law provision that violates the law is automatically void, and instead provides that such provisions are “voidable by the employee.” Thus it is not entirely clear whether including a forum selection or choice of law provision identifying a state other than California in an agreement with an employee who primarily resides and works in California is, by itself, a violation of California Labor Code Section 925. Rather, the employee may simply have the option to seek to have such provision(s) voided (and seek attorneys’ fees and other remedies if successful). On the other hand, the new law explicitly states that employers “shall not” require an employee to sign an agreement that includes forum selection or choice of law provisions that violate the law. California Labor Code Section 432.5 separately prohibits any employer from requiring any employee or applicant for employment to agree, in writing, to any term or condition which is known by the employer to be prohibited by law.” Therefore, any employer who chooses to require an employee who “primarily resides and works in California” to sign an agreement that includes a forum selection or choice of law provision identifying a state other than California could end up defending against claims that they violated California Labor Code Sections 432.5 and 925 (in addition to having such provisions rendered void).

What Should Employers Do?

An employer should first determine whether it has any employees who “primarily reside and work in California.” If so, then the employer should review each agreement it typically requires employees to sign as a condition of employment — including agreements that must be signed in order to receive certain forms of compensation and benefits — that include forum selection or choice of law provisions and determine what modifications should be made for use after January 1. Options include:

• Adding language excluding the application of such provisions to employees who primarily reside and work in California
• Creating California versions of the agreement(s), revising the provisions in such versions to identify California as the governing law and selected forum for resolving any dispute arising under the agreement
• If appropriate, adding an opt-out provision that explicitly states that signing the agreement is not a condition of employment, and therefore the employee is not required to sign the agreement in order to become or remain employed (and retaining the existing forum selection and choice of law provisions)
• Retaining existing non-California forum selection and choice of law provisions but adding language acknowledging the employee’s right to seek to have the provisions voided in the event the claim or controversy arises in California and disclaiming any intent to deprive the employee of his or her rights under California law (note that this option may not eliminate the employer’s liability exposure, including attorneys’ fees, in connection with the employee’s efforts to void the forum selection or choice of law provision(s) under California Labor Code Section 925)
• Including language acknowledging that the employee has been “in fact” individually represented by legal counsel in connection with reviewing and understanding the terms of the agreement and specifically consents to the selected forum and governing law as permitted under California Labor Code Section 925

Each of these options comes with certain benefits and risks that should be carefully considered and discussed with counsel.