Goodwin Insights June 22, 2017

Out-of-State Employers Beware: New California Law Prohibits Non-California Choice of Law and Venue Clauses in Employment Contracts

California Labor Code Section 925, enacted in late 2016, is likely to have major repercussions for out-of-state employers who have—until now—signed their California employees up to offer letters, proprietary information agreements, and arbitration agreements governed by the law of state in which they are headquartered. Specifically, Section 925 prohibits the use of contract provisions that apply another state’s law or require adjudication of disputes in another state as a condition of employment for an employee who primarily resides and works in California. Here are some questions Goodwin’s California employment experts have fielded that every California employer should know:

  1. Who is covered by the law? Section 925 applies to all companies (including those based outside of California) employing individuals who primarily work and reside in California.
  2. Are all agreements an employee signs subject to this law? No, only agreements that are required “as a condition of employment” are covered by Section 925. That means arbitration agreements, offer letters, employment agreements and proprietary information agreements that the employee must sign are covered by the new law. However, agreements like stock awards, bonus plans, and severance agreements which, are merely a condition of participation in some form of optional benefit, could choose another state’s law and venue.
  3. Do we need to revise/amend our existing agreements? No, the law applies only to agreements entered into, modified, or extended after January 1, 2017.
  4. What if the employee is represented by counsel? If an employee is “in fact individually represented” by counsel in negotiating the terms of the agreement, then Section 925 does not apply.
  5. What happens if a contract violates the law? Any forum selection or governing law provision that violated Labor Code § 925 is voidable by the employee. An employee may void only the specific provision concerning the choice of law or forum selection clause, not the entire agreement. If an employee requests that a provision be rendered void, the dispute over whether the provision is voidable will be litigated in California under California law and the prevailing employee would be entitled to recover reasonable attorneys’ fees incurred in enforcing their rights. 
  6. Is choosing another state’s law or forum now a violation of the Labor Code? Labor Code  925(a) states that an employer “shall not” require a California employee to enter into a contract applying another state’s laws or requiring adjudication outside of California. This type of language is usually reserved for a prohibition of the conduct at issue and would appear to make asking an employee to sign such an agreement an illegal act, but the issue is unclear and ripe for litigation.
  7. What are the consequences to the employer for forcing a California employee to sign an agreement with a non-California forum selection or governing law provision? Besides the employee’s ability to void the offending provisions, an agreement with provisions found to be void under Section 925 may also be an unfair business practice under California Business and Professions Code § 17200 and could expose the company to a representative action under the Private Attorneys General Act ("PAGA").
  8. What should diligent employers do now? Employers with California employees should review all mandatory employment agreement templates (e.g., offer letters, employment agreements, proprietary information agreements, arbitration agreements, and handbook acknowledgements).  Employers may want to consider eliminating such out-of-state forum selection and governing law provisions or developing templates to use for California employees that select California law and venue. 

Goodwin's team of California employment specialists can assist with the modification or drafting of templated documents.