It is no secret that hiring employees and conducting business in California involve more laws and rules than in other states. Multi-state employers often desire consistent personnel practices, or to mitigate some of the more restrictive elements of California employment law. To achieve these goals, employers may draft confidentiality, arbitration, or other agreements that include choice of law provisions and forum selection clauses.
Choice of Law and Forum Selection in California
A choice of law provisions applies the laws of a particular state to an agreement. For example, a Texas-based employer might wish to apply Texas law to a non-compete or non-solicitation clause, either of which might be unlawful in California. Texas law, on the other hand, permits them, and the employer’s main offices are in Texas.
With forum selection clauses, the parties agree that legal disputes will be resolved in a particular jurisdiction, location, or even a specific federal or state court. An Ohio-based employer, for example, might have just a few employees in California, and would prefer to have disputes with a California employee resolved in an Ohio court for a variety of legitimate reasons. For example, it may be less expensive to litigate closer to the company’s offices, the company’s lawyers may be local, or the employer might believe it will be treated unfairly in a “foreign” state’s court.
There is a significant body of law in California concerning the enforceability of provisions like these. California courts will examine different factors, including the other state’s interest in applying its law, whether the employee bargained for the provision, and whether the law of the other state is less protective of the employee’s rights. Forum selection clauses generally are enforceable, but are subject to “unconscionability” analysis, e.g., whether they are oppressive.
New Statute Imposes Limits
Newly enacted SB 1241, which is codified at California Labor Code section 925, addresses choice of law and forum selection clauses in employment agreements, such as employment contracts, confidentiality agreements, and the like. The law provides that an employer cannot require as a condition of employment that an employee who “primarily resides and works in California” must agree to litigate disputes outside California. The statute also says that an employer cannot “deprive the employee” of the “substantive protection” of California law for a “controversy arising in California.” In other words, California employment agreements must be subject to California law, and employment disputes must be resolved in California courts.
The law applies to any employment agreements entered into, modified, or extended on or after January 1, 2017. However, it does not apply if a lawyer represented the employee when the contract, including the forum selection or choice of law clause, was negotiated. The law also does not appear to apply to separation agreements and releases, given that those agreements are not entered into as a “condition of employment” (i.e., the employee is not hired or the employee’s employment will be terminated if he or she does not agree).
An employee may void a contract that contains a choice of law or forum selection clause that violates the statute. Even if an agreement has a forum selection clause or choice of law provision, an employee can demand any disagreement be litigated in California, applying California law. In addition to other remedies, an employee seeking to enforce the law can recover attorney’s fees.
SB 1241’s Effect on California Employers
SB 1241 will affect not only confidentiality agreements, but also employment contracts, bonus and commission plans, and arbitration agreements. However, it may not apply to many of the most important, specialized individual employment contracts employers enter into, including those with high-level executives, because those individuals are often represented by attorneys in negotiations.
Perhaps the biggest ambiguity in the law is the phrase “primarily resides and works in California.” The term “primarily” is not defined. In other parts of the Labor Code, such as wage and hour laws, it means more than 50% of the time. This ambiguity may be particularly concerning given that just a few years ago in Sullivan v. Oracle, the California Supreme Court applied California law’s more generous overtime provisions to out-of-state employees when they occasionally worked in California. The court emphasized California’s strong public policy in protecting individuals working in the state, even for relatively short periods of time. Given this case, California courts may generously interpret SB 1241’s provisions when applying the law to employees who reside or work in multiple states.
What Employers Should Do Now
Employers should revise standard California employment agreements, such as offer letters, arbitration agreements, and confidentiality agreements, to ensure they do not contain choice of law provisions or forum selection clauses that call for law or forums other than in California. Because the law does not affect agreements entered into prior to January 1, 2017, employers may also wish to make necessary changes to current agreements prior to that date. Of course, employers must accept that if they later need to modify those agreement, they will be subject to SB 1241’s restrictions.
Multi-state employers seeking uniformity in their personnel practices must also decide how these changes affect agreements in other states. Finally, affected employers should work with counsel to address these issues for employees who reside and work in California and another location or locations, to assess which location is the employee’s “primary” residence and place of work.