California Severely Limits The Use of Choice of Law and Venue Provisions in Employment Contracts

Starting January 1, 2017, California Labor Code, Section 925 generally prohibits choice of law or venue provisions in employment contracts for California employees. Section 925 provides as follows:

(a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

(1) Require the employee to adjudicate outside of California a claim arising in California.

(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

(b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.

(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees.

(d) For purposes of this section, adjudication includes litigation and arbitration.

(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.

(f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.1

Before Labor Code section 925, when out-of-state employers had full-time employees that live in California, the employers would often incorporate choice-of-law or venue selection provisions into employment contracts. Employees had to agree to these provisions as a condition of employment. The choice-of-law or venue locations typically had labor laws that were more favorable to the employer than California’s labor laws. For example, California law prohibits employers from requiring employees to waive their right to a jury trial before a dispute arises and also places significant limitations on arbitration agreements. California law also requires the reimbursement of certain business expenses, but many other states do not. Some out-of-state employers used choice of law or venue provisions simply to have uniformity throughout the company workforce and to create some litigation predictability. Labor Code section 925 severely limits this practice.

Interestingly, Labor Code section 925 does not render choice of law or venue provisions in employment contracts outright “void”; just “voidable by the employee.” This appears to give the employer some wiggle room in seeking to change venue to outside of California. It also specifically limits the prohibition on choice of law or venue provisions, “…as a condition of employment.” If an employer includes a choice of law provision in some other area of the employment contract, such as with an optional stock plan, the employer might be able to select a different state to adjudicate those types of disputes. Section 925 also does not apply (1) if the employee was represented by independent legal counsel who negotiated the terms of the employment agreement or (2) to any employment agreements entered into before January 1, 2017 (but it does apply to agreements that are modified or extended after that date.)

Many employment contracts include arbitration provisions as a means of resolving any disputes. California Labor Code section 925 expressly defines “adjudication” to include both litigation and arbitration. However, the Federal Arbitration Act preempts state laws, so an employer might be able to include an enforceable arbitration provision if the arbitration clause is governed by the Federal Arbitration Act.

What should an employee do if faced with a choice of law or venue provision in an employment agreement?

• In reality, this is a sensitive issue. Employees are reluctant to point out issues in their employment agreements at the risk of the job offer being retracted. Of course there are potential legal remedies available to employees who are retaliated against for enforcing their rights under Section 925. But there are also economic realities of needing to receive a paycheck sooner as opposed to later or after a legal battle. The best advice is to consult with an attorney to consider your options.

What steps should an employer with California employees take to ensure compliance with section 925? An employer should:

Review their standard employment agreements and boilerplate language regarding venue and choice of law, revising them for future use with California-based employees.
Include an acknowledgment that the employee was independently represented by counsel in negotiating his or her employment agreement (and have the lawyer for the employee execute the acknowledgment as well).
Consider removing all choice of law or venue provisions for employment contracts involving all California employees. (Or, add provisions that expressly inform employees of their right to void the choice of law or venue provision in the employment contract and/or that such provision was not a condition of employment.)
Review current or pending employment contracts and determine (1) if they contain choice of law or venue provisions and (2) if they do, extend the contracts before the end of the calendar year, before section 925 takes effect.