Contract

California Employers Cannot Designate Choice of Law or Venue

What is a Choice of Law or Venue Provision?

Many contracts, including employment contracts, contain choice of law and/or a venue provisions. A choice of law provision directs a court which state’s laws apply. A venue provision dictates where to try the case. For example, even though you work in California, your employment contract could follow Massachusetts law. The contract could also require litigation in Texas. Courts generally enforce choice of law and venue provisions unless it violates a fundamental public policy.

Why Employers Like Choice of Law and Venue Provisions

Employers like choice of law and venue provisions for two main reasons:

  1. They allow the employer reasonable certainly of consistency regarding which laws, and how those laws, will be applied.
  2. They allow the employer to move a case to a more favorable forum.

For employees, a choice of law provision deprives the employee access to California’s more beneficial laws.

On September 25, 2016, Governor Brown signed sB 1241 prohibiting employers from forcing employees to sign choice of law or venue provisions requiring litigation outside California.  Effective January 1, 2017, SB 1241 adds Labor Code section 925, which states:

(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.

Effect of Prohibition again Non-California Choice of Law and Venue Clauses

There are two significant areas where I have seen choice of law provisions make a big difference in litigation: Non-competition/non-solicitation clauses and arbitration clauses.  California is one of the toughest states when it comes to non-compete clauses. Most other states allow an employer to prevent an employee from working with a competitor. In California, such agreements are usually void. As a result, companies oftentimes require litigation in more favorable states. In some cases, my clients were prevented from working for employers because the non-competition clauses were upheld in other states. New Labor Code 925 prevents that from happening.

I wrote several arguments about the enforceability of arbitration clauses in California. Although California courts seem to be currently favoring arbitration–or at least allowing it–there is still significant efforts to keep employment cases out of arbitration in California. Employers have an easier time enforcing arbitration agreements in other states. This new law will make it more difficult for companies to move employment cases into arbitration.

Choice of Law and Venue Choice OK If Employee Attorney Involved

The new Labor Code contains an exception for cases where the employee “is in fact individually represented by legal counsel in negotiating the terms of an agreement.” The statute doesn’t specify whether the attorney must actually negotiate the terms, or whether the employee needs to simply consult with an attorney regarding the negotiations. I expect that may come up in future cases. Don’t be surprised if this provision is challenged in court on other grounds. I also question whether courts in other states will even enforce the new Labor Code.

Original article by Robert E. Nuddleman of Nuddleman Law Firm, P.C.

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