Existing California law provides that parties to an employment contract may select the state law governing their agreements, including the venue to litigate disputes. The common practice of using forum selection clauses and choice-of-law provisions regarded as more favorable to employers evolved out of California’s prohibition on non-compete clauses under California Business & Professions Code Section 16600. This practice is often used by employers as a means to adjudicate controversies with employees in a jurisdiction with laws that are more beneficial to employers.

However, effective January 1, 2017, employers are prohibited from requiring that employees living and working in California adjudicate claims outside the state or agree that the laws of another state will govern their employment agreements and related disputes. In short, the employer may not deprive the employee of the protections of California law and the convenience of seeking redress in a California court and any such contractual provisions to the contrary are voidable at the employee’s election.

The impact of the recent signing of SB 1241, which added Section 925 to California’s Labor Code, will reach employers nationwide. Companies with employees in California will be provided only a short timeframe in which to audit their standard agreements. Failure to do so will render voidable, at the election of the employee, any provision that violates the new law if the contract was entered into, modified or extended on or after January 1, 2017. Furthermore, when an employee elects to enforce his or her rights under Labor Code Section 925, the statute provides a basis for an award of attorneys’ fees.

Enforcing Labor Code Section 925 is Up to Employees

Labor Code Section 925 states that a prohibited clause is “voidable by the employee,” rather than void at inception. This suggests that employees may elect to recognize a contract term that would otherwise be prohibited by the new law. However, the statute is unclear regarding how or when the employee’s right to elect comes into play. When must an employee decide whether to void the venue or choice-of-law provision? How would such an election be made?

Exceptions to the General Rule

Some exceptions to Labor Code Section 925 include the situation when an employee is represented by legal counsel in negotiating the terms of the agreement containing the otherwise prohibited clauses, in which case the new law would not prohibit the use of a venue selection or choice-of-law provision. Similarly, where an employee is presented with an agreement containing an opt-out provision, such that a meaningful choice is provided and the employee is not required to sign as a condition of employment, it does not appear that Labor Code Section 925 would operate to invalidate otherwise prohibited venue and choice-of-law clauses.

Take Aways

Employers who have contracts with employees who live and work in California should examine whether these agreements require adjudication of controversies in a state other than California and whether they provide for a choice of law other than California law. If so, these contracts may violate the mandates of Labor Code Section 925 and may need to be modified.