The California Court of Appeal has ruled that out-of-state forum selection and choice-of-law clauses are unenforceable against an employee who had sued her employer for wage-and-hour violations, unless the employer proves that enforcement of the clauses “will not diminish in any way” the employee’s statutory rights under California law. Verdugo v. Alliantgroup, L.P. , No. G049139, (Cal. Ct. App., decided May 28, 2015).

Plaintiff Rachel Verdugo signed an employment agreement upon being hired by Texas-based defendant Alliantgroup. The agreement stated that any dispute regarding heremployment would be litigated in Texas and that the laws of Texas would govern the dispute. Verdugo subsequently filed a putative class action alleging wage-and-hour violations under the California Labor Code. Alliantgroup moved to stay the action based on the forum selection clause. The trial court granted the motion, holding that the forum selection clause was valid and enforceable.

The Court of Appeal reversed, holding that, where the claims at issue are based on unwaivable rights under the California Labor Code, the employer bears the burden of proving that enforcing the forum selection clause “will not diminish in any way the substantive rights afforded . . . under California law.” The defendant meets this burden “only by showing the foreign forum provides the same or greater rights than California, or the foreign forum will apply California law on the claims at issue.” Alliantgroup failed to meet its burden because it did not compare Texas and California law and also did not show that a Texas court would apply California law.

The Court of Appeal’s ruling runs contrary to the deference that California courts generally give to forum selection clauses freely entered into by parties where enforcement would not be unreasonable. In light of this ruling, employers should revisit their forum selection and choice-of-law clauses and determine whether they will be able to meet the burden of proving that such clauses are enforceable in the event an employee asserts unwaivable California Labor Code claims. In Verdugo, the Court of Appeal explained that “Alliantgroup could have eliminated any uncertainty on which law a Texas court would apply by stipulating to have a Texas court apply California law in deciding Verdugo’s claims, but Alliantgroup failed to do so.” This language suggests that the Court of Appeal likely would have reached an opposite ruling had it provided that disputes were to be litigated in Texas, but that Texas courts would be required to apply California law.