The recent published decision issued by the Fourth District California Court of Appeal (May 28) in Verdugo v. Alliantgroup, L.P. will make it more difficult for out-of-state employers to enforce forum selection and choice-of-law clauses in litigation with their California employees.  The defendant, Alliantgroup, is a tax consulting firm headquartered in Texas, with one of its eleven regional offices in California. The plaintiff, Rachel Verdugo, brought a class action against the company on behalf of past and present employees, alleging various hour and wage claims under the California Labor Code.  Upon being hired to work at Alliantgroup’s Irvine office, Verdugo signed an employment agreement that included a forum selection clause stating that Harris County, Texas would be the exclusive forum for disputes arising out of the agreement.  The employment agreement also included a choice-of-law clause, designating Texas law as governing any arising disputes.

California courts have traditionally held that they will not defer to a selected forum if doing so would violate public policy by diminishing the rights of California residents.  Furthermore, the courts have established that if the claims at issue are based on rights that California statutes have deemed “unwaivable,” the party seeking to enforce the forum selection clause bears the burden of showing that enforcement will not diminish the substantive rights afforded under California law in any way. In making certain rights “unwaivable,” the California legislature and courts are primarily concerned with providing California residents with all of the protections they are entitled to under California law. In Verdugo, the court ruled that California Labor Code rights are unwaivable.  In applying this rule, and the applicable precedent, the Court of Appeal held that defendant Alliantgroup could not enforce the forum selection clause or the choice-of-law provision in the agreement because it failed to show that the forum selection and choice-of-law clauses would not diminish plaintiff Verdugo’s statutory rights by requiring her to litigate her claims in Texas and under Texas law.  The court did not create a specific test for determining whether deferring to a forum selection clause will diminish an employee’s rights under the Labor Code.

Although it does not make forum selection and choice of law clauses per se unenforceable, the holding in this case is significant because it places the burden on the employer to show that application of the forum and/or choice of law clause will not diminish the employee's rights.  The Verdugo decision is available here.