Seyfarth Synopsis: On September 25 (yes, a Sunday), Governor Brown signed into law Senate Bill 1241. SB 1241, effective January 1, 2017, adds Section 925 to the Labor Code to restrain the ability of employers to require employees to litigate or arbitrate employment disputes (1) outside of California or (2) under the laws of another state. The only exception is where the employee was individually represented by a lawyer in negotiating an employment contract.

For companies that have headquarters outside of California and that employ people who work and reside in California, this assault on the freedom of contract is not welcome news.

Existing Law and the Genesis of SB 1241

Companies have long used forum-selection clauses and choice-of-law provisions in an effort to avoid California courts apply California law to employment disputes, especially those involving unfair competition. SB 1241 generally invalidates these provisions.

There often are legitimate reasons to have employment disputes decided where the company primarily does its business. Companies may prefer a court in their own state to decide which law (California’s or some other state’s) will govern a dispute. Under the common law, courts apply “substantial relationship” and “contrary to a fundamental policy of a state” tests to see if California law or some other law should govern a particular case.

Courts have long held that the freedom to contract favors the enforcement of forum-selection clauses. The U.S. Supreme Court in 2013 reinforced this rule in Atlantic Marine Constr. Co. Although not an employment case, Atlantic Marine broadly endorsed forum-selection clauses, stating that “courts should not unnecessarily disrupt the parties’ settled expectations” and that usually “ ‘the interest of justice’ is served by holding parties to their bargain.” Since that time, federal district courts in California have increasingly given more weight to forum-selection clauses.

What SB 1241 Provides

As we reported earlier, SB 1241 was among various employment-related bills that went to the Governor at the end of August 2016. SB 1241, the full text of which appears here, will be enacted as Labor Code section 925. It applies to employment contracts entered into, modified, or extended on or after January 1, 2017.

The key provision of Section 925 is its first section:

(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.

A key exception to the application of Section 925 appears in subdivision (e):

(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.

Thus, Section 925 generally forbids employers to require California employees to adjudicate claims outside of California or to submit to the laws of another state. An employee who successfully sues to void such offending provisions can recover reasonable attorney’s fees. Lab. Code § 925(e).

History of Labor Code Section 925

Section 925 represents a direct response to work-arounds that some employers have developed in attempts to dodge peculiar California law, such as California’s prohibition of covenants not to compete. (See Bus. & Prof. Code § 16600.)

Section 925 follows Governor Brown’s refusal to sign Assembly Bill 465. As we wrote earlier, AB 465 attempted to ban mandatory employment arbitration agreements. Governor Brown’s veto message explained that purported employment abuses “should be specified and solved by targeted legislation, not a blanket prohibition.” Section 925 is one such piece of targeted legislation, attacking contractual provisions that are hostile to California law, whether they appear in an arbitration clause or elsewhere within an employment agreement.

What Labor Code Section 925 Does and Does Not Do

Under prior law, a party seeking to enforce a forum-selection clause in an employment agreement already faced an uphill battle: it had to “prove that enforcement of the forum selection clause would not result in a significant diminution of rights.” Indeed, the Court of Appeal has refused to enforce an employer’s forum-selection clause and related choice-of-law clause because they violated California public policy on employee compensation. Section 925 changes the employer’s battle from difficult to hopeless: clauses that once were simply presumptively unenforceable will now be categorically unenforceable, except for clauses negotiated with an employee “individually represented by legal counsel.”

Although Section 925 apparently is a reaction to Governor Brown’s October 2015 veto of legislation that would have banned mandatory employment arbitration agreements, Section 925 applies to all employment contracts, regardless of whether they contain arbitration clauses. Section 925 affects arbitration clauses by ensuring that employment arbitrations with California residents generally will occur in California and apply California law. Arbitration clauses that contain forum-selection or choice-of-law provisions that offend Section 925 will be to that extent contrary to public policy, an outcome that would make enforcement of the overall arbitration agreement more difficult.

Section 925 does not affect employment agreements already in effect. By its terms, the law applies only to contracts entered into, modified, or extended on or after January 1, 2017.

Open Questions (or Things Left to Litigate)

Section 925 does not define what it means for an employee to “primarily reside[] and work[] in California.” Nor does it specify what qualifies as a “substantive protection of California law” that it seeks to protect.

Although the term “primarily” is vague, it often will not be difficult to determine whether an employee primarily resides and works in California. More difficult would be determining whether applying the law of another state would “[d]eprive the employee of the substantive protection of California law.” Some California courts have recognized that choice-of-law provisions are enforceable where the substantive law of the selected state provides the same or similar protections as California.