On January 1, 2017, employers in California with headquarters outside of the Golden State will be treated the same as in-state employers insofar as applying California Law. Labor Code Section 925, which applies to employment contracts with employees who live and work primarily in California, prohibits the use of contract provisions that apply another state’s law or require adjudication of disputes in another state as a condition of the employment of an individual who primarily resides and works in California.
Section 925 reads as follows:
(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:
(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.
In other words,
- “Choice of venue” or “forum shopping” clauses requiring employees to litigate or arbitrate claims arising in California in forums located outside California, or
- “Choice of law” provisions depriving the employee of the substantive protection of California law with respect to disputes arising in California
may be unenforceable. Put simply, multistate employers will no longer be able to rely on employment clauses requiring their California employees to contest disputes arising in California either in the employer’s home state or according to the employer’s home state laws.
The apparent intent of Section 925 is to fundamentally eliminate the employers’ ability to force California employees to litigate in another state or be governed by another state’s laws.
Employers have a brief window to update their employment agreements, as Section 925 only applies to an employment contract with a California employee entered into, modified, or extended on or after January 1, 2017. Contracts signed before December 31, 2016, are not affected (unless later modified or extended).
Section 925 does not apply to all employment contracts. Indeed, only those are entered into as a “condition of employment” will need to be updated to reflect the new law. Furthermore, Section 925 will not apply to employment agreements with an “opt-out” provision (In this context, an “opt-out” provision is a window of time during which the employee may opt out of entering into an agreement before it becomes effective) or to employment contracts negotiated on the employee’s behalf by the employee’s own attorney. Note: the employment agreement should clearly state that it was negotiated by the employee’s own counsel.
Consequences of Violations
While the legal ramifications of a business failing to comply with Section 925 have yet to play out in California courts, under the law, the employee can seek injunctive relief and collect attorneys’ fees and other remedies available by law.
Should an employee’s employment contract include choice of venue or choice of law provisions prohibited by California Section 925, it appears that the employee can elect to void those provisions. Any disputes between the parties would then be decided in California under California law.
How can multistate employers with California-based employees address the new law to ensure compliance? First, review all employment contracts and determine which may fall under Section 925. This includes executive level agreements, agreements with evergreen retainers, and agreements being prepared for 2017. Second, as we head into, 2017, employers should review all new and renegotiated employment contracts to ensure that they are either exempt from California Section 925, or that their terms comply with the new law.
For more information on how California Labor Code Section 925 applies to your business, contact experienced business attorney Drew E. Pomerance today.