We recently blogged about Governor Brown signing S.B. 1241, which is now codified as Section 925 of the California Labor Code. The law, which affects venue and choice of law provisions in agreements entered into as a condition of employment, will begin applying to agreements entered into, modified, or extended beginning on January 1, 2017. The text of the law (posted directly below) might appear relatively straight forward, but certain ambiguities and questions concerning the law’s implementation raise several issues, which are discussed in this blog post.
(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.
(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.
The new law regulates where and under what law a California employee may sue or arbitrate. In particular, for claims arising in California for employees who primarily reside and work in the state, employers are prohibited from requiring adjudication of claims in venues or forums outside of California – including both litigation and arbitration – or from depriving employees of the substantive protections of California law. Any contract provision to the contrary is voidable by the employee, who may seek injunctive relief and other available remedies (including attorney’s fees) in California and under California law.
According to the text of the statute, § 925 applies only to contracts that are required “as a condition of employment.” Therefore, if an employee is not required to sign the agreement containing the choice of law/venue provision as a condition of employment, the prohibition in the statute might not apply. So, for example, § 925 may not apply to an agreement to arbitrate that is not a condition of employment. If an agreement to arbitrate is executed in exchange for an employee’s participation in an optional benefit program, then § 925 may not apply and the employer may be able to enforce a non-California venue or choice of law provision. But if a non-California venue or choice of law provision appears in an employment contract or an arbitration agreement that an employee is required to sign as a condition of employment, then § 925 is likely to apply.
Neither the statute nor its legislative history provides a clear indication of whether § 925 applies to choice of law or venue provisions found in agreements executed in connection with optional benefits or compensation, so we expect this question to become a disputed issue once employment lawsuits or arbitrations begin involving the potential application of § 925.
Which employees does § 925 affect?
According to the text of the new law, it applies to an employee who “primarily resides and works in California.” But there is no test defining “primarily.” Must an employee both reside and work in California? Would it be sufficient for an employee to spend 50% of his time in California for the law to apply? These questions will likely soon be addressed by California courts.
Does § 925 make it illegal for an employer to ask an employee to enter into an agreement with a non-California venue or choice of law provision?
It is unclear whether the act of offering an employee an agreement with a venue or choice of law provision will be considered de facto illegal. An analysis of the text of the law and its legislative history suggests that venue and choice of law provisions would not be illegal to include in agreements, but that § 925 can make such provisions voidable.
§ 925(a) states that an employer “shall not” require an employee who primarily resides and works in California, as a condition of employment, to sign a contract that has a non-California venue or choice of law provision. The language “shall not” appears to be a prohibition that would make asking an employee to sign such an agreement an illegal act. In fact, the introduction in the Legislative Counsel’s Digest to Senate Bill No. 1241 (which added § 925 to the Labor Code) noted that existing law prohibits an employer from requiring an employee or applicant for employment to agree, in writing, to any term or condition that is known by the employer to be illegal. In that context, one could argue that § 925 makes it illegal for an employer to ask an employee to enter into an agreement that included a non-California venue or choice of law provision.
However, § 925(b) states that a non-California venue or choice of law provision “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.” So the new law contemplates a scenario where the employee can choose not to void the provision, thereby electing to have his or her dispute heard outside California or to have non-California law govern. In this scenario, the provision could not be illegal. Indeed, in distinguishing S.B. 1241 from prior unsuccessful bills, the legislative history indicates that “[i]n contrast to those bills, this bill would make the choice-of-law and choice of forum provisions voidable by the employee, and not automatically void and unenforceable.” See Senate Judiciary Committee April 25, 2016 Bill Analysis.
It is unclear under the statute at what stage of the dispute process an employee can elect to void the provision. The legislative history does not provide guidance on this issue. Future cases may determine whether an employee’s actions (e.g., filing a lawsuit in a particular venue, or making arguments based on non-California law) function to waive the employee’s power to void the offending provision.
How will a court determine whether a choice of law provision deprives an employee of the substantive protection of California law (and is therefore prohibited by § 925)?
There is no guidance in the statute itself as to how courts might make this determination. However, the statute’s legislative history does touch on this issue. Some of those who opposed § 925 argued that the new law is unnecessarily duplicative of existing law that already grants California courts the authority to refuse to enforce one-sided venue or choice of law clauses, and that already affords California courts the power to refuse to enforce a choice of law if another state’s laws fundamentally conflict with the public policy of California.
In response to this opposition, the legislature claimed that the new law was consistent with, and not merely duplicative of, existing law. See Assembly Committee on Judiciary, August 25, 2016 Bill Analysis. According to the legislature, the goal of the new law is to overcome the strong presumption that forum selection or choice of law clauses are valid and enforceable unless the contesting party meets the “heavy burden” of proving otherwise. The legislature’s reasoning suggests that the new law might shift the burden to the employer to prove that the employee is not being deprived of the substantive protection of California law. How this will play out in court remains to be seen.
The code states that the law “shall apply to a contract entered into, modified, or extended on or after January 1, 2017.” So, a contract or agreement entered into before January 1, 2017 may include an enforceable non-California venue or choice of law provision.
The legislative history certainly suggests that the statute is not meant to apply retroactively so as to not run afoul of the Contracts Clause of the Constitution. See Assembly Committee on Judiciary, August 25, 2016 Bill Analysis.
But uncertainty surrounds the question of whether § 925 will apply to agreements entered into before January 1, 2017 (or even those that were initially negotiated after that date by counsel) but which thereafter extend or renew automatically on a yearly basis, or that lapse into at-will arrangements following the expiration of a term.
On its face, § 925 applies to arbitration just as it does to court actions. Indeed, the legislative history makes that clear. The legislative history even notes that the new law does not appear to implicate the Federal Arbitration Act (“FAA”) because it “applies to all contracts involving employees,” and still allows them to adjudicate their claims in California and under California law (where doing otherwise would deprive the Californian of protection under California law). See Assembly Committee on Judiciary, August 25, 2016 Bill Analysis.
However, it is not clear how the legislature’s rationale will save § 925 from a challenge under the FAA where an employee challenges an employer’s selection of the FAA as governing law over the agreement. The Supreme Court has held that mandatory arbitration agreements governed by the FAA are enforceable under standards set forth in the FAA, and that the FAA preempts state laws that contradict it or that stand as an obstacle to the accomplishment of the Federal law. See AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 356 (2011)
Yes, but only if an employee is individually represented by legal counsel in negotiating the terms of an agreement. In that case, the agreement can include an enforceable non-California venue or choice of law provision. But even in the context of this exception, questions abound concerning the meaning of “negotiation.”
Does the exception only apply if some of the agreement’s terms are actually negotiated by an employee’s legal counsel, as opposed to an agreement that is merely reviewed by and signed off on by counsel? If the negotiation of terms is required, then it appears the exception might only be applicable to the agreements of highly compensated employees who engage counsel for the purpose of bargaining and drafting favorable terms. And what evidence of the negotiation is required to enforce the venue or choice of law provisions of the agreement? Must the employee’s lawyer also sign the negotiated agreement as proof it was negotiated by counsel? Employers should retain evidence of negotiations in case these issues arise.
The code states that “[i]n 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.” But § 925 does not identify what “other remedies” might be available. Considering that the Legislative Counsel’s Digest to Senate Bill No. 1241 (which added § 925 to the Labor Code) makes reference to the treatment of illegal provisions by Labor Code Section 432.5, there might possibly be some monetary penalties available under the Labor Code.
The primary remedies contemplated by § 925 are injunctive relief and attorneys’ fees. In the context of an arbitration, it is logical to imagine a party seeking a court injunction to ensure that the arbitrator applies the right law or that the arbitration venue complies with § 925. But it remains uncertain exactly how these remedies would work in a situation involving another state’s court. A declaratory judgment action where the employee seeks to have the choice of law and venue declared unenforceable would make sense, but the statute’s reference to injunctive relief may not be as simple to attain as it appears.
For example, issues concerning § 925 may arise when an employer has taken steps to enforce an agreement’s choice of law or venue provision in a court of law outside California. But California courts have typically been reluctant to enter injunctions preventing a party from exercising the right to pursue legal relief in another court of law. In the context of attempts to enforce non-compete contract provisions that would be void under Cal. Bus. & Professions Code Section 16600, the California Supreme Court ruled that a California court cannot enjoin an employer’s use of another state’s court to enforce a non-compete agreement, nor can it enjoin a foreign state court from going forward with a legal action to enforce a non-compete. See Advanced Bionics Corp. v. Medtronics, Inc., 29 Cal. 4th 697, 707-708 (Cal. 2002). Similarly, federal courts rejected the concept of using Section 16600 as basis for one court enjoining another court. See Bennett v. Medtronic, Inc., 285 F.3d 801, 807 (9th Cir. 2002). It is hard to see why a California court would prohibit an injunction in the context of Section 16600 but permit an injunction under § 925.
An employer should take several steps:
- Review new contracts that it intends to execute in 2017 (or current contracts that are likely to be modified or extended in or after 2017) to determine if they contain provisions that either require the adjudication of controversies (either in court or in private arbitration) in a state other than California, or state that the governing law is that of a state other than California.
- Consider striking potentially offending venue or choice of law provisions and replace them with California venue or choice of law (or remain silent).
- If certain situations, consider tying the arbitration agreement to the employee’s decision to participate in an optional benefits program (so that the agreement would not be considered a condition of employment), or adding an opt-out provision that does not make the contract a condition of employment and allows the employee a window of time during which the employee may opt out of the agreement before it becomes binding.
- If the employer wishes to include a venue or choice of law provision, then it should consider using a carve-out or savings clause that points out the employee’s ability to void the provision and renounces any intent on the part of the employer to deny the employee the substantive protection of California law In connection with a controversy arising in California.