Law is a sea change in employer, employee contract rights

For years, parties in California were permitted to agree upon the specific law that would apply to a given contract and the forum where the parties would litigate issues arising out of the contract. California employers relied upon these general principles when drafting and executing choice-of-law and choice-of-forum provisions in their employment and arbitration agreements. With the passage of Senate Bill 1241 - which will add Section 925 to the California Labor Code - the Legislature has significantly limited the right of employers and employees to enter into choice-of-law and choice-of-forum agreements. In most circumstances, California will be the only choice for employment-related agreements.

Section 925 will apply to all contracts and agreements between an employer and employee that are entered into, modified, or extended on or after Jan. 1, 2017. The question now is: With such a seismic shift in an employer's right to contract with its employees regarding the parties' intended choice of law and forum, what should employers and employees expect come January?

California Labor Code Section 925 Alters Well-Established Unconscionability Principles as It Applies to Employment Agreements.

As the law currently stands, unconscionable agreements containing choice-of-law and choice-of-forum provisions are not enforceable under California law. See Wash. Mut. Bank, FA v. Superior Court, 24 Cal. 4th 906, 917-18 (2001); see also Sanchez v. Valencia Holding Co., LLC, 61 Cal. 4th 899, 912 (2015) (citing Wash. Mut. Bank, F.A., 24 Cal. 4th at 916-17). In other words, if an agreement arises from an inequality of bargaining power or results in an overly harsh or one-sided result, a court will not enforce the agreement. See Parada v. Superior Court, 176 Cal. App. 4th 1554, 1568-72 (2009); Roman v. Superior Court, 172 Cal. App. 4th 1462, 1469-70 (2009).

The soon-to-be enacted Labor Code Section 925 foregoes the traditional unconscionability analysis for choice-of-law and choice-of-forum provisions in employment agreements. Specifically, under Section 925, an employer is prohibited from requiring an employee, as a condition of his or her employment, to agree to a provision that would either (a) require the employee to litigate or arbitrate claims arising in California in a forum outside of California or (b) deprive the employee protection of California law with respect to claims arising in California. Simply put, employment agreements falling under the purview of Section 925 must be governed by California law and litigated in California.

Section 925 applies to any "employee who primarily resides and works in California" Both conditions must apply to the given employee. Counsel should instruct their clients to compile a list employees who "primarily reside[] and work[] in California." Counsel also should review their clients' form employment agreements and arbitration agreements to determine whether Section 925 applies to such agreements and any post-Jan. 1 modifications to them.

Under Certain Circumstances, Employers and Employees May Still Agree to Non-California Choice-of-Law and Choice-of-Forum Provisions.

At first blush, Labor Code Section 925 appears to end all non-California choice-of-law and choice-of-forum provisions relating to an individual's employment. Not quite. The text of the statute provides several grounds for parties to argue that Section 925 does not apply to a particular agreement. Although Section 925 generally presents a significant obstacle for the parties to agree upon non-California choice-of-law and choice-of-forum provisions, employers and employees may still be able to artfully navigate around the statute.

First, and most obvious, the parties may utilize the explicit exception found in Section 925(e). In that subsection, the Legislature has made it clear that Section 925 will not apply to an agreement when the employee "is in fact individually represented by legal counsel in negotiating the terms of the agreement." If an employer seeks to remove an agreement from the purview of Section 925, it should consider requiring its employees to have separate legal counsel review and advise employees on any agreement containing a choice-of-law or choice-of-forum provision. Additionally, the employer should include language within the agreement at issue that expressly states that an employee has retained separate legal counsel who has reviewed and advised him or her on the agreement. Although the statute does not explicitly define the phrase "individually represented by legal counsel in negotiating the terms of the agreement," an employer should require an employee to acknowledge that the employee has done so in compliance with Section 925(e).

Second, the parties could argue that Section 925 does not apply if the agreement was not entered into "as a condition of employment." The parties might avoid the application of Section 925 if, at the time of hire, the parties entered into a separate agreement that establishes the parties' choice of applicable law and choice of forum for employment issues. The employer would offer separate consideration - e.g., a signing bonus - in exchange for the employee's agreement to be bound by the given choice-of-law and choice-of-forum provisions. Under such a scenario, the employee would not be entering into the agreement "as a condition of employment;" rather, he or she would be agreeing to such provisions solely for monetary or other valuable consideration. It would be prudent to require that an employee obtain legal counsel on this agreement as well as a fail-safe until jurisprudence develops around the issues.

Similarly, the statute is unlikely to apply to choice-of-law and choice-of-forum provisions in severance agreements. Typically, severance agreements provide some consideration in exchange for a general release and other material terms sought by the employer. A court would likely find that these agreements are not executed "as a condition of employment," unless the severance is built into an employment agreement at the inception, as in many executive contracts.

Third, the text of Section 925(b) intimates that non-California choice-of-law and choice-of-forum provisions may be enforceable if the employee ratifies the provisions. Pursuant Section 925(b), choice-of-law and choice-of-forum provisions that violate the statute are "voidable by the employee," meaning they are rendered "void at the request of the employee." Stated differently, the employee has the option to adhere to the contracted provisions or void them entirely. However, California courts have consistently allowed individuals to ratify a voidable contract or provision by an express or implied agreement. E.g., Hastings v. Dollarhide, 24 Cal. 195, 215 (1864) (summarizing a case where "it was held that the voidable deed of an infant might be affirmed by an express ratification"); see also Cal. Civ. Code Section 1588 ("A contract which is voidable solely for want of due consent[] may be ratified by a subsequent consent"); Yvanova v. New Century Mortg. Corp., 62 Cal. 4th 919, 930 (2016) (explaining that "[d]espite its defects, a voidable transaction, unlike a void one, is subject to the ratification by the parties.").

Presumably, California courts also will allow an employee to ratify non-California choice-of-law or choice-of-forum provisions contained in employment agreements by entering into a subsequent express agreement with the employer. Accordingly, employers and employees who wish to enter into non-California choice-of-law or choice-of-forum provisions after Jan. 1 should consider executing an express ratification by the employee of those provisions.

Fourth, employers and employees might be able to avoid the application of Section 925 if they can demonstrate that the employee does not "primarily reside[] and work[] in California." The statute does not define the phrase. Thus, it is unclear the specific amount of time or exact factors considered when determining an employee's primary residence and primary place of work for purposes of Section 925. This begs the question: Does Section 925 apply to employees who frequently travel - e.g., a flight attendant? Absent specific authority on this issue, and until further jurisprudence is developed, employers and employees might consider expressly stating, where applicable, that a given employee does not primarily reside or work in California.

Conclusion

New California Labor Code Section 925 will impose a significant, but surmountable, impediment for employers and employees who wish to contract on their agreed choice of law or forum. At this stage, and absent any case law analyzing the statute, those who desire to enter into and enforce non-California choice-of-law or choice-of-forum provisions after Jan. 1 must develop creative methods for drafting and executing such provisions. To that end, employers and employees should contact their legal counsel to determine whether their choice-of-law or choice-of-forum provisions are compliant with Section 925.