Why Senate Bill No. 1241 may mean you need to clean up your employment contracts.

On September 25, 2016, California Governor Jerry Brown signed a bill updating section 925(a) of California’s Labor Code. As a result, employers must carefully evaluate whether they can require most California-based employees to agree to another state’s or jurisdiction’s choice of law and forum selection as a condition of entering into employment. This new law applies to employment contracts entered into, modified, or extended, on or after January 1, 2017 with employees who primarily work and reside in California.

This new law targets two types of contract provisions that now may require housekeeping. The first is a forum selection clause: any contract provision that requires an employee to adjudicate claims that arise within California outside of the state. Amended Section 925(a) defines “adjudication” to include arbitration and litigation.

The second contract provision targeted by the new law is a choice of law clause: any provision that deprives an employee of substantive protection of California law with respect to a controversy arising in California by mandating the application of another jurisdiction’s law to the controversy.

Effective January 1, 2017, if an employment contract with an employee who primarily resides and works in California contains one or more of the targeted adjudication or choice of law provisions, the employee may void the targeted provision at his or her election. The statute further authorizes an employee to obtain injunctive relief, attorneys’ fees and “other remedies” in an action to void such clauses, although what that means practically is far from clear.

What this law means for you

— Your existing and future employment, confidentiality, arbitration, and non-competition contracts may be implicated. If you have employees who primarily reside and work in California, you may need to do some housekeeping on your form contracts to the extent they contain adjudication or choice of law provisions that require the resolution of disputes outside of California or using a foreign body of law. This includes arbitration and non-competition agreements and provisions.

— The adjudication and choice of law provisions are not automatically void; they are merely voidable at the election of an employee. But consult with counsel regarding the impact of the new law; if an employee elects to void one or more such provisions, California law supposedly will govern and the matter may need to be adjudicated in California.

— It is not clear if the new law outright prohibits foreign choice of law and forum selection clauses, or merely makes them voidable. If the former, employees may be able to recover for the violation of the statute itself, including injunctive relief, the award of reasonable attorneys’ fees, and other remedies.

Specific Applications

—This law applies only to contracts entered into, modified, or extended, on or after January 1, 2017. It does not apply to pre-January 1, 2017 contracts where no modification or extension will take place after that date. It does, however, apply to pre-January 1, 2017 contracts that are modified on or extended after that date.

—The new law exempts from its scope employees who are represented individually by legal counsel in negotiating the terms of an agreement to designate the venue in which a controversy arising from the employment contract may be litigated or the choice of law to be applied.

 

Check to see if your employment contracts include either of these adjudication or choice of law provisions. If so, it is time to sweep away the dust by consulting employment counsel to clean up your employment contracts. For additional information about this decision and its impact on your workforce, please contact one of the authors of this alert or the Hogan Lovells lawyers with whom you work.