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Another Employee-Friendly Law: New California Law Aims to Keep Employment-Related Disputes Centered in California

By Michael Arnold, Brent Douglas and Audrey Nguyen

Beginning next year, employers may no longer force their California employees to resolve their employment-related disputes outside of California or use non-California law when doing so.  With limited exceptions, the new law, codified at Labor Code Section 925, will be applicable to all employment agreements entered into, modified, or extended on or after January 1, 2017.  The new law is yet another attempt by California policymakers to provide added protections to employees working in their state.

The Law Tries to Keep Disputes in California and Apply California Law

Specifically, the new law states that 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 provides for either or both of the following:

  • Requires the employee to adjudicate outside California a claim arising in California; or
  • Deprives the employee of the substantive protection of California law with respect to a controversy arising in California.

Currently, companies may require employees to agree to a non-California venue or to apply non-California law to resolve disputes, subject to certain constraints.  But starting January 1, 2017 such contracts will be voidable at the employee’s election subject to a few important exceptions we will address further below.

Despite its robust limitations on venue selection and choice of law clauses, the legislation fails to define several important concepts, including who “primarily resides and works in California” or what “substantive protection of California law” means, thus leaving open two avenues for future litigation.

Important Exceptions Apply

First, the law is not retroactive and older agreements may retain their existing non-California venue and choice of law provisions.  However, the law does cover those agreements extended on or after January 1, 2017.  Thus, employers must keep an eye on agreements whose terms automatically extend to avoid a violation of the new law.  In such cases, employers will need to determine whether to terminate those agreements short of an extension (which can create its own set of issues) or amend them to comply with the law.

Second, the law excludes from its coverage contracts where the employee is “individually represented by legal counsel in negotiating the terms [of the] agreement.”  This provision will likely prove handy for executive employment agreements and settlement agreements.  One outstanding question is whether an agreement will be excluded where the employee retained a lawyer, but the agreement was not subject to negotiation.

Third, Section 925 expressly applies only to agreements that are entered into “as a condition of employment.”  This would seem to exclude contracts where the employee truly has a choice over whether to execute, including where the employee may have the option to opt-out of the agreement at some later date.  This is yet another area where the courts may lend an interpreting hand.

Important Question Remains Over Scope of Prohibition

Based on the wording of the statute, it is unclear whether requiring the employee to enter into an agreement containing non-California venue and choice of law provisions is by itself a violation of the statute.  The law says employers are not permitted to do this, but also provides the employee with the option of voiding the contract.  The answer to this question is critically important because the new law makes imposing a non-California venue or choice of law an independent cause of action and successful litigant-employees can recover attorneys’ fees in addition to injunctive relief and any other available remedies under California law.  Query then whether an employer may be able to include some savings language.  Examples include notifying the employee of his or her ability to void the agreement and also stating that the employer is not otherwise seeking to deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

* * *

California employers need not review or revise any existing employment agreement solely because of the new law.  However, they should ensure that all employment agreements entered into or even slightly revised after January 1, 2017 that they require an employee to enter into as a condition of employment will be in compliance.  Employers should consider whether to change agreements entered into as a condition of employment to include California choice of law and forum provisions or to just leave them silent on these issues.

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Brent Douglas