What Happens in CA Stays in CA: CA Bans Out of State Forum Selection Clauses in Employment Contracts

Many employers doing business in California compel employees to sign employment agreements with non-competes that name other states as the exclusive forum for adjudicating contractual disputes and requiring that the law of those other jurisdictions apply. These forum selection clauses (“FSC”) allow these employers to get around California law, which outlaws non-competes in employment agreements, and often forces California employees to defend themselves elsewhere, often at great expense and inconvenience. Although district courts generally have discretion in deciding whether to transfer a case, the FSCs are enforced in most cases. 

California just passed a law designed to prohibit the use of these clauses in employment contracts so that employers cannot get around the state’s public policy against non-competition agreements. On Sept. 25, Governor Jerry Brown signed a bill (Senate Bill 1241) that amended the state’s Labor Code to prohibit an employer from requiring as a condition of employment, that an employee “who primarily resides and works in California” to “adjudicate” outside of California a claim arising in that state. The term “adjudicate” covers both litigation and arbitration. Moreover, the law prevents an employer from depriving an employee “of the substantive protection of California law” for a matter arising in California. In other words, a company cannot use what are commonly referred to as choice of law provisions to make the law of other states applicable to California workers. The law exempts any agreement made by an employee individually represented by an attorney that designates “either the venue or forum” in which an employment claim will be resolved. Violations of the law, which applies to contracts entered into, modified or extended after Jan. 1, 2017, will entitle the employee to injunctive relief and other remedies, including reasonable attorneys’ fees. 

Importantly, the new law does not apply to an employee contract where the employee is individually represented by an attorney that is negotiating the terms of the contract. This means that the employer can in that case include a provision that designates the venue or forum in which a controversy arising from the employment contract may be adjudicated. 

The Bottom Line: Starting in January 1, 2017, out-of-state companies that conduct business in California will no longer be able to force employees to defend themselves in their home jurisdictions, where the law may be employer friendlier. Therefore, now is the time to review all employment contracts used in California. Since the new law will apply to any contracts modified or extended after January 1, 2017, now is a good time to consider any modifications or extensions. If you have any questions, please contact Jed Marcus at jmarcus@bressler.com or (973) 966-9678.