Under a new law, employment contracts made or modified after January 1, 2017, can no longer require California employees to adjudicate disputes outside of California or subject their disputes to the laws of other states.
The new law, codified as California Labor Code section 925, states in part:
“(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.”
As many employers are aware, California law generally provides broader protections to employees than many other states. These protections often mean that employers are exposed to greater liability under California law than they would be under the laws of most other states. This can be especially difficult for employers who employ people in many different states because a particular employment policy could be legal in one state but illegal in California.
One way for employers to minimize their exposure under California law is to require their California employees to agree that the laws of a different state (i.e. the state in which the employer is headquartered) will apply to any dispute that may arise. That way, the employer is not tasked with navigating a patchwork of different laws in each state.
Under Labor Code section 925, however, it will no longer be as simple for employers to avoid litigating in California or under California law. Further, employees who litigate against an employment contract that runs afoul of Labor Code section 925 will be entitled to recover their attorneys’ fees against their employer.
Fortunately, there are exceptions to the new law. First, the law only applies to contracts “entered into, modified, or extended” on or after January 1, 2017. Therefore, any contract executed with a California employee before January 1, 2017, will remain valid even if it requires the employee to litigate outside of California or under a different state’s law. Second, the law does not apply if an employee is represented by legal counsel in negotiating the employment contract at issue.
Employers need to immediately evaluate whether Labor Code section 925 will affect their present or future employment contracts. If so, one option is for employers to negotiate new contracts prior to the law being triggered beginning January 1, 2017. This, however, is probably not a long-term solution because any contracts that are ultimately modified or extended after January 1, 2017, will then be subject to the law. Ultimately, employers who currently require their California employees to submit to the laws of a different state should begin analyzing whether their employment policies are consistent with California law, in anticipation of California law ultimately governing the employment agreements.