United States: A Possible New Year's Hangover For Multistate Employers With California Employees

Multistate employers with headquarters located outside California may wake up to a rude surprise on January 1, 2017, as a result of a new California Labor Code law affecting their employment agreements with California employees. California Labor Code Section 925 applies to employment contracts with employees who live and work primarily in California, prohibiting such agreements from requiring California employees to agree (as a condition of employment) to:

  • "Choice of venue" or "forum shopping" clauses requiring employees to litigate or arbitrate claims arising in California in forums located outside California
  • "Choice of law" provisions depriving the employee of the substantive protection of California law with respect to disputes arising in California

As a result of the new law, multistate employers will no longer be able to rely on contract provisions requiring their California employees to contest disputes arising in California either in the employer's home state or according to the employer's home state laws.

Effective Date. California Section 925 will apply to any employment contract with a California employee entered into, modified, or extended on or after January 1, 2017. Contracts signed before December 31, 2016, are not affected (unless later modified or extended).

Exempt Agreements. California Section 925 only applies to employment contracts that are entered into as a "condition of employment." It will not apply to agreements required as a condition to participate in deferred compensation plans or other benefit plans, or to employment agreements with an "opt-out" provision. These types of agreements can still include choice of venue and choice of law provisions. (For this purpose, an "opt-out" provision is a window of time during which the employee may opt out of entering into an agreement before it becomes effective.)

In addition, California Section 925's requirements do not apply to employment contracts negotiated on the employee's behalf by the employee's own attorney. (In such cases, the employee is most likely an executive, and is therefore generally viewed as more sophisticated and able to negotiate the terms and conditions of his or her employment agreement.) To ensure its exemption from the requirements of California Section 925, the employment agreement should state it was negotiated by the employee's individual counsel, and, ideally, the employee's attorney would sign the agreement, attesting to that fact, as well.

Also, while not technically an exemption, employers should note that California Section 925 does not necessarily preclude enforcement of mandatory employment arbitration agreements. An otherwise valid arbitration agreement that provides for arbitration in the state of California, applying California law, will not be prohibited by the new law.

Traps for the Unwary. Pre-2017 employment agreements that are extended automatically from year to year due to an "evergreen" provision will be subject to California Section 925 after December 31, 2016. In addition, agreements that permit the parties to renegotiate the employee's salary from year to year will become subject to California Section 925, if the parties agree to a salary increase in 2017 (or later years).

Consequences of Violations. If an employee's employment contract includes choice of venue or choice of law provisions prohibited by California Section 925, the employee can elect to void those provisions. Any disputes between the parties would then be decided in California under California law, rather than in the employer's preferred forum and under its preferred law. The employee is entitled to injunctive relief to prevent litigation or arbitration of any dispute outside of California in such cases, and the court may also award the employee reasonable attorney's fees.

Next Steps. Multistate employers with California-based employees who might have employment agreements subject to California Section 925 should take the following steps now to ensure they are in compliance with (or exempt from) the new law:

  1. If possible, all employment contracts that might be affected by Section 925, and that are in the final stages of negotiation, should be signed on or before December 31, 2016.
  2. Review all employment contracts to distinguish between employment contracts and other types of contracts, i.e., agreements to participate in deferred compensation plans, etc., that may be exempt from California Section 925's requirements.
  3. Determine whether an employment agreement contains an evergreen provision that will cause it to automatically become subject to California Section 925 after 2016. Employers may want to consider amending such agreements to address this issue. (In many cases, however, this may not be possible without the employee's consent.)
  4. Determine whether the employee entering into an affected employment agreement was represented by an attorney during the contract's negotiations (again, this will most likely apply to executives). If it is possible to amend the contract to include a clause stating that it was negotiated by the executive's attorney, thereby making California Section 925 inapplicable, that would be ideal. Otherwise, the employer should retain a record of the attorney's involvement in the negotiation of the agreement, in case there is a dispute in the future.

On and after January 1, 2017, employers should review all new and renegotiated employment contracts to ensure that they are either exempt from California Section 925, or that their terms comply with the new law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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