There were many changes to California law that were voted on and signed into law in 2016. Many of those are just now taking effect and beginning to impact small business across the state. One of those laws, Section 925 of the California Labor Code, limits what forum and choice of law clauses can go into an employment contract.
The new law prohibits employers from using contract provisions that require a contract to be interpreted using another state’s law, or that disputes be resolved in another state. The prohibition applies only to the contracts of employees who primarily reside and work in California. So, while it will not affect all workers in California, it will impact the vast majority.
Choice of Law Provisions in General
Choice of forum and law provisions are found in any contract, employment or otherwise. Currently, those provisions are subject to a robust body of regulations from different statute and judicial law. So, it is not clear at all why the California legislature chose to enact this law or how it will be interpreted with the existing set of judicial opinions and other laws.
This new choice of law provision rule became effective for contracts entered into after the first of this year. Will the new law have an impact on mandatory arbitration clauses in employment contracts? Not likely, but this has yet to be resolved by a court.
Mandatory arbitration clauses are nearly as universal in employment contracts as choice of law and forum clauses. In many cases they go together within the same clause or section. Under the new California law, any clause of a contract with a foreign choice of law provision is voidable. So, would that also void the arbitration clause?
The reason this is not likely is because of the Federal Arbitration Act. That law requires all contracts with arbitration clauses to be enforced. The federal government has made the policy choice to uphold these clauses with the intent of lessening the burden of litigation on the federal judiciary (whether that worked is the subject of a different post). As a result, any state law that would go against this policy would also (likely) go against the Supremacy Clause of the U.S. Constitution.
Another important part of this new law is the enforcement provision it entails. If a contract does have a choice of law clause that violates this law, then it is voidable by the employee. But the catch here is that the employee would be entitled to any attorney’s fees used to void the clause that should not have been there in the first place. In a class action suit, or even a small litigation, this adds extra cost to already costly cases.
Knowing that this new law has teeth should put all businesses on notice. Compliance with this and other California law can be a complex and difficult endeavor, which is why you need the best legal counsel available. At The Royse Law Firm we can counsel you on compliance with this and other laws, and help you through any legal hurdle your company is facing. Contact us today for the details.