California Won’t Enforce Employee Contracts With Out-of-State Law

Almost all contracts have some kind of “choice of law” or “governing law” clause. For example, such a clause might read:

The interpretation, validity and enforcement of this Agreement, and all legal actions brought under or in connection with the subject matter of this Agreement, shall be governed by the law of the State of New York…

Contracts also often have a “jurisdiction” or “choice of forum” clause that might read something like this:

Vendor hereby consents and submits to the jurisdiction and forum of the state and federal courts in the New York in all questions and controversies arising out of this Agreement.

These clauses may look like they’re dealing with the same thing, but they’re not. The first clause deals with which state’s LAW will be applied. The second clause deals with which state’s COURT will deal with any disputes.

It may come as a surprise to many non-lawyers that a court in one state can actually apply the law of another state.

Employment Contracts

When it comes to employment contracts, the employer is normally the party drafting the agreement. Employers will usually select the law and jurisdiction of the state where the employer is headquartered or incorporated.

(Companies aren’t always incorporated in the same state where their headquarters are located. For example, Delaware is a popular state for incorporation. As reported by the New York Times, a single address in Wilmington, Delaware is the legal address for 285,000 separate businesses, including Apple (based in California) and Coca-Cola (based in Atlanta).)

Federal courts will usually enforce forum-selection clauses, and the US Supreme Court recently reinforced this policy in the case of Atlantic Marine Construction Co.

New California Law

However, a new California law will prevent employers from enforcing out-of-state choice of law and forum clauses in employment contracts.

California Senate Bill 1241 will

prohibit an employer from requiring an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would require the employee to adjudicate outside of California a claim arising in California or deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

The law applies not just to general employment agreements but to other employment-related contracts such as:

• employee NDAs
• non-competes (which are almost never allowed under California law)
• invention and intellectual property assignments
• severance (termination, separation) agreements
• non-solicitation agreements (prohibiting employees from trying to get business from the employer’s clients or hire the employer’s employees)

The law went into effect January 1, 2017 and only applies to contracts signed, modified, or extended as of that date. It applies to contracts that require arbitration as well as those in which disputes are to be resolved via conventional litigation.

Importantly, the law doesn’t apply when an employee is represented by a lawyer when negotiating an agreement. It’s intended to protect lower-level employees who can’t afford to hire a lawyer to review an employment contract.

This is good news for California employees, who won’t be forced to bear the additional expense and inconvenience of resolving employment disputes in another state.

California businesses need to be aware of the new law and may need to adjust their contract terms in accordance with it.