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California Law to Prohibit Choice of Law Provisions for In-State Employees

Posted: October 5, 2016

On September 25, 2016, California Governor Jerry Brown signed into law S.B. 1241, which prohibits employers from requiring employees, as a condition of employment: (1) to litigate or arbitrate claims arising in California outside of California; and (2) to agree to the application of another state’s law for controversies arising in California.  These prohibitions apply to contracts entered into, modified, or extended on or after January 1, 2017, and are applicable to employees who primarily reside and work in California.  Any provision of a contract that violates these prohibitions is voidable, upon request of the employee, and disputes over a voided provision are to be adjudicated in California under California law. The statute provides for injunctive relief and authorizes courts to award reasonable attorney’s fees.  The only exception to these prohibitions are for employees who are represented by legal counsel in negotiating their agreements, who may designate the forum and venue in which a controversy may be adjudicated, as well as the choice of law that may be applied.
This law substantially changes the way employment contracts can be drafted in California. It is not yet clear how the “condition of employment” language will be interpreted—whether it only applies to agreements contingent on job offers or whether broader agreements, such as equity agreements signed by senior management, are subject to this law.  Such prohibitions may present difficulties for national companies who prefer consistent agreements, as well as for the maintenance of restrictive covenants, which California generally prohibits.