Starting January 1, 2017, it will be much more difficult for employers to bind California employees to non-competition agreements by choosing the law of another State to apply to the agreement. New California Labor Code section 925 prohibits employers from requiring California-based workers as a condition of employment to litigate their claims outside of California or under another state’s laws.
While it has long been the public policy of California to void employee noncompetition provisions under state law, other states do not have the same policy. Some employers thus chose a state other than California for interpretation and enforcement of such contracts for their California-based employees. Other employers used forum selection clauses to place any litigation with an employee in a more favorable foreign forum.
Under the new law an employer cannot require an employee who primarily resides and works in California to adjudicate outside of California claims arising in California or deny the employee the substantive protection of California law with respect to a controversy arising in California. Such contractual provisions are made “voidable by the employee.”
Thus, an employee may opt to proceed under another state’s law, but cannot be forced to do so by the employer; and may void a provision which runs afoul of the new law and require the matter to be tried in California. whether through litigation or
arbitration. This effectively removes the use of forum selection clauses and choice-of-law provisions to provide California employees the protections of California law.
There is one large exception provided in the new law. It does not apply to employment contracts where a party is represented by counsel in the negotiation of an agreement. This occurs frequently with high level executives and senior management.
There are several questions that have yet to be answered about how the new law will be interpreted and applied. For example, what is meant in the statute by “as a condition of employment”? Does the statute also apply to confidentiality agreements that by their terms do not state that the agreement is a condition of employment? Will the statute apply in arbitrations governed by the Federal Arbitration Act, which courts often hold preempts contrary state law? What constitutes an employee “represented by legal counsel in negotiating the terms” of an agreement? Does that include Unions or any employee who hires counsel?
In light of the new law, employers should seek counsel to review and amend their employment agreements to assure they comply and to determine the best strategy for management of their work force.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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