Labor Code Section 925: Answers to 10 Key Questions About California’s New Limits on Out-of-State Choice of Law and Forum Selection Clauses

On January 1, 2017, California Labor Code Section 925 went into effect. This new provision limits an employer’s ability to require employees to enter agreements that include out-of-state choice of law and/or forum selection clauses. Below are 10 questions about the new law and the answers every employer should know.

1. To whom does the law apply? Generally, Section 925 applies to all employers (regardless of where they are headquartered) entering employment agreements with employees who primarily work and reside in California.
2. What are the law’s restrictions? An employer may not require an employee (unrepresented by counsel) who primarily works and resides in California, as a condition of employment, to agree to a provision requiring the employee to adjudicate disputes arising in California in a forum outside of California or under other than California law.
3. What if the employee is represented by counsel? Section 925 does not apply to an agreement with an employee who is “in fact individually represented” if his or her lawyer is involved in negotiating the terms of the forum selection or choice of law clause applicable to employment disputes.
4. What if the employee works in California but resides outside of California (or vice versa)? The plain language of Section 925 makes clear that the law applies to agreements with employees who primarily (meaning more than half of the time) reside and work in California.
5. What if the agreement is voluntary? Section 925 prohibits requiring an employee to enter an agreement with an out-of-state forum selection or choice of law clause as a condition of employment. The law would not apply to a voluntary agreement that is not a condition of employment. For example, a voluntary severance agreement is not entered into as a condition of employment.
6. What if the dispute arises outside of California? The plain language of Section 925 makes clear that the law applies to claims or controversies arising in California. Keep in mind, however, that absent a unique fact pattern, employment claims by employees who primarily reside and work in California are likely to be deemed to have arisen in California.
7. What if the dispute involves arbitration, rather than litigation? Section 925 applies to disputes arising in arbitration or litigation.
8. What are the consequences of violating the law? Any provision of an agreement that violates the law is voidable by the employee. If an employee requests that a provision be rendered void, the dispute over whether the provision is voidable will be litigated in California under California law. A court may issue a full range of relief in connection with the resolution of that dispute, including injunctive relief and reasonable attorneys’ fees. Additionally, existing law prohibits an employer from requiring an employee or applicant for employment to agree, in writing, to any term or condition that is known by the employer to be illegal. An agreement found to be void under Section 925 may also violate California Labor Code Section 432.5, California Business and Professions Code Section 17200, and/or common law claims such as violation of public policy.   
9. Does the law apply to existing agreements? The law applies to agreements entered into, modified, or extended on or after January 1, 2017. The law does not apply to existing agreements that remain unchanged.
10. What can employers do now? Employers with employees working and residing in California may want to review all mandatory employment agreements to determine whether they contain out-of-state forum selection or choice of law clauses, including arbitration clauses, at-will agreements and handbook acknowledgments, confidentiality and nondisclosure agreements, and invention and assignment agreements. For those agreements that will be modified or extended and for all new agreements, employers may want to consider removing out-of-state forum selection or choice of law clauses. Alternatively, employers may consider adding an addendum to existing mandatory agreements stating that employment disputes arising in California with employees primarily working and residing in California will be resolved in California under California law. For non-mandatory, individually negotiated agreements, employers may want to consider advising employees or applicants to obtain counsel. Where applicable, employers may want to include a recital confirming the presence of counsel.