California’s Newest Threat to Out-of-State Businesses [UPDATE]

October 4, 2016

On July 22, we wrote about California Senate Bill 1241 and its potential impact on foreign businesses operating in California.  In modified form, SB 1241 became law on September 25, 2016.  It adds Section 925 to the California Labor Code.

SB 1241 does two things: (1) it prohibits 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, and (2) it prohibits depriving the employee of the substantive protection of California law with respect to a controversy arising in California.  “Adjudication” includes both civil litigation and arbitration.

SB 1241 effectively deprives out-of-state businesses of the ability to include in their employment contracts the state in which arbitrations and lawsuits would take place and what state’s law would apply.  Earlier versions of SB 1241 had sought to impose the same regulations on consumer contracts, but before the governor signed the bill into law, those provisions were removed.

The proposed law applies to employment contracts entered into after January 1, 2017 and those contracts entered into before that date but still effective after January 1 through renewal or modification.

SB 1241 makes offending contracts voidable at the mere request of the employee.  Further, SB 1241 empowers a court to award reasonable attorney’s fees to the employee who is enforcing his or her rights under the new law; though an award of fees is discretionary, not mandatory.  Other remedies are also available, such as injunctions.

The bill does state, however, that these new rules do not apply to a contract with a party who is actually represented by an attorney in negotiating the agreement if it designates an out-of-state choice of law and/or venue.

SB 1241 should result in out-of-state companies that hire employees in California being divested of the ability to designate another state’s law or venue, such as the state where the company is based.  This is a significant departure from current law and this author is not aware of any other state that has a similar law on the books.  Under SB 1241, companies may be pulled into a California court of their employee’s choosing, with California’s not so business-friendly laws applying.

Claims available to employee plaintiffs will also likely be expanded under SB 1241 — it could usher in more lawsuits against businesses in California.  Plaintiffs’ attorneys will surely assert that including a non-California choice of law or venue provision in an agreement (whether intentionally or inadvertently) gives rise to claims under the California Private Attorneys General Act (PAGA), and common and unfair competition law.  PAGA claims, especially in the employment context, have steadily been on the rise in California for years.

SB 1241 is a response by a state legislature continuing to struggle with how to respond to California state and federal courts who have routinely upheld the enforceability of arbitration provisions in consumer and employment contracts regardless of their choice of law or venue selection provisions.

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