New Law May Force GCs to Revise Company Contracts

A new California law will change the way that thousands of corporate counsel draft company contracts.

Many companies with employees in California have tried to have their contracts governed by the laws of other states or countries and to have disputes heard in those other locations.

For example, a company might specify that a contract would be governed by the state or country where it was headquartered or incorporated, if that state or country’s law was seen as more favorable to employers.

Public Policy

Companies have used foreign forum selection and choice of law clauses to try to get around California’s general prohibition on non-compete clauses in employment contracts.

California courts would often refuse to enforce such clauses when they were contrary to California public policy.

However, federal courts will usually enforce forum-selection clauses. The US Supreme Court reinforced this policy in the 2013 case of Atlantic Marine Constr. Co.

New California Law

Senate Bill 1241, which will become California Labor Code Section 925,

would 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.

Any contract clause that violates the law would be voidable by the employee.

Affected Contracts

The law applies to a range of contracts commonly signed by employees, including:

  • employment agreements
  • non-competes
  • non-solicits
  • confidentiality agreements (NDAs)
  • IP assignments
  • separation (severance) agreements

An employee suing to enforce rights under the law could be awarded attorney’s fees and costs.

Advice of Counsel

The law includes an exception for employees represented by legal counsel in negotiating their contracts. Thus, the law will primarily affect lower-level employees who don’t hire lawyers to review and negotiate their contracts.

Some things about the new law aren’t entirely clear and may end up being the subject of court cases.

The new law doesn’t define what “primarily” means, and thus how it applies to employees who don’t live full-time AND do all their work in California.

Also, the law doesn’t define what “deprive the employee of the substantive protection of California law” means.

Deadline

The law applies to contracts entered into, modified, or extended on or after January 1, 2017, so employers won’t need to revise all of their existing contracts with California residents.

However, going forward attorneys for businesses with California employees will need to decide how to deal with the new law.

There are several options:

  • Keep contracts the way they are (with a non-California choice-of-law and/or forum selection clause), knowing that those clauses probably won’t be enforceable.
  • Include California choice of law and forum clauses for all new contracts.

Revise standard contracts to add a clause that for California employees (only) California law will apply.

We Can Help

LawGeex can create custom solutions for corporate counsel to make contract review easier, faster, and more accurate.

For example, when a contract with an employee with a California address includes a foreign choice of law or forum clause, LawGeex can flag that and alert the attorney that the clause may not be enforceable.

For a demo, please contact us at hello@lawgeex.com.

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