Forum Selection and Choice of Law provisions in Employment Agreements
As a general rule, California favors contractual forum selection clauses (the place where the lawsuit will be filed) and enforces them, if they are entered into freely and voluntarily and their enforcement would not be unreasonable. However, a forum selection clause in an Employment Agreement may not be enforced when the claims at issue are based on non-waivable rights created by California statutes unless the Employer can show that the forum designated in the Employment Agreement will not result in a significant diminution of the rights of the California-based Employee.
Forum Selection Clauses Favored in California
California has long favored contractual forum selection clause that are entered into freely and voluntarily, if enforcement would not be unreasonable because forum selection clauses are important in facilitating national and international commerce. [Verdugo v. Alliantgroup, L.P. (2015) 187 Cal.Rptr.3d 613, 617-618; 2015 DJDAR 5849.] In fact, forum selection clauses in Employment Agreements are also generally enforced by California courts unless enforcement would be unreasonable or unfair. [Animal Film, LLC v. D.E.J. Productions, Inc. (2011) 193 Cal.App.4th 466,471.] It is important to note that mere inconvenience or additional expense is not the test of unreasonableness, and a clause is reasonable if it has a logical connection with at least one of the parties or the transaction. [Berg v. MTC Electronics Technologies Co. (1998) 61 Cal.App.4th, 349, 358-359.]
The party opposing enforcement of a forum selection clause ordinarily bears the burden of proving it should not be enforced. However, that burden is reversed when the claims at issue are based on unwaivable rights created by California statutes. When this is the case, the party seeking to enforce the forum selection clause bears the burden of showing that litigating the claims in the forum designated in the Employment Agreement will not diminish in any way the substantive rights afforded to the Employee under California law. [Verdugo v. Alliantgroup, L.P., supra, 187 Cal.Rptr. 3d at 618.]
In Verdugo, the Employment Agreement designated Harris County, Texas as the exclusive forum for any dispute arising out of Verdugo’s employment and also had a provision designating Texas as the choice of law to be applied. [Id. at 617-618.] The plaintiff based all her claims on Labor Code provisions and sought unpaid wages, statutory penalties, interest and attorneys’ fees based on the Employer’s failure to pay overtime compensation, and failure to provide accurate wage statements, meal breaks, wages due upon termination, earned commissions, and vacation pay. The California Legislature declared that these rights cannot be contravened or set aside by a private agreement, whether written, oral or implied. In fact, the courts in California have repeatedly recognized that these provisions are unwaivable and any contract purporting to waive these rights is illegal and unenforceable. [Id. at 621.]
A Comparison of the Laws in each Forum is Necessary
A comparison of the subject laws in California and the foreign forum designated in the Employment Agreement is necessary to determine whether or not enforcing the forum selection and choice of law clauses would violate California public policy. Therefore, an Employer seeking to enforce a mandatory forum selection clause bears the burden to show enforcement will not in any way diminish the Employee’s unwaivable statutory rights. An Employer can only meet its burden by showing the foreign forum provides the same or greater rights than California or will apply California law on the claims at issue. [Verdugo v. Alliantgroup, L.P., supra, 187 Cal.Rptr.3d at 626.]
Forum Selection and Choice of Law Provisions Found Unenforceable
In Verdugo, the court found that the Employer could have eliminated any uncertainty regarding which law a Texas court would apply by stipulating to have the Texas court apply California law, but the Employer failed to do so. In addition, the Employer failed to identify or compare Texas and California law on overtime pay, breaks, and the other compensation issues, and failed to address the impact applying Texas law would have on any fundamental California policy. As a result, the Employer failed to meet its burden to show enforcement of the forum selection clause would not diminish the unwaivable statutory rights on which the Employee based her claims. [Id. at 627-628.]
Whether you’re an employer who wishes to enforce a forum selection provision or choice of law provision outside of California, or an employee who is subject to such clauses, a legal review of the Employment Agreement is necessary to determine whether or not these provisions are legal and enforceable under California law.