Legislature Closes a Loophole and Prohibits Out-Of-State Non-Competes in California

Effective January 1, 2017 the new law codified in Labor Code Section 925 prohibits employers from requiring employees who primarily reside and work in California to agree to adjudicate claims against employer somewhere other than California or agree to apply law other than California to their employment disputes. The new law reads:

(a) An employer shall not require an employee who primarily resides and works in California, as a condition of employment, to agree to a provision that would do either of the following:

(1) Require the employee to adjudicate outside of California a claim arising in California.

(2) Deprive the employee of the substantive protection of California law with respect to a controversy arising in California.

(b) Any provision of a contract that violates subdivision (a) is voidable by the employee, and if a provision is rendered void at the request of the employee, the matter shall be adjudicated in California and California law shall govern the dispute.

(c) In addition to injunctive relief and any other remedies available, a court may award an employee who is enforcing his or her rights under this section reasonable attorney’s fees.

(d) For purposes of this section, adjudication includes litigation and arbitration.

(e) This section shall not apply to a contract with an employee who is in fact individually represented by legal counsel in negotiating the terms of an agreement to designate either the venue or forum in which a controversy arising from the employment contract may be adjudicated or the choice of law to be applied.

(f) This section shall apply to a contract entered into, modified, or extended on or after January 1, 2017.

I have blogged previously on a common practice by out-of-state employers to require California employees to sign non-compete agreements that violate California law. Non-compete agreements are generally prohibited in California. See this blog post. A typical non-compete agreement was presented as a condition of employment or continued employment. It forced employee to agree to not work for employer’s competitors after leaving employer for a number of months or years, often without adequate compensation.

Over the years I counseled many California-based clients who faced a loss of an otherwise desirable job offer or promotion if they refused to sign a non-compete agreement, made “lawful” by the choice of law and forum provision in a State where non-competes were allowed, such as Washington, Florida or Massachusetts. Alternatively, having signed a non-compete, folks were deterred from accepting a new job with an employer’s competitor and moving forward in their career. Employers enforced these agreements with relative impunity by forcing employees to litigate in foreign states, usually using federal court to remove local disputes out of state, where legal costs and unfavorable laws would inevitably work against employees.

By passing the new law California legislature went a long way to stop these practices and ensure that California employees enjoy all of the rights and protections afforded to them by the home state. The new law provides that a contract that violates it is voidable by the employee, unless he or she negotiated the contract through counsel. The new law applies to contracts entered into, altered, modified, renewed, or extended on or after January 1, 2017. This means that many employment agreements, which were entered into prior to January 1, 2017 and contained out-of-state choice of law and forum provisions, will become voidable. The law adds some teeth to enforcement, by entitling employees to reasonable attorney fees and injunctive relief, as well as any other available remedies. By placing control to void an offending contract in the hands of employees and by providing an exception for the assistance of counsel, the law affords employees a stronger bargaining position, should they choose to accept an out-of-state choice of law and forum clause.

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