BILL ANALYSIS
Senate Committee on Labor and Industrial Relations
Mark DeSaulnier, Chair
Date of Hearing: June 24, 2009 2009-2010 Regular
Session
Consultant: Rodger Dillon Fiscal:No
Urgency: No
Bill No: AB 335
Author: Fuentes
Version: As introduced February 18, 2009
SUBJECT
Employment contracts.
KEY ISSUE
Should provisions of employment contracts be made void and
unenforceable if they require an employee, as a condition of
obtaining or continuing employment, to use a forum other than
California, or to agree to a choice of law other than California
law, to resolve employment-related disputes?
PURPOSE
To ensure that workers employed in California have unfettered
access to their rights under California law.
ANALYSIS
Existing law:
Codifies the established doctrine that the courts will not
enforce an unconscionable contract. (Civil Code section
1670.5).
Defines unconscionability as having both a "procedural" and a
"substantive" element, the former focusing on "oppression" or
"surprise" due to unequal bargaining power, the latter on
"overly harsh" or "one-sided" results. (Armendariz v.
Foundation Health Psychcare Services, Inc., 24 Cal. 4th 83,
114(2000)).
Rejects forum selections clauses which "would substantially
diminish the rights of California residents in a way that
violates our state's public policy." (America Online, Inc. v.
Superior Court, 90 Cal. App. 4th 1, 12 (2001)).
Allows employers to insert certain clauses in employment
materials that predetermine the forum or venue into which an
employee may bring an employment dispute (i.e. forum/venue
selection clauses) and/or the law - either the law of a state
or a nation - that will govern the employment dispute (i.e.
choice of law clauses). Employers may place these clauses in
job applications, employment agreements, employment handbooks,
or other statements of an employer's policies applicable to
its employees.
Provides, with respect to a contract between a contractor and
a subcontractor for the construction of a public or private
work of improvement in this state, that a provision shall be
void and unenforceable if it purports to require any dispute
between the parties to be litigated, arbitrated, or otherwise
determined outside this state or purports to preclude a party
from commencing such a proceeding or obtaining a judgment or
other resolution in this state or the courts of this state.
[Code of Civil Procedure section 410.42.] (This provision is
broader than that contemplated by the bill because it
absolutely prohibits such contract terms, even if voluntarily
agreed to by both parties.)
Makes certain substantive rights unwaivable as against public
policy, such as one's rights under the Consumer Legal Remedies
Act [Civil Code 1751] and one's rights under state securities
law [Corporations Code 25701].
Prohibits certain other employment contract provisions as
against public policy, such as non-compete provisions.
Currently, there is no other statute prohibiting choice of law
clauses, which may act as a waiver of California's labor and
employment laws. Further, there is no statute prohibiting
contract provisions that require an employee to travel outside
Hearing Date: June 24, 2009 AB 335
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Senate Committee on Labor and Industrial Relations
of the state to resolve an employment dispute that arose in
California.
This Bill prohibits specified choice of law clauses,
venue-selection clauses, or forum-selection clauses in binding
employment materials that are imposed on an employee as a
condition of employment. Specifically, this bill:
1.Makes legislative findings and declarations emphasizing that
workers in California should have the protections of
California law.
2.Prohibits an employer from requiring an employee or job
applicant, as a condition of employment, to waive the
application of California law to any dispute regarding
employment, or the securing of employment, in California.
3.Prohibits an employer from requiring an employee or job
applicant, as a condition of employment, to resolve outside of
California any dispute regarding employment, or the securing
of employment, in California.
4.Provides that any choice of law, choice or forum, or choice of
venue provision in a job application, employment agreement,
employment handbook, or other statement of an the provision
would have the effect of either of the following:
a) Requiring the employee or job applicant, as a condition
of employment, to resolve claims outside of California that
arose from employment, or the securing of employment, in
California.
b) Depriving the employee or job applicant of the
protection of California law for claims arising from
employment, or the securing of employment, in California.
5.Specifies that nothing in this bill affects the right of an
employee to voluntarily agree to a choice of law or forum
selection provision that is not required as a condition of
employment and that is the subject of independent
consideration.
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Senate Committee on Labor and Industrial Relations
COMMENTS
1. Background
Rulings of California Courts
The California Supreme Court has held that out-of-state
employers who employ individuals in California may use choice
of law and forum selection provisions in their employment
contracts, so long as the forum selected offers the employee
adequate remedies otherwise available to him or her under
California law (see Olinick v. BMG Entertainment, 42
Cal.Rptr.3d 268). In this case, a California employee tried
to bring an age discrimination suit under California's Fair
Employment and Housing Act in a California court but was
subject to a choice of law clause and forum selection clause
in his employment contract, which stated that any employment
dispute was to be brought in New York and resolved under New
York law. The Court held that the public policy of California
in enforcing its anti-discrimination statutes under FEHA and
the convenience of the party and witnesses in adjudicating the
case in California do not invalidate the parties' enforceable
agreement where the selected forum affords an adequate remedy
to the employee. California courts have seen challenges to
the clauses at issue in several cases (see Hopkins v. Lotus
Dev. Corp, 1995 U.S. Dist. Lexis 8804 (N.D. Cal. 1995)
requiring California employees to litigate age discrimination
and other claims in Massachusetts); Flake v. Medline Indus.,
Inc., 882 F. Supp. 947 (E.D. Cal. 1995) requiring California
employee to litigate age discrimination claims in Illinois;
Sarmiento v. BMG Entm't, 326 F. Supp. 2d 1108 (C.D. Cal. 2003)
requiring California employee to litigate breach of contract
and wage claims in New York). In these cases, the court has
held that the burden is on the employee to prove that the
challenged provision is unconscionable or unreasonable. As a
practical matter, this means that the choice-of-law and forum
selection provisions are usually enforced.
Constitutional Freedom of Contract
Under the U.S. Constitution and the California Constitution, a
federal or state law may not operate as a substantial
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impairment of a contractual relationship (U.S. Const. art. I,
10; Cal. Const. art. I, 9). This bill arguably does not act
to prohibit or impair the contractual relationship because the
contracting parties may still voluntarily agree to a
choice-of-law clause or forum selection clause. This bill
takes the narrower approach of prohibiting employers from
forcing employees to accept these provisions as a condition of
employment, i.e. the provisions at issue are declared void and
unconscionable only to the extent that they are required as a
condition of employment.
Furthermore, even where a state regulation imposes a
substantial impairment on a contractual relationship, the
regulation will be upheld if a significant or legitimate
public interest justifies the regulation (i.e., the law is
aimed at a general social purpose and is not merely "private
interest legislation") and if the law adjusts the parties
rights in a reasonable and appropriate way (see Energy
Reserves Group, Inc. v. Kansas Power & Light Co. (1983) 459
U.S. 400, 411-413; Associated Builders & Contractors v. Baca
(N. D. Cal. 1991) 769 F.Supp. 1537, 1551). Supporters argue
that this bill is aimed at a broad, generalized social problem
potentially affecting every California employee, not a private
interest matter, and the law addresses the issue in a
reasonable and appropriate way by voiding only those contracts
that are imposed as a condition of employment (see Allied
Structural Steel Co. v. Spannaus (1978) 438 U.S. 324, 347,
349).
A Louisiana law nearly identical to the proposed bill was
upheld as constitutional by the Louisiana Supreme Court in
Sawicki v. K/S Stavanager Prince and Assurance-Foreningen
Skuld (La. 2001) 802 So. 2d 598, 600. The Louisiana law
prohibits choice of forum clauses and choice of law clauses in
employment contracts, except where "expressly, knowingly, and
voluntarily agreed to and ratified by the employee after the
occurrence of the incident which is the subject of the civil
or administrative action" (La. Rev. Stat. 23:921(A)(2)). The
Louisiana Supreme Court held that the statute did not violate
the Contract Clause because it did not impair the contractual
relationship between the employer and the employee and that
the statute reasonably accomplished a legitimate public
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purpose.
Federal Arbitration Act
The Federal Arbitration Act (FAA) governs the interpretation
of arbitration agreements and preempts any state law to the
contrary. State law, however, is applicable to an arbitration
case if the law arose to govern issues concerning
the validity, revocability, and enforceability of contracts
generally. Therefore, because this bill states that it is the
public policy of the state that forum selection clauses and
choice of law clauses are unconscionable if imposed on an
employee as a condition of employment, as opposed to
prohibiting these clauses altogether, this bill may not be
preempted under the FAA. As a result, because these clauses
are not outright prohibited, an employers and employee may
have the option to bargain over whether to insert
these clauses into an employment contract.
2. Proponent Arguments :
According to the author, worker advocates have increasingly
reported incidents of employees being unable to enforce their
rights under California law because the employer imposed a
requirement that employment disputes be adjudicated in a
distant jurisdiction and/or subject to the laws of a state
with weaker employee protections than California. Supporters
of this bill, argue that this bill would prevent unscrupulous
employers from evading California's strong worker protection
laws. Additionally, this bill would assure adequate access to
an in-state forum for all California workers to bring a labor
or employment dispute. Proponents say that while some
existing case law would seem to offer some protection against
unfair forum selection provisions the courts are too casually
enforcing such law with too little inquiry.
Proponents state that forum selection clauses and choice of
law clauses pose a particularly acute problem for lower income
workers and disabled workers. Those workers that do have the
resources or ability to travel might well find that the
protection that they had under California law does not exist,
or is not as comprehensive, in the jurisdiction that will be
deciding their dispute.
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Senate Committee on Labor and Industrial Relations
Further, supporters contend that the current situation
benefits out-of-state employers at the expense of California
employers. Employers who remain subject to the rigorous
requirements of California labor and employment law are at a
distinct competitive disadvantage when an out-of-state
employer uses a choice-of-law provision to exempt itself from
California's laws governing employment relationships and adopt
another State's less burdensome regime. Proponents believe
these agreements are bad for employers, bad for employees and
bad public policy for the State of California. If a business
does business here, it should be required to follow California
law and not avoid our protections by simply forcing employees,
as a condition of employment, to seek redress in another
forum. In support of their arguments that this bill is
necessary, supporters points to several cases in which the
courts have upheld such clauses and required California
employees to litigate their employment
discrimination claims in New York, Massachusetts, and
Illinois.
3. Opponent Arguments :
Those opposed to this bill argue that it will unnecessarily
prevent California's employers from using choice of law
clauses in their employment contracts. Opponents support the
right of parties to freely contract as they wish - a
principle they contends is offended because the bill is an
absolute prohibition against waiver, choice of law, forum and
venue clauses. Moreover, judges should have the discretion to
allow forum selection clauses when appropriate. If this bill
becomes law, judges will be prevented from allowing forum
selection clauses when appropriate. Opponents contend that,
with respect to choice of law clauses, California residents
are already protected from unjust contracts and courts already
possess the authority to make decisions in this area in the
interests of justice. Therefore, this portion of the bill is
unnecessary. California courts are free to ignore contract
terms dictating a different choice of law if doing so would
cause a Californian to lose the protections of California law.
Further, they are not aware of any abuse in this area and
believe that legislation should be narrowly targeted to
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resolve specific problems.
Some opponents of this bill argue primarily that the measure
is overbroad. While they might agree that forcing a
rank-and-file employee to resolve disputes outside of
California is unfair, the bill would apply to every employee,
including the chief executive officer and president. National
sales staff with responsibilities in many states would
presumably be covered if the employment relationship was
commenced in California. The bill thus covers a large number
of employees with full bargaining power to agree to forum
selection and choice of law clauses. The bill could result in
fewer employment opportunities for Californians in today's
global workplace since it would discourage such employers from
offering employment in California if doing so means they
travel across the country or overseas to appear in California
courts.
At least one opponent argues that this bill is the first step
towards outlawing all choice of law clauses in contracts,
which would be detrimental to California consumers, taxpayers
and businesses. Certain states have well-developed complex
law regarding certain areas: Delaware and corporations law,
Connecticut and Insurance law, for example, and many
non-residents of those states use choice of law clauses to
utilize the most well developed and modern law. California
residents benefit from seeing the development of that body of
law.
4. Prior Legislation :
This bill is identical to AB 1043 (Swanson) from 2007. That
measure was vetoed by Governor Schwarzenegger, whose veto
message stated the following:
This bill appears to create a solution in search of a
problem. California law currently ensures that
employees can not be subjected to unconscionable
contract provisions that would force them to forego the
protections of California law or litigate their claims
in an inappropriate out-of-state forum. Moreover, this
bill creates unnecessary and unhelpful uncertainties
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for the employers and employees concerning issues of
federal preemption. Lastly, I strongly support the
right of parties to freely contract for the terms of
their employment relationship. This bill fundamentally
conflicts with that policy.
5. Staff Note :
If approved by the Senate Labor and Industrial Relations
Committee, this bill will go to the Senate Judiciary
Committee, per Senate Rules.
SUPPORT
California Employment Lawyers Association (sponsor)
American Federation of State, County and Municipal Employees
California Applicants' Attorneys Association
California Labor Federation
California Professional Firefighters
California School Employees Association
Consumer Attorneys of California
OPPOSITION
California Chamber of Commerce
California Employment Law Council
Civil Justice Association of California
Hearing Date: June 24, 2009 AB 335
Consultant: Rodger Dillon Page 9
Senate Committee on Labor and Industrial Relations