BILL ANALYSIS
SENATE JUDICIARY COMMITTEE
Senator Ellen M. Corbett, Chair
2009-2010 Regular Session
AB 335
Assemblymember Fuentes
As Amended June 26, 2009
Hearing Date: July 14, 2009
Labor Code
GMO:jd
SUBJECT
Employment Contracts: Choice of Law and Choice of Forum
Provisions
DESCRIPTION
This bill would establish a rebuttable presumption that a choice
of law or choice of forum provision in an employment agreement
or other employment policy material provided to an employee is
unconscionable, violates public policy, and is void if it would:
(1) require an employee or job applicant to arbitrate or
litigate outside of California, a claim that arose from
employment or conduct occurring in California; or
(2) deprive the employee or job applicant of the protection of
California law for such a claim.
This bill would require a court to consider specified factors to
determine whether the rebuttable presumption described above has
been rebutted by an employer seeking to enforce the choice of
law or choice of forum clause in an employment agreement.
The bill contains findings and declarations relative to the
public policy of the State of California to ensure that
California employees have the full benefit of California's
employment laws and that employees are not deprived of the
protection of California law by contract provisions that require
them to submit to the laws of other states for claims that arise
from employment, or conduct occurring, in California.
BACKGROUND
Sponsored by the California Employment Lawyers Association
(more)
AB 335 (Fuentes)
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(CELA), AB 335 started out as an identical bill to AB 1043
(Swanson, 2007), that would have prohibited employment
agreements from including choice of law and choice of forum
clauses relative to litigation or arbitration of employment
disputes if those clauses are imposed on an employee as a
condition of employment. AB 1043 was heard and passed by this
committee, but was eventually vetoed by the Governor, with this
message:
The bill appears to create a solution in search of a
problem, California law currently ensures that employees
cannot 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 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.
This bill, in the same form of AB 1043 that was vetoed by the
Governor, was heard and passed by the Senate Labor and
Industrial Relations Committee on June 24, 2009. On June 26,
2009, the bill was amended to create a rebuttable presumption
that a choice of law or a choice of forum clause in an
employment agreement that is a condition of employment is
unconscionable, violates public policy, and is void, and to
enumerate the factors that would guide the court in determining
whether the presumption has been rebutted by an employer seeking
to enforce the choice of law or choice of forum clause.
CHANGES TO EXISTING LAW
Existing law codifies the established doctrine that the courts
will not enforce an unconscionable contract. Thus, Civil Code
Section 1670.5 provides that, if a court finds as a matter of
law that a contract or any clause of the contract was
unconscionable at the time it was made, the court may refuse to
enforce the contract or the unconscionable clause.
Existing case law , in which the California Supreme Court struck
down a mandatory arbitration agreement in an employment contract
as an unconscionable contract of adhesion, the court held that
"unconscionability has both a 'procedural' and a 'substantive'
element, the former focusing on 'oppression' or 'surprise' due
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to unequal bargaining power, the latter on 'overly harsh' or
'one-sided' results." (Armendariz et al. v. Foundation Health
Psychcare Services, Inc. (2000) 24 Cal.4th 83.)
Existing case law , in which the appellate court refused to
enforce a forum selection clause in a consumer contract, the
court stated that forum selection clauses will be enforced only
"so long as California consumers will not find their substantial
legal rights significantly impaired by their enforcement."
"California courts will refuse to defer to the selected forum if
to do so would substantially diminish the rights of California
residents in a way that violates our state's public policy."
(America Online, Inc. v. The Superior Court of Alameda County
(2001) 90 Cal.App.4th 1.)
Existing law 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 Civ. Proc. Sec. 410.42.)
Existing law provides the waiver of certain substantive rights
as against public policy, such as a person's rights under the
Consumer Legal Remedies Act (Civ. Code Sec. 1751) and a person's
rights under state securities laws (Corp. Code Sec. 25701).
Thus, those rights are non-waivable.
Existing law makes certain other employment contract provisions,
such as non-compete clauses, void or voidable as against public
policy.
This bill would establish a rebuttable presumption that a choice
of law or choice of forum provision in an employment agreement
or other statement of an employer's policies applicable to its
employees is unconscionable, violates public policy, and is void
if it would:
(1) require an employee or job applicant to arbitrate or
litigate outside of California, a claim that arose from
employment or conduct occurring in California; or
(2) deprive the employee or job applicant of the protection of
California law for such a claim.
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This bill would require a court to consider the following
factors to determine whether the rebuttable presumption
described above has been rebutted by an employer seeking to
enforce the choice of law or choice of forum clause in an
employment agreement:
(1) whether the employee was represented by counsel in
negotiations regarding the employment agreement at the time
that the choice of law or choice of forum provision was
incorporated into the employment contract;
(2) whether separate consideration was provided by the employer
in exchange for the choice of law or choice of forum
provision;
(3) whether the choice of law or choice of forum provision
provides the employee with rights and remedies that are equal
to, or greater than, those provided by California law with
respect to the claim; and
(4) whether the choice of law or choice of forum provision
imposes a financial burden or other burden that would deter
the employee from pursuing a claim against his or her
employer.
This bill would expressly state that it does not replace any
other remedies available under law.
COMMENT
1. Need for the bill
The author states:
Under existing law, employers may seek to force California
workers to litigate or arbitrate their labor and employment
claims under the laws of other States (even other nations)
and in foreign jurisdictions, even if the employee lives in
California, works in California, and the dispute arose in
California. As a result, employers, particularly
out-of-state employers, are able to evade the requirements
of California law, discourage California workers from
bringing suits to enforce their rights, and ensure that any
claims are heard in a jurisdiction favorable to the
employer.
The author states that 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
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employee protections than California. As an example, the
sponsor, California Employment Lawyers Association, cites the
case of an employee with multiple sclerosis who wanted to bring
a disability discrimination case under California's broadly
protective Fair Employment and Housing Act (FEHA). However, the
employer had required the employee to sign an agreement imposing
Florida law on the employment relationship and mandating that
any claims be arbitrated in Florida. The employee's disability
and the expense of litigating in a distant state would make it
very difficult for the employee to pursue his claim. In
addition, Florida's laws are far less protective than
California's FEHA, and if the employment contract is enforced,
the employee may not be fully protected, according to the
sponsor.
Under this bill, that employment agreement would be subject to a
rebuttable presumption that the choice of law and choice of
forum provisions of the agreement are unconscionable, violate
public policy, and are void because they would require the
employee to litigate the claim of employment discrimination in
Florida, under Florida law. The employee could then litigate
his claim in his home state, California, where his rights are
better protected.
2. Employers are not prohibited from inserting choice of law
and choice of forum clauses in their employment agreements
To be sure, employers are not prohibited from inserting certain
clauses in employment materials that predetermine the forum or
venue into which an employee may bring an employment dispute
(i.e., forum or venue selection clauses) or predetermine the law
(i.e., the law of a state or a nation) that will govern an
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.
However, under AB 335, when these choice of law and choice of
forum clauses are in an employment agreement to (1) require an
employee to litigate or arbitrate outside of California a
dispute that arose in California from the employment or from
conduct occurring in California, or (2) deprive the employee of
the protection of California law for such a claim, a rebuttable
presumption would be raised that the employment agreement (or
the choice of law or choice of forum clause) is unconscionable,
violates public policy, and is void
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The sponsor of the bill, CELA, contends that the use of choice
of law and choice of forum clauses has become more prevalent in
employment law practice. For example, CELA members have seen
these clauses in truck driver contractor agreements, salespeople
commission plans, and in "non-disclosure agreements" that even
rank and file employees are asked to sign. They point to
several court decisions that exemplify the rationale behind
creating the presumption of unconscionability that this bill
would establish, if banning such clauses under specified
conditions is not achievable:
(1) Olinick v. BMG Entertainment et al. (2006) 138 Cal.App.4th
1286. In Olinick, the court held, in an age discrimination
lawsuit filed under FEHA, that the case was subject to New
York law under forum selection and choice of law provisions in
the employment contract, despite the fact that the employee
worked in California and the agreement was entered into in
California. The court based its holding on two points: New
York's law provided an adequate age discrimination remedy, and
FEHA does not contain a specific antiwaiver provision. The
court pointed to several examples of California statutes that
contain antiwaiver provisions: Civil Code Section 1751, the
Consumer Legal Remedies Act, Corporations Code Section 25701,
the Corporations Security Law, and Civil Code Section 1717,
relating to attorneys fees.
(2) Hopkinson v. Lotus Development Corp. (N.D.Cal. June 21,
1995) 1995 U.S. Dist. Lexis 8804. In Hopkinson, the court
required that San Francisco employees litigate their
employment discrimination claims in Massachusetts pursuant to
an employment agreement.
(3) Flake v. Medline Industries, Inc. (E.D.Cal. 1995) 882
F.Supp.947. In Flake, the court held that a California
employee's age discrimination lawsuit under FEHA was subject
to Illinois law under the forum selection clause in the
employment contract.
(4) Sarmiento v. BMG Entertainment (C.D.Cal. 2003) 326
F.Supp.2d 1108. In Sarmiento, the court held that a
California composer and music director must litigate his
breach of contract and other claims in New York, pursuant to a
forum selection clause.
The author and sponsor argue that the above decisions underscore
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the need for this bill. They argue that, without the employee
protections under this bill and in light of current Labor Code
provisions that do not contain antiwaiver provisions, employers,
particularly out-of-state employers, will continue to take
advantage of choice of law and forum selection clauses in
employment contracts that deprive California employees of their
employment rights under California law. The author and sponsor
also argue that this is particularly relevant to employees who
do not stand on a level playing field with their employers.
3. Leveling the playing field: rebuttable presumption shifts
the burden
While AB 335 would not outright ban the use of choice of law and
choice of forum clauses in employment agreements when they limit
recourse for employees who find themselves in employment
disputes, it does attempt to level the playing field by creating
a rebuttable presumption that shifts the burden onto the
employer to show that the clause or clauses in question do not
deprive an employee of his or her rights under California law
for the claim being made, or require that the employee litigate
or arbitrate outside of California the employee's claim that
arose from employment, or conduct occurring, in California. The
showing must be made by preponderance of the evidence, the
normal standard of proof used in burden-shifting when a higher
standard is not specified.
This bill would provide the court with guidance in determining
whether the employer seeking to enforce a choice of law or
choice of forum provision has rebutted the presumption. The
court would be required to consider all of the following factors
in making that determination:
(1) whether the employee was represented by counsel in
negotiations regarding the employment agreement at the time
that the choice of law or choice of forum provision was
incorporated into the employment agreement.
This and the other factors would apply to every employer in
the state, if this bill is enacted. Unless the employer
negotiates an agreement with every potential employee and by
practice varies the employment terms with each one, this
factor would seem like one that will almost always be answered
in the negative. Standardized contracts of employment are
ubiquitous and it would be unusual for an employer to craft a
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customized employment agreement whenever a new employee is
hired. Nevertheless, this factor is designed to address
situations where the courts have enforced forum selection
clauses where the contract had the basic qualities of an
adhesion contract - "a standardized contract, imposed upon the
subscribing party without an opportunity to negotiate the
terms," clauses and the parties were of relatively of equal
bargaining strength. (Aral v. Earthlink (2005) 134 Cal.App.4th
544, 559, 561.) Presumably the court would interpret the
absence of counsel as evidence that one of the parties (the
employee) had an inferior bargaining position, depriving that
party of the opportunity to negotiate a fair choice of law or
choice of forum provision.
This factor also requires the employee to have been an
employee when the choice of law and choice of forum provisions
were being negotiated ("... represented by counsel ... in
negotiations ... at the time the choice of law or choice of
forum provision was incorporated in the employment
agreement.") Again this would limit the inquiry to only
employees (yet this bill would apply to a "job applicant") who
were participants in the drafting of the employer's standard
employment agreement;
(2) whether separate consideration was provided by the employer
in exchange for the choice of law or choice of forum
provision;
(3) whether the choice of law or choice of forum provision
provides the employee with rights and remedies that are equal
to, or greater than, those provided by California law with
respect to the claim.
"California favors contractual forum selection clauses so long
as they are entered into freely and voluntarily, and their
enforcement would not be unreasonable." (Wimsatt v. Beverly
Hills Weight Loss Clinics Int'l, Inc. (1995) 32 Cal.App.4th
1511, 1523, involving weight-loss center franchises.) The
Court of Appeal stated that "'forum selection clauses are
important in facilitating national and international commerce,
and as a general rule should be welcomed.' Id. However, this
favorable treatment of forum selection clauses is conditioned
on their free and voluntary procurement, 'with the place
chosen having some logical nexus to one of the parties or the
dispute, and so long as California consumers will not find
their substantial legal rights significantly impaired by their
enforcement.' Therefore, to be enforceable, the selected
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jurisdiction must be 'suitable,' 'available,' and able to
'accomplish substantial justice.'" (Nagrampa v. MailCoups,
Inc. (2006) 469 F.3d 1257, citations omitted.).
By codifying some of the factors used by other courts in
determining whether to enforce these clauses, AB 335 would
provide a court being asked to enforce a choice of law or forum
selection clause with guidance.
The leveling of the playing field, according to CELA, the
sponsor of the bill, would be particularly advantageous for
California employers in the context of non-competition
agreements. Some out-of-state companies, particularly in the
tech industry, are believed to require their employees to sign
non-competition agreements that are unenforceable in California
because of our protective standard for free enterprise under
Business and Professions Code, Section 16600. As many in the
business community have commented, California's stringent laws
on non-competition are good for California employers because
they are more free to hire whomever they want without regard to
the efforts of out-of-state companies to prevent access to
desirable employees. In an effort to avoid California's law,
however, these out-of-state companies add choice of law and
forum provisions specifying another state to their employment
agreements. "A rule clarifying that these employment disputes
cannot be subject to distant forums would clearly be in the
interest of both California employers and employees because
California employers are at a disadvantage if they are required
to adhere to California's protective employment and labor laws
while out-of-state companies with operations here could contract
their way out of those laws, or discourage employees from
enforcing them," the sponsor states. It has been reported that
attorneys representing out-of-state companies have advised those
out-of-state companies to include forum selection clauses in an
effort to increase the chances that the non-compete contract
will be litigated and enforced in another state, making it more
difficult and costly for California companies to hire the
employees they want. If enacted, AB 335 would deter efforts to
enforce non-competition clauses in other states that are
contrary to California rules.
4. Rebuttable presumption v. outright ban; impairment of
contractual rights
Until the most recent amendments to AB 335, the bill, and its
predecessors AB 1043 (Swanson, 2007, vetoed) and AB 1740
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(Judiciary, 2005), would have imposed an outright ban on choice
of law or choice of forum clauses in employment agreements if
they would require the employee to litigate in another state or
deprive the employee of substantive rights available in
California. Such protective antiwaiver statutes have been
enacted in other areas, such as in construction (Code Civ. Proc.
Sec. 410.42) and in regulating private child support
collections.
Existing law provides with respect to a contract between a
contractor and a subcontractor for the construction of a public
work of improvement in California 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 Civ.
Proc. Sec. 410.42.) This provision (Code Civ. Proc. Sec.
410.42) is actually broader in its impact than that contemplated
by AB 335, because it absolutely prohibits such contract terms,
even if voluntarily agreed to by the parties.
In addition, private child support collectors are forbidden to
require, as a condition of providing services to an obligee,
that the obligee waive any right or procedure provided for in
any state law regarding the right to file and pursue a civil
action, or that the obligee agree to resolve disputes in a
jurisdiction outside of California or to the application of laws
other than those of California. Any waiver, including, but not
limited to an agreement to arbitrate or regarding choice of
forum or choice of law, that is required as a condition of doing
business with the private child support collector is presumed
involuntary, unconscionable, against public policy, and
unenforceable. (Fam. Code Sec. 5614(b)(7).)
Under both the federal and state constitutions, a federal or
state law may not unduly impair existing contractual
relationships. (U.S. Const. art. I, Sec. 10, Cal. Const. art.
I, Sec. 9.) In Energy Reserves Group v. Kansas Power & Light
(1983) 459 U.S. 400 the U.S. Supreme Court laid out a three-part
test for whether a state law violates the Contract Clause.
First, the state regulation must substantially impair a
contractual relationship. Second, the state "must have a
significant and legitimate purpose behind the regulation, such
as the remedying of a broad and general social or economic
problem." (Id. at 411-13.) Third, the law must be reasonable and
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appropriate for its intended purpose (this test is similar to
the rational basis review). Thus, a state regulation that
imposes a substantial impairment on a contractual relationship
will be upheld if a significant or legitimate public interest
justifies the regulation and if the law adjusts the parties'
rights in a reasonable and appropriate way. (Id. at 411-413;
Associated Builders & Contractors v. Baca (1991) 769 F. Supp.
1537, 1551 (N.D. Cal.).)
An outright ban on choice of law and choice of forum clauses in
employment agreements could arguably pass constitutional
challenge as impairing parties' rights to enter contracts
freely, only if it is imposed as a condition of employment and
because it would be aimed at a broad, generalized social problem
potentially affecting every California employee, not a private
interest matter. (See Allied Structural Steel Co. v. Spannaus
(1978) 438 U.S. 324, 347.)
By switching the approach to an antiwaiver statute from an
outright ban to a rebuttable presumption, this bill creates a
wider field for the parties' rights to be balanced by the court,
and gives the court more room to apply the numerous rulings that
have been issued on choice of law and choice of forum clauses as
they impact other types of employment agreement provisions such
as a non-competition clause.
A Louisiana law that imposes an outright ban on these clauses
was upheld as constitutional by the Louisiana Supreme Court in
Sawicki v. K/S Stavanager Prince and Assurane-Foreninger Skuld
(La.2001) 802 So.2d 598. 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 purpose.
While the same could be argued for a bill that would outright
ban such clauses under the same conditions to protect the rights
of California workers, a rebuttable presumption, while it still
poses a heavy burden on an employer to overcome, is a less
onerous hurdle for an employer to handle. It should also be
noted that some of the language in this version of AB 335 is
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similar to Code of Civil Procedure Section 410.42.
5. Opponents' Arguments
The Civil Justice Association of California (CJAC) opposes AB
335, because it will "unnecessarily prevent California's
employers from using forum selection and choice of law clauses
in their employment contracts." While this organization
supports parties' rights to freely contract as they wish,
"[c]ontractual relationships tend to differ from situation to
situation, and certain situations may be best served by a choice
of law other than California's." CJA contends that the bill is
unnecessary, as California law "already protects residents from
unreasonable contract provisions and unreasonable choice of law
provisions"; that "we should allow judges to balance factors in
individual cases to determine if a choice of law is
appropriate"; and that the bill "sets a dangerous precedent for
prohibiting other choice of law provisions."
CJAC's argument that judges should be allowed to balance factors
in individual cases to determine if a choice of law clause is
appropriate is addressed by the fact that the bill now does not
impose an outright ban, but rather it creates a rebuttable
presumption that a choice of law or forum is unconscionable,
violates public policy, and void, with the court being guided by
various factors in making a determination of whether the
presumption has been rebutted.
The California Chamber of Commerce in turn opposes AB 335,
arguing that: (1) it is unnecessary and overrides judicial
discretion; (2) it could result in fewer employment
opportunities for Californians ("In today's global workplace,
employers and jobs are increasingly mobile and not constrained
by geographical boundaries. Technology allows employers
headquartered in other states of other countries to have
increasing flexibility to offer jobs around the globe. AB 335
discourages such employers from offering employment in
California if doing so means they travel across the country or
overseas to appear in California courts."); and (3) whether to
accept a choice of forum or law as a "condition of employment"
is in fact tied to a voluntary decision by the employee to
accept an offer of employment ("Every offer of employment
involves a set of conditions about which the prospective
employee makes choices. When unacceptable, the offer of
employment is rejected.") The California Chamber of Commerce
believes AB 335 sets a bad precedent for statutory interference
with the constitutional right of parties to contract.
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6. Supporters' contentions
On the other hand, supporters are unanimous in calling
employment agreements with choice of law and forum provisions
"bad for employers, bad for employees, and bad public policy for
the State of California." The Consumer Attorneys of California
(CAOC) contends that "[e]ach day California Legislators vote and
pass laws on employment issues, with the full intent that the
laws they pass be enforced. Unfortunately, some businesses
(particularly out of state businesses) are ignoring California
law and, in effect, ignoring the California Legislature, by
simply forcing employees to sign, as a condition of employment,
a contract stating disputes arising from California claims from
California employees will be decided in another state, another
forum."
Supporters of AB 335 state that it makes sense for Californians
(both employers and employees) to have full benefit of the laws
our Legislature enacts. "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," CAOC argues.
The California School Employees Association also supports AB 335
because "[a]pplicants for employment are at a complete and total
disadvantage when employers make demands such as [using a forum
other than California or using other than California law to
resolve employment disputes]. Once employed, these workers may
have waived protections in California law and agreed to dispute
resolution processes that are inferior to those provided in
California."
The California Applicants Attorneys Association believes that
the bill, creating a rebuttable presumption that a choice of law
or forum provision that requires an employment-related dispute
to be resolved in another state violates public policy and is
unconscionable and void, would narrow case law, including the
holding in Olinick, supra, in which a California worker sought
to bring an age discrimination action under FEHA but was forced
to file the claim in New York because of such a choice of forum
clause in his employment contract.
Support : Consumer Attorneys of California; California Applicants
Attorneys Association; California School Employees Association
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AFL-CIO; California Labor Federation; American Federation of
State, County and Municipal Employees (AFSCME), AFL-CIO
Opposition : Civil Justice Association of California; California
Chamber of Commerce
HISTORY
Source : California Employment Lawyers Association
Related Pending Legislation : None Known
Prior Legislation :
AB 1043 (Swanson, 2007) See Background and Comment 3.
AB 1740 (Judiciary, 2005) See Comment 3.
Prior Vote :
Assembly Committee on Labor and Employment (Ayes 5, Noes 2)
Assembly Committee on Judiciary (Ayes 7, Noes 3)
Assembly Floor (Ayes 45, Noes 30)
Senate Committee on Labor and Industrial Relations (Ayes 5, Noes
2)
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