BILL ANALYSIS
AB 335
Page 1
Date of Hearing: April 1, 2009
ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT
William W. Monning, Chair
AB 335 (Fuentes) - As Introduced: February 18, 2009
SUBJECT : Employment contracts.
SUMMARY : 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 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.
2)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.
3)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 employer's
policies is unconscionable, violative of the public policy of
this state, and void if 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.
4)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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FISCAL EFFECT : Unknown
COMMENTS : Under existing law, employers may insert certain
clauses in employment materials that predetermine the forum or
venue that 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.
Existing law prohibits certain other employment contract
provisions as against public policy, such as non-compete
provisions (Business & Professions Code 16660) and provisions
that require an employee to promise to join or refrain from
joining a labor organization as a condition of employment (Code
of Civil Procedure 410.42). In addition, California law also
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). Currently, there is no 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 of the state to resolve an employment dispute
that arose in California.
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.
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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 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
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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 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.
Similar Statutory Protections in Other Contexts
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 Civil Procedure section 410.42.) This
provision is broader than that contemplated by the bill because
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it absolutely prohibits such contract terms, even if voluntarily
agreed to by both parties.
In addition, private child support collectors are forbidden
under AB 2781 (Leno) from 2006 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 by the obligee of the right to file and
pursue a civil action, the right to file and pursue a civil
action in California, or the right to rely upon California law
as provided by law must be knowing, voluntary, and not made a
condition of doing business with the private child support
collector. 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.
(Family Code section 5614(b)(7).)
ARGUMENTS IN SUPPORT : The California Employment Lawyers
Association (CELA), the sponsor of this bill, argues 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 disptue.
CELA states 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.
CELA contends 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.
Correcting this problem therefore benefits California employers
as well as employees and contributes to fair competition in
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California.
The Consumer Attorneys of California (CAOC) argues that this
bill levels the playing field for California businesses and
employees by prohibiting out of state companies (who do business
in California) from forcing California employees out of state to
enforce employment rights. CAOC states that existing law allows
some businesses to ignore California law, and in effect, ignore
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. CAOC states that 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 its argument that this bill is necessary, CAOC
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.
ARGUMENTS IN OPPOSITION :
The California Employment Law Council (CELC) opposes this bill
and argues primarily that the measure is overbroad. CELC states
that, while it 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.
CELC also states that proponents argue that the bill does not
absolutely prohibit forum selection and choice of law clauses,
merely that they not be required as a condition of employment.
CELC counters that this provides little solace to employers
seeking to enforce contracts fairly negotiated with high-level
employees, who will simply argue that they would not have
received the job had they not agreed to the clause. This will
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simply be another point debated in a lawsuit.
CELC contends that, with respect to choice of law clauses,
courts already possess the authority to make decisions in this
area in the interests of justice. Therefore, this portion of
the bill is unnecessary.
Finally, CELC is not aware of any abuse in this area and
believes that legislation should be narrowly targeted to resolve
specific problems.
The Civil Justice Association of California (CJAC) is opposed to
the bill, arguing that it will unnecessarily prevent
California's employers from using choice of law clauses in their
employment contracts. CJAC states that it supports the right of
parties to freely contract as they wish - a principle it
contends is offended because CJAC casts the bill as an absolute
prohibition against waiver, choice of law, forum and venue
clauses.
CJAC states it has three primary concerns with the bill: "It is
unnecessary, as California law already protects California
residents from unreasonable contract provisions and unreasonable
choice of law provisions. We should allow judges to balance
factors in individual cases to determine if a choice of law
clause is appropriate. It sets a dangerous precedent for
prohibiting other choice of law provisions. The bill is
unnecessary. California residents are already protected from
unjust contracts. 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."
CJAC goes on to argue, "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. Not all employees in
California are similarly situated - think about a highly paid
entertainers or sports figures - and they should not be treated
similarly. We should not ban forum selection clauses entirely,
because they are appropriate in certain situations. A
corporation headquartered out of state who has some employees in
California may use a standard employment contract that chooses
the law of its home state, and they should be allowed to do so.
Courts can and should exercise their discretion as to whether,
in a particular case, that clause is reasonable or not."
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Finally CJAC states, "This bill starts us down the proverbial
slippery slope. 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. 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."
The California Chamber of Commerce also opposes this bill,
stating that the bill "could result in fewer employment
opportunities for Californians in today's global workplace?[This
bill] discourages such employers from offering employment in
California if doing so means they travel across the country or
overseas to appear in California courts."
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 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."
REGISTERED SUPPORT / OPPOSITION :
Support
California Labor Federation, AFL-CIO
California Employment Lawyers Association (sponsor)
Consumer Attorneys of California
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Opposition
California Chamber of Commerce
California Employment Law Council
Civil Justice Association of California
Analysis Prepared by : Ben Ebbink / L. & E. / (916) 319-2091