California Protects Employees from Weaker Out-of-State Labor Laws

by Michelle R. Ferber and Ben McDonald

Late this past May, the California Court of Appeals overturned a ruling by an Orange County Superior Court to hold that forum selection clauses in employment contracts may not prevent employees from pursuing actions against out-of-state employers in California courts under California labor laws.

In 2007, Plaintiff Rachel Verdugo was hired by the Texas-based tax consulting company Alliantgroup as an associate director at its Irvine office in California.  In the employment contract, Alliantgroup included a forum selection clause requiring employees to agree to litigate all disputes under the employment contract in Texas under Texas laws.

In April of 2013, Verdugo brought a class action suit against Alliantgroup in a California court alleging various California Labor Code violations, including, among others, failure to pay overtime, failure to provide meal breaks, and failure to pay wages and commissions.   Alliantgroup moved to dismiss or stay the action on the basis that the forum selection clause in Verdugo’s employment contract required that any disputes were to be litigated in Texas, not in California.  Finding the forum selection clause to be valid, the trial court granted Alliantgroup’s motion and stayed the action.  Verdugo then appealed claiming that the forum selection clause violated California’s public policy on employee compensation.

While California generally favors the rights of parties to freely engage in contractual obligations, including forum selection clauses, 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. Superior Court.  In most actions involving the enforcement of a forum selection clause, the person opposing the enforcement of the clause bears the burden of showing why the clause should not be enforced.  However, when an employee’s claims are based upon non-waivable rights afforded under California law, the party seeking to enforce the forum selection clause is required to bear the burden of showing that litigating the claims in the contractually designated forum will not result in a diminution of the employee’s substantive rights afforded under the laws of California.  Applied to Verdugo’s case, Alliantgroup’s ability to enforce the forum selection clause in her employment contract turned on whether requiring Verdugo to bring her claims in a Texas court and under Texas laws would deprive her of the substantive rights guaranteed to her under the laws of California.

To support her argument, Verdugo pointed to language in the California Labor Code that specifically states that a person’s rights under the Labor Code cannot “in any way be contravened or set aside by private agreement, whether written, oral, or otherwise.”  The court reasoned that the forum selection clause in Verdugo’s employment contract could potentially operate as a waiver of her rights under California labor law because by signing it, Verdugo was agreeing to bring her claims under a set of laws that might provide her fewer protections than the laws of California would provide her.  As the forum selection clause could functionally diminish the substantive rights afforded to her under California law, the court ruled that Alliantgroup must show that the laws of Texas would provide Verdugo with at least as much protection as the laws of California in order for the forum selection clause to be legally enforceable.

In its attempt to carry that burden, Alliantgroup merely argued that a Texas court would “most likely” apply California law.  The court clearly found this to be insufficient and commented that not only could the parties have stipulated to the application of California law and did not do so, but that it was also fairly clear from the proceedings that, in fact, Alliantgroup intended to argue that Texas law should be applied.  Finding that Alliantgroup failed to meet its burden, the appellate court reversed the trial court’s grant of Alliantgroup’s motion to stay.

Under the California Labor Code, it is clear that a person does not have the power to contract away some of their rights guaranteed to them under California labor law.  In the context of employment contracts and forum selection clauses, a person does not have the power to agree to a provision that may result in the deprivation of their rights under California labor laws.  To the extent that employers seek to enforce forum selection clauses requiring California workers to bring disputes in out-of-state courts, employers will have to demonstrate with certainty that the contractually-selected forum state will provide the California employee with the same protections as, if not more than, those guaranteed under California law.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.