In Verdugo v. Alliantgroup, L.P., the California Court of Appeal held that a forum selection clause in an employment agreement was unenforceable because the employer could not prove that the employee’s rights under the California wage and hour law “would not be diminished in any way” if the lawsuit proceeded in a non-California court.

Plaintiff Rachel Verdugo worked in California as an Associate Director for Alliantgroup, a specialty tax consulting services company with its corporate headquarters in Texas. When she was hired by Alliantgroup, Verdugo signed an employment agreement that included both a forum selection clause and choice-of-law clause.  Those clauses stated that (1) the sole venue for disputes arising out of Verdugo’s employment would be Harris County, Texas; and (2) the Texas court would apply Texas law to the dispute.

Verdugo brought a putative wage and hour class action in California against Alliantgroup for violations of various California Labor Code and California Business & Professions Code sections (unpaid overtime, failure to provide accurate itemized wage statements, failure to provide meal breaks, failure to pay all wages due at termination, failure to pay commissions, failure to pay vacation pay, unfair business practices, and civil penalties under the California Private Attorneys General Act).  Alliantgroup moved to enforce the choice of forum selection clause and the trial court found that Verdugo must pursue her claims in Harris County, Texas pursuant to the forum selection clause.

Following Verdugo’s appeal, a California Court of Appeal reversed the trial court’s decision.  It held that the forum selection clause she had signed was not enforceable, and that her claims must proceed in California.  The Court of Appeal recognized that while forum selection clauses are generally enforced unless “unreasonable or unfair,” “California courts will refuse to defer to the selected forum if to do so would substantially diminish the rights of California residents in any way that violates our state’s public policy.”  Thus, the inquiry was whether Verdugo’s rights under California law would be substantially diminished if she pursued her claims in Texas.

Because all of Verdugo’s claims (even her unfair business practices claim) were based on rights created by the California Labor Code, the Court focused on the California Labor Code’s explicit language stating that the rights it created could not in any way be contravened or set aside by a private agreement.  Based on this language, the Court found that Verdugo’s claims were all based on unwaivable rights under California law.  Because the case involved unwaivable rights, the party seeking to enforce the forum selection clause (here, Alliantgroup) bore the burden to prove that the opposing party’s rights (Verdugo) would not be diminished “in any way” if the case proceeded in the out-of-state forum.  In other words, Alliantgroup was faced with proving that a Texas Court would provide the same or greater rights than California, or that the Texas court would apply California law to the claims at issue.

In support of its position that Verdugo’s rights would not be diminished, Alliantgroup argued that a Texas court “would most likely apply California law.”  Alliantgroup also argued that even if California law did not apply, Texas law provided “adequate” wage and hour rights.  However, Alliantgroup refused to stipulate to have the Texas court apply California law, and did not provide a comparison of California and Texas law governing the rights Verdugo raised in her lawsuit.  The Court noted that, based on this refusal to stipulate, it was clear that if the case proceeded in Texas, Alliantgroup would argue to the Texas court that Texas law should be applied.  The Court found that Alliantgroup thus failed to carry its burden to show that Verdugo’s rights would not be diminished, and found the forum selection clause to be unenforceable.

Employers seeking to enforce a forum selection (or even a choice-of-law) clause should note that the Court’s opinion designates several contexts in which the employer could succeed at enforcing such clauses:

• First, the Court suggested that Alliantgroup could have enforced its forum selection clause, if it would stipulate to have the Texas court apply California law.  Thus, an employer seeking to enforce a forum selection clause against a California wage-and-hour employee can stipulate that California law will apply to the claims, to increase the chances that the forum selection clause will be enforced.  However, this approach may defeat the purpose of the clause.

• Second, the Court drew a distinction between the wage and hour rights implicated in the case, and other legal rights.  Interestingly, the Court stated that the California Fair Employment and Housing Act lacks an antiwaiver provision, implying that an employer seeking to enforce a forum selection clause in a discrimination or harassment case would not bear the same burden to prove that enforcement would not diminish the opposing party’s substantive rights “in any way.”  The Court pointed to Olinick v. BMG Entertainment, an age discrimination case where the employer succeeded in enforcing a New York forum selection and choice-of-law clause to have the California plaintiff’s claims heard in New York, applying New York law.

• Third, the Court noted that in some contexts, the foreign state’s case law may require that California law be applied, which would militate in favor of enforcement of the forum selection clause.  For instance, it pointed out that in cases involving a California plaintiff’s challenge to a noncompete agreement, a Texas court would apply California law.  Thus, where it is shown that the foreign state will apply California law, the employer will not face the same burden that Alliantgroup did in the Verdugo.

• Lastly, if the employer can show that the foreign law provides equal or greater protections to the employee, it is more likely to succeed in enforcing its forum selection and choice-of-law clause.