Employers in states across the country are known to shudder and cringe at the thought of contending with the vast array of employment law regulations that apply to California employers. Employers — especially those headquartered elsewhere but with employees in California — have also been known to use clauses in employment agreements with these California employees in an attempt to avoid application of California law. Such clauses include forum selection and choice of law clauses specifying that the law of another state governs the employment relationship, and requiring that employment disputes be litigated in that other state. This approach suffered a heavy blow recently in the guise of a California Court of Appeal’s decision in Verdugo v. Alliantgroup, L.P. The court in Verdugo held that a forum selection clause in the plaintiff’s employment agreement was unenforceable, relying upon a legal test that makes it all but impossible to use such a clause as a device to avoid application of California employment laws.

Alliantgroup is a tax consulting firm headquartered in Texas, with regional offices in 11 states, including California. When the plaintiff was hired to work as an inside salesperson at Alliantgroup’s Irvine, California office, she signed an employment agreement with a combined forum selection and choice-of-law clause stating that the agreement was governed by Texas law, and that the sole venue for disputes arising under the agreement was in Harris County, Texas. The plaintiff subsequently filed a class action lawsuit against Alliantgroup in state court in California, alleging failure to pay overtime, failure to provide meal breaks, failure to pay accrued vacation, and other violations of California’s Labor Code. Relying on the forum selection clause, the trial court granted Alliantgroup’s motion to stay the California case. The Court of Appeal reversed, concluding that the contract’s forum selection clause should not be enforced.

After acknowledging the general rule that forum selection clauses are “generally given effect unless enforcement would be unreasonable or unfair,” the court observed that “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.” Moreover, where the claims at issue are based on “unwaivable rights” created by California statutes, a party seeking to enforce the forum selection clause bears the burden to show that enforcing it “will not diminish in any way the substantive rights afforded ... under California law.” Here, each of the plaintiff’s claims was based on statutory rights under the Labor Code which, by legislative declaration, cannot “in any way be contravened or set aside by a private agreement...” The Court of Appeal concluded these rights would be threatened by requiring the plaintiff to litigate her claims in Texas, where (if enforced by the Texas court) the employment agreement’s choice-of-law clause would require the court to apply Texas law rather than California law.

In order to protect against possible waiver of California Labor Code rights, the Court placed the burden on Alliantgroup to show that enforcing the forum selection clause would not diminish the plaintiff’s substantive Labor Code rights in any way. Alliantgroup sought to meet this burden by arguing that plaintiff’s rights under the Labor Code would remain intact, because a Texas court was likely to apply California law --notwithstanding the contract’s choice of law clause designating Texas law. Not surprisingly, the Court of Appeal was unimpressed by this argument, noting among other things that Alliantgroup had made it clear that, if the suit went forward in Texas, it intended to convince the Texas court to apply the law of Texas, not California. The Court noted that Alliantgroup could have met its burden by agreeing to stipulate to application of California law in the Texas court, thereby ensuring that the plaintiff’s substantive Labor Code rights would not be diminished. Because Alliantgroup failed to do so, and because it otherwise failed to meet its burden to show how the plaintiff’s substantive Labor Code rights would be preserved if the action was transferred to Texas, the Court concluded that the choice of forum clause should not be enforced.

The Take-Away: Even under Verdugo, forum selection clauses are not per se unenforceable. There are circumstances where a court could well be convinced to enforce the parties’ forum selection clause, especially where the contract leaves it up to the court in the chosen forum to determine which state’s substantive employment laws to apply. However under Verdugo, employers should not rely upon forum selection and choice-of-law clauses to avoid litigating disputes with California employees in California under California law.