California employers sometimes try to avoid the employee-friendly rules embedded in California law by inserting choice of law clauses into employment contracts. These clauses stipulate that, in the event of a dispute between the employer and employee, the laws of the State of Texas (or some other employer-friendly state) shall govern the dispute. In addition, employers sometimes go even farther and insert a forum selection clause, which states that, in the event of a dispute, the dispute shall be heard in a particular county or court within that chosen state.
How successful are employers who utilize this strategy? Well, it depends on the state chosen, how the contract was drafted and negotiated, and the nature of the dispute among other factors. But, a recent California Court of Appeal decision sheds some light on the analysis and confirms that employers face an uphill battle when utilizing this strategy.
In Verdugo v. Alliantgroup, the plaintiff worked in California for a company headquartered in Texas. At the time she was hired, the plaintiff signed an employment agreement that included a choice of law clause and a forum selection clause. Those clauses stated that (1) the “sole venue” for disputes arising out of plaintiff’s employment would be Harris County Texas; and (2) Texas law would apply to the dispute.
In April 2013, plaintiff brought a class action lawsuit alleging the following claims on behalf of all similarly situated past and present employees of Alliantgroup: (1) unpaid overtime wages under Labor Code section 1194;1 (2) failure to provide accurate itemized wage statements under section 226; (3) failure to provide meal breaks under section 226.7; (4) failure to pay all wages due at time of termination under section 203; (5) failure to pay commissions under sections 200 to 204; (6) failure to pay vacation pay under section 227.3; (7) unfair and unlawful business practices under Business and Professions Code section 17200 et seq.; and (8) civil penalties under the Labor Code Private Attorneys General Act of 2004.
The employer-defendant moved to dismiss or stay plaintiff’s California action based on the Texas forum selection clause. The trial court granted the motion and stayed the plaintiff’s action based on its finding that the forum selection clause was enforceable. The plaintiff then appealed.
The Court in Verdugo v. Alliantgroup reversed the trial court. The Court held that the forum selection clause that plaintiff signed was not enforceable, and that plaintiff’s lawsuit therefore could proceed in California. According to the Court, although forum selection clauses can sometimes be enforceable, “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.”
The Verdugo Court noted that all of plaintiff’s claims emanated from provisions of the Labor Code. These California statutes provided rights to plaintiff which were “unwaivable” and, thus, could not be set aside by private agreement. Therefore, the burden fell on the defendant-employer to prove that a Texas court applying Texas law would provide the same or greater rights as did the California Labor Code. At best, the defendant-employer could say only that a Texas Court “would most likely apply California law.” Moreover, the defendant-employer refused to stipulate that the Texas Court apply California law.
These key facts left the Verdugo Court convinced that plaintiff’s rights would be “substantially diminished” if she were forced to litigate her California Labor Code claims in a Texas court under Texas law. Accordingly, the Court concluded that the forum selection and choice of law clauses were unenforceable.
You can find the full opinion in Verdugo v. Alliantgroup here.