Choice of Law Provisions: What Exactly Are You Choosing?

August 7, 2008

In today’s workforce, it is no longer unusual to have an employee telecommuting from home, even if home is across the country. These arrangements often benefit both the employer and employee, but create a number of novel legal issues. The North Carolina Court of Appeals recently addressed one such issue in Sawyer v. Market America, Inc., 661 S.E.2d 750 (N.C. Ct. App. 2008).

Case Background

Steve Sawyer was an independent contractor for Market America. Market America is based in North Carolina, but Sawyer lived and worked in Oregon. He signed an “Independent Contractor Agreement,” which governed his relationship with the company and included a North Carolina choice of law provision. After his contract was terminated, and relying on the North Carolina choice of law provision contained in it, Sawyer sued for breach of contract and a violation of the North Carolina Wage and Hour Act, N.C. Gen. Stat. § 95-25.1.

Was The Choice of Law Valid?

When used in employment, contractor and other agreements, a choice of law provision typically designates a particular state and provides that the substantive laws of that state will be applied to determine the validity of the contract, regardless of where a lawsuit is actually brought. Most courts agree that, as the Court held in Sawyer, a choice of law provision is generally binding, “as long as [the contracting parties] had a reasonable basis for their choice and the law of the chosen State does not violate a fundamental public policy of the state [where the lawsuit is pending].” Sawyer, 661 S.E.2d at 752. In this case, because Market America was located in North Carolina, the Court found that the choice of law provision was reasonable.

Choice Won’t Change The Law

The contract at issue in Sawyer clearly stated that the agreement would be governed by North Carolina law – but what did that mean? Some states limit the choice of law provision to interpreting whether the contract itself is valid. However, Sawyer argued that the choice of law provision meant that he was subject to and therefore protected by North Carolina’s entire body of laws. This included the North Carolina Wage and Hour Act.

The Court took a middle road, holding that while the contract did require the Court to apply North Carolina law, the contract could not require the application of a law that was not otherwise applicable. In other words, choosing the North Carolina body of laws did not change that body of laws. Specifically, the Court held that the North Carolina Wage and Hour Act was not intended to apply to nonresidents who neither live nor work in North Carolina (assuming Sawyer was a covered “employee” to begin with). Therefore, honoring the choice of law provision and applying North Carolina law produced a result where the Wage and Hour Act did not protect Sawyer, an Oregon resident who did not work in North Carolina.

Maximizing Choice

Almost all agreements include a choice of law provision. That choice can prove important where one state’s laws provide greater contractual protection to a party than another state’s laws. In the non-compete area alone, states’ laws vary wildly. Thus, in choosing your law as an employer, it is critical to think through the various options with counsel to ensure that your choice will be honored and that you will ultimately receive the optimal legal protection desired.

For assistance in analyzing existing or form employment, independent contractor or separation agreements for the impact of choice of law elections, or for help in preparing new agreements to meet your legal goals, please contact any member of the McGuireWoods Labor & Employment or Employee Benefits Teams.