A California employer can’t require a worker or applicant to sign a term it knows is illegal. Labor Code section 432.5 bars requiring anyone “to agree, in writing, to any term or condition which is known by such employer, or agent, manager, superintendent, or officer thereof to be prohibited by law.” The statute is on PAGA’s list, so an unlawful clause in a standard offer letter or handbook acknowledgment can produce a claim covering every worker who signed it. The knowledge element is the main defense.
What does section 432.5 prohibit?
Three things together. Under the statute, the employer, or a manager or officer, must “require” the term. The term must be agreed to “in writing.” And the term must be one the employer knows is “prohibited by law.”
The statute reaches applicants as well as employees, so the problem often starts in onboarding documents. A noncompete in an offer letter, a wage waiver in a handbook acknowledgment, or an out-of-state forum clause in an employment agreement are common examples.
Which terms usually trigger it?
Terms that other statutes already make unlawful. Three come up often.
Noncompetes are first. Business and Professions Code section 16600.5(c) says “An employer shall not enter into a contract with an employee or prospective employee that includes a provision that is void under this chapter.” Subdivision (d) makes entering such a contract “a civil violation,” and subdivision (e) gives workers a private action with attorney fees. The firm covers that area in a post on California noncompete agreements.
Wage waivers are second. Labor Code section 219(a) says the wage payment rules can’t “be contravened or set aside by a private agreement, whether written, oral, or implied.” A form that has workers waive final pay timing or agree to deductions the law doesn’t allow fits that pattern.
Out-of-state forum and law clauses are third. Labor Code section 925(a) bars requiring an employee who primarily lives and works in California to agree to litigate a California claim elsewhere, or to give up “the substantive protection of California law.”
How does the knowledge element work?
It’s the employer’s best defense. Section 432.5 requires that the term be “known” to be prohibited. A clause that was lawful when drafted, or whose legality was genuinely unsettled, is a weaker basis for a claim than one that was plainly void when the worker signed.
Timing matters. The noncompete rules in section 16600.5 took effect January 1, 2024, and the Legislature has adopted notice requirements around void noncompetes. An employer that kept using an old template after those changes will have trouble arguing it didn’t know. An employer that updated its forms promptly, and can show when, is in a much better position.
The defense also depends on who knew. The statute reaches the employer and its “agent, manager, superintendent, or officer.” A local manager who adds language on their own creates a different record than a company-wide template approved by HR or counsel.
What exposure does a violation create?
PAGA claims, mostly. Labor Code section 2699.5(a) lists section 432.5 among the provisions covered by PAGA’s notice procedure. Because forms are signed by everyone, one bad clause can reach the whole workforce.
The underlying statutes add their own remedies. Section 16600.5 allows actual damages and fees for void noncompetes, and section 925 lets a court award fees to an employee enforcing it. A 432.5 count often rides alongside those claims.
Common unlawful terms and their sources
| Term | Rule it violates | Source |
|---|---|---|
| Employee noncompete | Void and unlawful to enter | Bus. & Prof. Code 16600.5 |
| Waiver of wage payment rules | Can’t be set aside by private agreement | Lab. Code 219 |
| Out-of-state forum or law for California employee | Voidable by the employee | Lab. Code 925 |
| Requiring any of the above in writing, knowingly | Separate violation | Lab. Code 432.5 |
When an unlawful-terms claim arrives
- Preserve every version of the offer letter, agreement, and handbook acknowledgment, with the dates each was used and who approved it.
- Calendar the deadline on the PAGA notice, demand, or complaint, and check for an arbitration agreement and EPLI notice requirements.
- Identify who drafted and approved the challenged language, and make sure no one treats the complaining worker differently.
- Pull records showing when the company learned the term was unlawful and when templates were changed.
- Talk to a lawyer before sending any notice to employees about the clause, since the wording can affect the knowledge defense.
The firm’s page on defending PAGA claims in California explains how it handles Labor Code claims for employers.
Unlawful terms questions from employers
Does a severability clause protect us?
It may save the rest of the agreement, but it doesn’t change whether the employer required a known unlawful term. Section 432.5 focuses on the requirement itself. A severability clause is a contract tool, not a defense to the statute.
What if we never tried to enforce the clause?
Non-enforcement helps on damages and on the narrative, but section 432.5 is about requiring the agreement. For noncompetes, section 16600.5(c) separately bars entering the contract at all.
Do we need to tell current employees an old clause is void?
California law has added notice requirements for some void noncompete clauses. Whether and how to notify workers about other terms is a judgment call that affects both compliance and litigation. Get advice on wording before sending anything.
Does section 432.5 apply to arbitration agreements?
An arbitration agreement isn’t unlawful in itself. Specific terms inside one, such as limits on remedies the law requires, may be challenged. Review arbitration agreements for terms that courts have treated as unlawful.
If a PAGA notice claims your agreements contain unlawful terms
If your company has received a PAGA notice or lawsuit claiming its offer letters, agreements, or handbook forms contain unlawful terms, the drafting history and the date templates were updated usually shape the defense. Rosenberger + Kawabata represents employers defending employment lawsuits and claims through its business litigation practice, including claims involving noncompetes and employment agreements. Contact Rosenberger + Kawabata online for a confidential consultation, or call (310) 894-6921.
Sources
The statutes are Labor Code sections 219, 432.5, 925, and 2699.5, and Business and Professions Code section 16600.5.
This post is general information about California and federal employment law as of November 7, 2026. It is not legal advice, and reading it does not create an attorney-client relationship. Employment statutes, regulations, and court decisions change often, and the outcome of any claim depends on its facts. Past results do not guarantee future outcomes.