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Can Employers Still Require Arbitration in New York and New Jersey?

Nov. 5, 2020, 9:00 AM

For decades, New York and New Jersey courts have found that state public policy, set against the backdrop of the Federal Arbitration Act (FAA), favors arbitration as an efficient method of alternative dispute resolution. In recent years, however, it has become more closely scrutinized by courts, and the target of legislation aimed at curbing its use.

Most recently, courts have focused on the specific language of the provision and the manner in which it is accepted by employees.

Legislative actions taken in both New York and New Jersey demonstrate these provisions are being targeted. Courts have made clear that provisions are enforceable if their terms are explicit, and the party seeking to compel arbitration can prove the signor’s acceptance.

Avoiding overcomplicated “legalese” in favor of a clear and unambiguous waiver, communicated in a straightforward manner, is the better course. However, nuances such as referencing the FAA, establishing a traceable signature process, and referencing the contemplated arbitral forum and rules strengthen efforts to enforce arbitration agreements down the road.

Are Arbitration Agreements Legal in New York?

Even though the U.S. Supreme Court has held the FAA will preempt and displace any state law which prohibits outright the arbitration of a particular type of claim, that has not stopped states from enacting their own laws to limit employment arbitration provisions.

A recent New York law makes it unlawful to include a mandatory arbitration agreement covering claims of discrimination within any contract, and provides that existing agreements are null and void. (C.P.L.R. 7515). The law is only batting .250 in publicly released opinions; losing twice in federal court and once in state court.

In both federal opinions, the court found the New York law is preempted by the FAA, and thus void. The lone victory for the law has come out of the New York County Supreme Court, which openly disagreed with the federal court and refused to compel arbitration of a sexual harassment claim.

New Jersey Law

Things are not much clearer in the Garden State. In 2019, that state enacted a law which most practitioners believe is meant to prevent employers from enforcing arbitration agreements in claims raised under the New Jersey Law Against Discrimination. (N.J.S.A. 10:5-12.7(a)).

Although no court has reached the preemption issue yet, last year various business interest groups seeking to invalidate the law brought suit against the New Jersey attorney general. That caseis still pending in federal court, and will likely be decided before the end of the year.

What Are Employers to Do?

Based on recent court decisions, employers should ensure their agreements explicitly state that they are governed by the FAA, rather than state law. Further, employers must ensure that their agreements are clear, concise, and appropriately accepted by employees.

Both New Jersey and New York have laws embracing the use of electronic signatures in contracts, subject to certain verification requirements. (New Jersey Electronic Transactions Act, N.J.S.A. 12A:12-1, et. seq.); (Electronic Signatures and Records Act, N.Y. Technology Law § 301, et. seq.). While these requirements are not onerous, employers contracting with an outside vendor to roll out their arbitration program through training or human resources software should ensure their vendor’s competency with these requirements.

Alternative forms of acceptance may also be acceptable. For example, the New Jersey Supreme Court in Skuse v. Pfizer Inc. recently enforced an arbitration agreement communicated by e-mail, which stated that it would be considered accepted by any employee who continued working for 60 days, and where employees were also asked to “acknowledge” the agreement in a separate training program.

In terms of substance, the cornerstone of a valid arbitration agreement is that it clearly and unambiguously identifies the distinction between arbitration and going to court.

In 2018, the New Jersey Appellate Division in Flanzman v. Jenny Craig Inc. alarmed employers by taking this a step further, finding an agreement was invalid because it did not identify the arbitration forum (e.g., AAA or JAMS). The New Jersey Supreme Court recently reversed, finding that although selecting an arbitral forum in advance may add clarity to an agreement and weigh in favor of enforceability, it is not a prerequisite.

Nevertheless, employers who seek to enforce agreements to arbitrate are on more solid footing by including an explanation of how arbitration may differ from proceeding in court, and signaling in the agreement and in any cover letter or e-mail the importance of the employee’s acceptance.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

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Author Information

Ruth Rauls is a partner at Saul Ewing Arnstein & Lehr LLP and concentrates her practice on complex commercial litigation, employment litigation, real estate litigation, and litigation involving closely-held corporations. She litigates matters at the trial and appellate levels in state and federal court in New Jersey and New York, as well as in private mediations and arbitrations.

Erik Pramschufer is an associate at Saul Ewing Arnstein & Lehr LLP, assisting business owners with employment and commercial litigation matters, including claims related to wages, restrictive covenants, discrimination, corporate governance and breach of contract.

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