New Jersey Supreme Court Confirms Enforceability of Employment Arbitration Agreements With Class Action Waivers Exempted Under FAA

On May 21, 2018, in Epic Systems Corporation v. Lewis, the Supreme Court of the United States upheld class action waivers in arbitration agreements, ruling that the Federal Arbitration Act (FAA) instructs “federal courts to enforce arbitration agreements according to their terms—including terms providing for individualized proceedings.” On July 14, 2020, the Supreme Court of New Jersey handed down a landmark decision of its own upholding the enforceability of employment arbitration agreements with class action waivers under the New Jersey Arbitration Act (NJAA), even if the agreements are exempted from the coverage of the FAA, by virtue of the FAA’s Section 1 “transportation worker exemption.” The decision is not only a watershed victory for businesses that employ or engage transportation workers who fall within the Section 1 exemption, but all businesses that employ or engage workers in New Jersey. The decision highlights the enormous value of an effective arbitration program and illustrates why businesses that do not already have arbitration agreements with their workers may want to carefully consider obtaining them.

Background

In Arafa v. Health Express Corp. (A-6-19), the Supreme Court of New Jersey considered two related cases: Colon v. Strategic Delivery Solutions, LLC (A-7-19) and Arafa v. Health Express Corp. (A-6-19). In both cases, truck drivers brought suit against their putative employers in New Jersey state court asserting claims under the New Jersey Wage and Hour Law and the New Jersey Wage Payment Law. In both cases, the putative employers sought to dismiss the claims and compel individual arbitrations based on their arbitration agreements with the plaintiffs.

The question posed in both cases was whether the parties’ arbitration agreements could be enforced under the NJAA, if exempt from FAA coverage. Section 1 of the FAA provides in relevant part: that “[the FAA shall not] apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” In Circuit City Stores, Inc. v. Adams, the Supreme Court of the United States narrowly interpreted this provision—frequently referred to as the “FAA Section 1 exemption” or “transportation worker exemption”—to  apply only to contracts of employment of transportation workers, not to contracts of employment in general. Therefore, for the Section 1 exemption to apply, it needs to be determined that plaintiffs are transportation workers engaged in interstate commerce.

In Colon, the trial court dismissed the complaint and compelled the named plaintiffs to individual arbitrations under the NJAA. The plaintiffs appealed, arguing that they are transportation workers exempt from the FAA’s coverage. While the Appellate Division remanded for further proceedings the question of whether the plaintiffs were, in fact, transportation workers, such that the FAA should not apply, the court found the resolution of that question immaterial to the result. Regardless of whether the FAA applied, the court ruled, the class action waiver provision contained in the parties’ arbitration agreements must be enforced under New Jersey law and the plaintiffs must be ordered to pursue their claims in individual arbitrations, pursuant to the NJAA, which applies to all arbitration agreements made since 2003, except those contained in collective bargaining agreements.

In Arafa, the trial court also granted the putative employer’s motion to dismiss and ordered the plaintiffs to arbitrate their claims on an individual basis. However, the Appellate Division reversed, holding that the plaintiff was exempt from the FAA as a transportation worker. Because the agreement only referenced the FAA (and not the NJAA), the court further found that the inapplicability of the FAA undermined the entire premise of the parties’ contract. That is, the court concluded the arbitration agreement was “unenforceable for lack of mutual assent” and stated that “all other arbitration issues [were] moot.”

On appeal to the Supreme Court, the Colon and Arafa plaintiffs asserted that they are transportation workers falling within the FAA’s Section 1 exemption, and therefore their arbitration agreements could not be enforced pursuant to the FAA. Because the arbitration agreements designated the FAA as the ‘“sole and exclusive governing law,’ plaintiffs argue[d] there was no ‘meeting of the minds,” regarding arbitration. The plaintiffs further argued that “absent express intent to apply the NJAA, the state law cannot be applied in the FAA’s place.”

In response, the defendants argued that: (1) “the FAA choice of law provision should not be interpreted as in conflict with the purpose of the arbitration agreement”; and (2) “the FAA’s inapplicability to the parties did not destroy the intent to arbitrate in general.”

Supreme Court of New Jersey’s Decision

Faced with the parties’ competing positions, the Supreme Court of New Jersey found in favor of the defendants, holding that the NJAA may apply to the arbitration agreements even if they are exempt under Section 1 of the FAA. In doing so, the Supreme Court observed (as did the Appellate Division in Colon) that the NJAA governs ‘“all agreements to arbitrate made on or after January 1, 2003,’ and exempts from its provisions only ‘an arbitration agreement between an employer and a duly elected representative of employees under a collective bargaining agreement or collectively negotiated agreement.’ N.J.S.A. 2A:23B-3(a).” Accordingly, the Supreme Court found that “since 2003, there has been no need to express an intent that the NJAA would apply because its application has been automatic, absent preemption.” Therefore, the Supreme Court rejected the plaintiffs’ argument that the NJAA must be specifically invoked to apply.

The Supreme Court then turned to the question of preemption. As there is no express preemption provision in the FAA, including in Section 1, and the “application of the NJAA” would not “frustrate the principal purpose of the FAA by discriminating against arbitration agreements,” the Supreme Court held that the FAA does not preempt the NJAA.

Finally, the Supreme Court considered the enforceability of the arbitration agreements and class waivers at issue under New Jersey law. In Colon, “plaintiffs voluntarily agree[d] to waive any right to a trial by jury in any suit filed hereunder,” and to “adjudicate any dispute pursuant to [the arbitration agreement].” The Colon arbitration clauses further specified that plaintiffs agreed to arbitrate any claim “arising out of or in any way relating to the [employment] Agreement or the transportation services provided [t]hereunder.” The Arafa arbitration clause involved similarly broad language specifying that the plaintiff agreed to resolve “all disputes” between the parties through binding arbitration. The Supreme Court found the language of the arbitration clauses in both cases sufficiently broad to conclude that the plaintiffs “knowingly and voluntarily waived their rights to pursue their statutory wage claims” in a judicial forum. “By the same principles of construction applied to the jury trial waiver provision,” the Supreme Court found that “plaintiffs knowingly and voluntarily waived their ability to proceed as a class.” As such, the Supreme Court held the Arafa plaintiffs must pursue individual arbitrations pursuant to the NJAA, while the Colon plaintiffs must pursue individual arbitrations pursuant to “either the FAA or the NJAA, which will be determined by the trial court upon remand.”

Takeaways

This decision provides much needed relief to New Jersey employers at the end of a 12-month span that saw the passage of the historic New Jersey Wage Theft Act, and various other laws passed in furtherance of efforts to identify and severely punish wage law violations, particularly in the independent contractor misclassification context.

To be sure, the decision is most critical for businesses that engage transportation workers, as it confirms their arbitration agreements with such workers can be enforced under the NJAA even if the FAA doesn’t apply. But the decision is extremely important for all businesses that employ or engage workers in New Jersey, insofar as the highest court in the state has upheld the enforceability of employment agreements to arbitrate statutory claims on an individual basis based on a straightforward, common-sense reading of the language of the agreements. This is significant because even in cases in which the FAA applies, state law contract interpretation principles apply, and arbitration agreements may be invalidated based on generally-applicable contract defenses such as unconscionability, fraud, and duress. The Supreme Court’s ruling provides clear guidance to lower courts that no magic language is required for an enforceable agreement to arbitrate on an individual basis and serves as a reminder that the Supreme Court of New Jersey has long articulated New Jersey’s strong public policy in favor of arbitration. While many New Jersey employers will continue to carefully craft their arbitration agreements with their workers, the Arafa decision should provide them with a greater level of comfort that their agreements to arbitrate disputes, including on an individual basis, will be enforced by the courts of this state according to their terms, in most instances, regardless of whether the FAA applies.

One potential exception could be agreements to arbitrate claims alleging employment discrimination, harassment, and/or retaliation. In 2019, the New Jersey state legislature amended the New Jersey Law Against Discrimination to preclude enforcement of agreements to arbitrate such claims and to prohibit retaliation against employees for refusing to agree to arbitrate such claims. New Jersey employers may want to carefully consider the impact of this amendment when crafting their arbitration agreements, particularly where the FAA does not apply, because in such cases, they will be unable to avail themselves of the argument that it should be preempted by the FAA on the grounds that it discriminates against arbitration agreements.

Nevertheless, the Arafa decision illustrates just how valuable an effective arbitration program can be, and why employers without one may want to carefully consider implementing one. That said, the Arafa decision is limited to New Jersey, and other states may have other requirements or present other obstacles to the formation or enforcement of arbitration agreements, particularly where the FAA does not apply. As such, a state-by-state analysis of such issues is required. However, given Arafa’s clear pronouncements, in instances where workers have a reasonable connection to New Jersey, employers may want to consider drafting arbitration agreements with a view toward maximizing the likelihood that New Jersey law (including the NJAA) will apply to disputes regarding the interpretation and enforceability of the agreements, particularly in situations where employers are more concerned about ensuring the individual arbitration of wage claims, as opposed to discrimination and/or retaliation claims, where New Jersey law may present a problem. Such strategies may include the insertion of a choice of law provision selecting New Jersey law to govern such disputes, in the alternative, should the FAA be found not to apply.