Federal Court Rules the Federal Arbitration Act Demands the Arbitration of NJLAD Claims

Arbitration in a Nutshell

Many New Jersey employers routinely require employees to sign an arbitration clause as a condition of their employment. In other words, in exchange for the job, the employee agrees to waive his or her right to litigate claims against the employer in court. Instead, the employee consents to submit those claims to arbitration – a dispute resolution process in which the parties submit arguments and evidence to an arbitrator, who then issues a decision on the matter.

Employers prefer arbitration because, generally speaking, it moves faster than litigation and uses relaxed evidentiary rules in comparison.  Moreover, instead of deciding in favor of one party over the other, arbitrators often “split the difference” between them.  On the whole, arbitration allows employers to resolve disputes more quickly, avoiding costly jury verdicts and attorneys’ fees.  Conversely, employees prefer litigation since its stricter evidentiary rules allow for the discovery of more information helpful to their claims.  Additionally, the time-consuming, risky, and costly nature of litigation gives the employee leverage in the dispute.

Amended LAD Prohibits Arbitration Clauses for LAD Claims

In 2019, the New Jersey legislature became concerned that employers were strong-arming employees into arbitrating discrimination, harassment, and retaliation claims via arbitration clauses.  As such, the legislature amended the Law Against Discrimination (or “LAD”) to provide:

(a) A provision in any employment contract that waives any substantive or procedural right or remedy relating to a claim of discrimination, retaliation, or harassment shall be deemed against public policy and unenforceable.

(b) No right or remedy under the “Law Against Discrimination,” P.L. 1945, c.169 (C.10:5-1 et seq.) or any other statute or case law shall be prospectively waived.

On its face, then, the amended LAD prohibited employers from requiring employees to agree to arbitrate any potential discrimination, harassment, or retaliation claims as a condition of employment.  But a tricky legal issue remained: a federal law, the Federal Arbitration Act (or “FAA”), simultaneously provided that:

“A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (emphasis added).

Further, to really hammer the point home, the FAA stated that such a “written provision” “foreclose[s] state legislative attempts to undercut the enforceability of arbitration agreements.”

The plain language of the FAA, then, seemed to invalidate the LAD’s prohibition against arbitration clauses.  The question arose: given the FAA, did the LAD’s prohibition have any teeth?

The New Jersey District Court Holds the FAA Preempts the LAD

In March 2021, the New Jersey District Court settled the question in N.J. Civil Justice Institute v. Grewal, ruling that the FAA “preempts”, or overrides, the LAD’s ban on arbitration clauses.  Key to the Court’s decision was the FAA’s clearly articulated policy in favor of arbitration agreements, as well as the long line of court decisions upholding arbitration provisions under the FAA.

As it now stands, then, the LAD does not provide employees with a defense against enforcing an arbitration clause with regard to their discrimination, harassment, or retaliation claims.  However, other contractual defects may apply to render such a clause unenforceable – for instance, if the clause is worded in a vague or confusing way, such that the employee isn’t adequately apprised that they are signing away their right to a jury trial.  If you have a question regarding an arbitration provision, or your legal options relating to a workplace issue, call our offices today for a free consultation.