New Jersey’s “Ban” Against Mandatory Arbitration Provisions Suffers Another Setback

Since its enactment in 2019, the ban against mandatory arbitration provisions in employment agreements contained in Section 12.7 of New Jersey’s Law Against Discrimination (NJLAD) has been on thin ice.  And it appears to have just gotten thinner.

A recent New Jersey Appellate Division case—Antonucci v. Curvature Newco, Inc., et al. (A-1983-20)—has confirmed what the U.S. District Court in New Jersey already determined in 2021: Section 12.7 is preempted by the Federal Arbitration Act (FAA) and cannot prevent employers from including mandatory arbitration provisions in employment contracts.

To be clear, Section 12.7, which amended the NJLAD, contains no express prohibition against an employer requiring its employees to arbitrate claims arising from their employment, like discrimination and other claims.  Rather, the amendment attempts to accomplish the same end by simply providing that “[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.”  The law also prohibits the prospective waiver of any “right or remedy” under the NJLAD or “any other statute or case law.”

The New Jersey legislature’s scrupulous avoidance of the word “arbitration” in Section 12.7, however, did not save the amendment when it was scrutinized in the matter N.J. Civil Justice Inst. v. Grewal, Civ. No. 19-17518.  Far from it, the U.S. District Court was wise to the legislature’s game and considered whether the implicit prohibition against arbitration provisions in employment contracts ran afoul of the FAA.  The court reasoned that “[c]ritically, a state law that ‘avoid[s] referring to arbitration by name’ does not avoid FAA preemption.”  Specifically, the court noted that any law that effectively discriminates against arbitration or “covertly” prohibits the waiver of the right to file a complaint in court and be heard by the jury (which are the “primary” and “defining” characteristics of arbitration provisions) violates the FAA.  The court then held that since Section 12.7 discriminates in practice against arbitration, it is preempted by the FAA and its enforcement should be permanently enjoined.

At the beginning of this year, considering the issue for the first time, the New Jersey Appellate Division wholeheartedly embraced the reasoning of the District Court.  At issue on appeal was a trial court ruling compelling an employee to arbitrate whether his discharge due to a failed drug test constituted a failure to accommodate under the New Jersey Compassionate Use Medical Cannabis Act.  (The arbitration agreement was set forth in an employee handbook that the plaintiff acknowledged having received and reviewed; and the agreement provided that continued employment constituted assent to its terms.)  Relying on U.S. Supreme Court precedent, the Appellate Division unanimously held that, even though Section 12.7 did not “expressly single out” arbitration agreements, it nevertheless succeeded in banning their use in employment agreements in violation of the FAA.

Given the strong language and unambiguous message of both the Grewal and Antonucci cases, it seems clear that Section 12.7 no longer poses a significant obstacle to the enforcement of an employment agreement’s mandatory arbitration provision governed by the FAA.  Employers should be wary, however, that the Antonucci case left open whether Section 12.7 is enforceable when applied to an arbitration agreement governed by the New Jersey Arbitration Act, N.J.S.A. 2A:23B-1 et seq.  Therefore, prudent employers are well advised to consult counsel when drafting arbitration provisions in their employment contracts.