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New Federal Law Bans Mandatory Arbitration and Class-Action Waivers in New Jersey Sexual Harassment Cases

Courts in New Jersey and all over the country encourage parties involved in disputes to use alternative dispute resolution (ADR) procedures in order to keep dockets from getting excessively backlogged and free up court resources. Mandatory arbitration clauses are increasingly common in employment contracts. Many employees, as well as their legal advocates, dispute whether these clauses are truly voluntary since employees are often not in a position to negotiate those terms. They also maintain that arbitration tends to favor employers for various reasons. A new law, signed by the president in March 2022, amends the Federal Arbitration Act (FAA) to prohibit the enforcement of mandatory arbitration clauses when employees claim sexual harassment.

Arbitration is a form of ADR in which the parties to a lawsuit present their cases to a neutral third party. That person, known as an arbitrator, presides over a proceeding that resembles a trial in many ways. Data generally support the perception that arbitration favors employers. One possible reason for this is because, while an employee might only encounter an arbitrator once, their employer might have seen that arbitrator many times in other employment disputes. An arbitrator may feel pressure not to alienate a source of consistent business.

If all of the parties to a dispute agreed in advance that the arbitrator’s decision would be binding, the FAA protects the decision from judicial review. A party to the arbitration may petition a court to enforce the award. If the other party tries to challenge the validity of the award, however, the court may not vacate or modify it without evidence of fraud, duress, or misconduct by the arbitrator. This type of mandatory arbitration effectively shuts employees out of the court system.

The FAA states that arbitration agreements are “valid, irrevocable, and enforceable” in most situations. Several states, including New Jersey, have enacted laws seeking to limit the use of mandatory arbitration clauses in employment contracts, particularly in disputes involving alleged workplace sexual harassment or sexual assault. These laws have had to contend with the FAA because of the federal preemption doctrine.

Section 12.7 of the New Jersey Law Against Discrimination (NJLAD), which was added in 2019, states that employment contracts may not waive “​​any substantive or procedural right or remedy” in claims involving “​​discrimination, retaliation, or harassment.” This includes arbitration clauses that prevent employees from filing civil lawsuits under the NJLAD and other statutes.

Several trade organizations challenged § 12.7. In March 2021, a federal judge ruled that the section was preempted “​​with respect to arbitration agreements between employers and employees that are governed by the FAA.” The Appellate Division ruled in February 2022 on an employee’s challenge to a mandatory arbitration clause under § 12.7. It also found that the FAA preempted that provision of the NJLAD.

The new federal law amends the FAA to bring it partly in line with the NJLAD. It prevents employers from enforcing arbitration agreements in civil lawsuits involving alleged sexual harassment or sexual assault. The law only applies to arbitration agreements signed before a dispute arises. An employee may still agree to submit a dispute to arbitration once they have made a complaint.

The employment attorneys at the Resnick Law Group represent New Jersey and New York workers — both individually and collectively — in claims for sexual harassment and other unlawful acts by employers. Please contact us today online, at 973-781-1204, or at 646-867-7997 to schedule a confidential consultation with a member of our team.

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