Courts and Legislatures Continue to Limit Employers' Access to the Arbitral Forum

Article

New Jersey Law Journal

August 18, 2022

Employers have long favored arbitration as a means of efficiently resolving disputes with employees. Business-minded employers are often drawn to the benefits afforded by private arbitration in comparison to the judicial process. These benefits include “the reduced cost, increased speed, private nature, and elimination of juries.” David Sherwyn et al., “In Defense of Mandatory Arbitration of Employment Disputes: Saving the Baby, Tossing out the Bath Water, and Constructing a New Sink in the Process,” 2 U. Pa. J. Lab. & Emp. L. 73, 100 (1999). The arbitral forum for employers is under threat, however, as both courts and legislatures continue to chip away at employers’ ability to enforce arbitration agreements. Recent judicial decisions and legislation exemplify this growing trend and serve as a warning signal for employers seeking to adjudicate employment claims out of court.

Both the Federal Arbitration Act (FAA) and New Jersey Arbitration Act purportedly enunciate state and federal policies favoring arbitration. Atalese v. U.S. Legal Services Group, L.P., 219 N.J. 430, 440 (2014). Despite this seemingly clear judicial declaration, you would be forgiven for thinking the opposite in light of recent case law. Multiple high-profile decisions have made it harder for employees to enforce arbitration agreements. For example, in Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022), the United States Supreme Court invalidated a widely held rule concerning waiver of the right to arbitration. In Morgan, the plaintiff worked at a Taco Bell franchise owned and operated by the defendant employer. The plaintiff alleged wage-and-hour violations and brought suit in federal court. The defendant employer initially defended these claims in court, but after eight months of litigation, moved to stay the proceedings and compel arbitration. The plaintiff opposed this motion, arguing that the employer had waived its right to compel arbitration by litigating the case in court.

In adjudicating this motion, the district court applied the well-established standard adopted by nine United States Courts of Appeal—including the Third Circuit Court of Appeals—which provides that a party will only be deemed to have waived its right to compel arbitration where: (1) it was aware of the right to compel arbitration; (2) it acted inconsistent with that right; and (3) its delay in invoking this right caused prejudice to the adverse party. Id. at 1712. The requirement that an adverse party demonstrate prejudice stemmed from the judicially recognized policy favoring arbitration. Id. Despite this seemingly clear policy, the Supreme Court upended well-established jurisprudence in several jurisdictions and invalidated the aspect of this test requiring the adverse party to demonstrate prejudice. As such, moving forward, employees will not be required to show prejudice when arguing that an employer has waived its right to force arbitration. Hence, defense counsel must be even more diligent in reserving their client’s rights under arbitration agreements and, ideally, should move to compel arbitration at the earliest possible juncture of a case.

The Supreme Court also recently expanded a seemingly narrow exemption to the FAA. Section 2 of the FAA provides that the statute does not “apply” to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” as Congress had already enacted alternative dispute resolution regimes available to these classes of employees at the time it passed the FAA. 9 U.S.C. § 2; Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 121 (2001). Yet, judicial interpretation has expanded Section 2’s applicability, which has had the corresponding effect of narrowing business owners’ ability to compel arbitration in certain circumstances. For instance, despite Section 2’s explicit language limiting its applicability to “contracts of employment,” in 2019 the Supreme Court held that this exemption applied to invalidate arbitration clauses in independent contractor agreements, even though no employment relationship existed between the parties. See New Prime Inc. v. Oliveira, 139 S.Ct. 532 (2019).

In the recent decision of Southwest Airlines v. Saxon, 142 S.Ct. 1783 (2022), the Supreme Court once again expanded the scope of Section 2. Saxon involved a putative collective action under the Fair Labor Standards Act (FLSA) for unpaid overtime by a ramp supervisor employed by Southwest Airlines. Ramp supervisors’ duties include training, supervising, and assisting ramp agents, who load and unload cargo onto and off of planes. Ramp supervisors themselves do not transport goods across state lines. The Saxon plaintiff was party to an employment contract with an arbitration clause and class waiver, and therefore the defendant employer moved to dismiss her FLSA suit and compel arbitration. The Saxon plaintiff argued she was an exempt transportation worker under Section 2 of the FAA, but the district court disagreed, holding that only employees involved in the “actual transportation” of goods were exempt from the FAA under Section 2. The Court of Appeals disagreed, however, and the Supreme Court affirmed that reversal, holding that employees who load and unload cargo onto planes are “‘engaged in transportation’ of those goods across borders via the channels of foreign or interstate commerce,” and therefore are exempt from mandatory arbitration of employment claims. Id. at 1790.

Though Saxon focuses on a discrete set of employees—employees who load and unload cargo onto planes—the potentially expansive effect of this decision is quite clear. In a modern economy, numerous employees may play a part in the flow of goods across state lines from manufacturers to consumers. By applying the FAA’s transportation exemption to employees who do not actually transport goods, the Supreme Court has potentially expanded the number of exempt employees exponentially. Post-Saxon, it is unclear how far removed an employee must be so as not to be considered “engaged in transportation,” and litigation examining just how far this exemption reaches appears likely in the coming years.

Finally, new federal legislation has also taken aim at employers who utilize arbitration agreements. On March 3, 2022, President Joe Biden signed the Federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (“the Act”) into law. 9 U.S.C. §402. This act amends the FAA to provide that “no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to [a] sexual assault dispute or [a] sexual harassment dispute.” Id. Though limited to claims alleging sex-based assault and harassment—as opposed to all protected classifications set forth under state and federal law—the Act notably prohibits both arbitration clauses and class waivers.

New Jersey employers will undoubtedly recall the New Jersey legislature’s similar attempt to bar arbitration of discrimination and harassment claims brought under the New Jersey Law Against Discrimination. See N.J.S.A. §10:5-12.7. To date, this statute has had little practical effect on New Jersey employers, as the New Jersey Superior Court, Appellate Division, has held in a published opinion that N.J.S.A. §10:5-12.7 is preempted by the FAA. See Antonucci v. Curvature Newco, Inc., 470 N.J. Super. 553 (App. Div. 2022). N.J.S.A. §10:5-12.7 looks poised to enjoy a new lease on life following the passage of the Act, however. With the FAA now amended to specifically exclude sexual harassment and assault claims, the basis for asserting preemption over N.J.S.A. §10:5-12.7 as to such claims appears to have disappeared. And indeed, one decision from the New Jersey Superior Court, Law Division, has already invoked the Act in rejecting an attempt to compel arbitration of a sexual harassment claim. See e.g., Sellino v. Gallagher, Docket No.: ESX-L-8519-21 (N.J. Super. Law Div. May 25, 2022).

Though seemingly distinct, MorganSaxon, and the Act collectively embody a worrying trend for employers who utilize arbitration agreements. These decisions and legislative enactments are among the latest that have had the effect of whittling away employers’ ability to enforce their bargained-for arbitration clauses. Though arbitration remains an effective tool through which employers may pursue efficient resolution of employment disputes, defense counsel must remain vigilant to guard against any further erosion of employers’ right to compel arbitration of claims.


Reprinted with permission from the August 22, 2022 issue of the New Jersey Law Journal. © 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. For information, contact 877-257-3382 or reprints@alm.com or visit www.almreprints.com.