Legal Alert

New Jersey Court Rejects Punitive Damages Waivers in Employment Arbitration Agreements

September 4, 2018

The New Jersey Appellate Division recently held in Roman v. Bergen Logistics, LLC, that a provision in an arbitration agreement that requires an employee to waive claims for punitive damages under the New Jersey Law Against Discrimination (LAD) is contrary to public policy and therefore unenforceable. The court did, however, affirm enforcement of the arbitration agreement as a whole and require the employee’s claims to be brought before the American Arbitration Association, as required by the agreement.

As a result of this case, employers should carefully draft or review and revise any employment arbitration agreements to ensure they will achieve the legal objectives intended.

The plaintiff in Roman worked as a human resources generalist for around three months and was then terminated. The plaintiff filed a complaint in New Jersey Superior Court alleging sexual harassment, a sexually hostile work environment, and retaliatory termination. At the start of her employment, she had signed an arbitration agreement that required all employment-related claims to be brought in arbitration, not court, and provided that both the employee and employer "are waiving any right, statutory or otherwise, to a trial by jury and to punitive and exemplary damages." (Emphasis added.) The employer moved to dismiss the complaint, arguing that the plaintiff was obligated to arbitrate her claims and had waived any claim for punitive damages.

The court first addressed the punitive damages waiver. Though federal and state statutes express a preference for arbitration, the court explained the preference "is not without limits" and arbitration agreements may be unenforceable in whole or in part when contrary to public policy. The LAD, N.J.S.A. 10:5-3, expressly allows plaintiffs to recover punitive damages. The court found this provision was designed not only to protect individual plaintiffs, but also to further the public interest of eliminating discrimination by deterring and punishing egregious misconduct. According to the court, allowing punitive damage waivers would "eviscerate an essential element of the LAD's purpose—deterrence and punishment of the most egregious discriminatory conduct by employees who … control employer policies and actions that should prevent discriminatory conduct in the workplace." As a result, the court held the punitive damages waiver was unenforceable.

The court found the remainder of the arbitration agreement was enforceable because the punitive damage waiver could be severed from the remainder of the agreement. Notably, the court declined to address the plaintiff’s argument that the limitation on the recovery of attorneys fees in the arbitration agreement was similarly unenforceable because the issue was not timely raised or briefed and does not involve "public interest concerns." The court also rejected the plaintiff’s claim that she did not knowingly and voluntarily agree to waive the claims asserted in her complaint, finding that the agreement expressly included a waiver of the statutory right to seek a trial by jury and agreement not to proceed to lawsuit, action, or other legal proceedings. Accordingly, the court affirmed the trial court’s dismissal of the plaintiff’s complaint, but modified the dismissal to allow the plaintiff to seek punitive damages before the American Arbitration Association.

Ballard Spahr's Labor and Employment Group routinely assists employers in drafting, reviewing, and defending the enforceability of employment and arbitration agreements.

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