In a case of first impression, a judge of the Essex County Superior Court held that the Federal Arbitration Act (FAA) no longer preempts Section 12.7 of the New Jersey Law Against Discrimination (LAD)—which prohibits mandatory arbitration clauses in employment disputes—with respect to workplace sexual harassment and sexual assault suits. The ruling follows President Biden’s March 3, 2022, signing of the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021, which amends the FAA to prohibit the enforcement of contract provisions that require arbitration of sexual harassment and sexual assault claims. In addition, House representatives recently introduced a bipartisan bill, known as the SPEAK OUT Act (HR 8227), that would prohibit the enforcement of predispute nondisclosure agreements (NDAs) when employees allege sexual misconduct in the workplace.
- The LAD amendments had been struck down by the federal court for the District of New Jersey’s March 2021 holding that Section 12.7 is preempted by the FAA.
- The scope of the new federal law is limited to sexual harassment and sexual assault claims. Recent opinions in New Jersey courts indicate that mandatory arbitration clauses are still enforceable in other types of employment disputes.
- Whether the law can be applied retroactively is unclear. The federal law states that it applies to claims that arise on or after March 3, 2022. However, the Essex County decision allowed that plaintiff to bring her claim under the state law for alleged harassment that occurred prior to the enactment of the federal law.
- Employers should work with their counsel to carve out claims of workplace harassment or assault from mandatory arbitration provisions in their employment agreements and other contracts.
- A Senate companion bill to the SPEAK OUT Act is expected to be introduced by a group of bipartisan legislators.
The Bottom Line
The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 and the SPEAK OUT Act are the latest actions taken by legislators in the wake of the #MeToo movement to address sexual misconduct in the workplace. As seen in recent New Jersey cases, the new federal arbitration law is limited to sexual harassment and sexual assault cases for now and does not affect arbitration in other types of employment disputes. However, the LAD amendment is broader, so it remains to be seen how state courts will react to FAA preemption arguments based on other categories of claims. New Jersey employers should review any mandatory arbitration clauses in their employment agreements and contracts to carve out claims of workplace harassment or assault.
On March 3, 2022, President Biden signed the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 into law, which we previously discussed here. The law was developed in the wake of the #MeToo movement and amended the Federal Arbitration Act (FAA) to prohibit the enforcement of contract provisions that compel arbitration of workplace sexual harassment and sexual assault claims.
In a case of first impression, a judge of the Essex County Superior Court applied the new federal law in Sellino v. Galiher, in which the plaintiff alleged that her employer engaged in workplace sexual misconduct and argued that the mandatory arbitration clause in her employment contract was unenforceable under both state and federal law. The court held that the new federal law prohibited enforcement of the arbitration provision and allowed the plaintiff to pursue her claim in court.
The New Jersey Legislature had previously attempted to bar mandatory arbitration of employment discrimination disputes through the passage of Section 12.7 of the Law Against Discrimination (LAD) in March 2019, which prohibited the enforcement of contract provisions that “waive any substantive or procedural right or remedy relating to a claim of discrimination, retaliation, or harassment.” However, in 2021, the federal district court for the District of New Jersey held that Section 12.7 was preempted by the FAA in New Jersey Civil Justice Institute v. Grewal. The New Jersey Attorney General did not appeal, so the injunction barring the enforcement of Section 12.7 remained in effect.
However, the amended FAA may allow for the enforcement of Section 12.7 in sexual harassment and assault cases, and the Essex County case could be the first of many brought before New Jersey courts. Other types of employment claims, such as discrimination or retaliation, are not impacted by the new federal law and mandatory arbitration clauses will likely continue to be enforced with respect to those claims. For example, in April 2022, the New Jersey Appellate Division heard a retaliation and wrongful termination case and confirmed that the FAA preempted Section 12.7 and compelled arbitration.
Whether the new federal law can be applied retroactively remains unclear. Although the law states that it applies to “any dispute or claim that arises or accrues on or after the date of enactment,” which was March 3, 2022, the Essex County judge concluded that the new federal law permitted LAD claims to be brought in court—and not restricted to arbitration—where the underlying facts occurred between 1995 and 2020. The court reasoned that retroactive application was available because Section 12.7 was enacted in March 2019.
In the latest federal legislative development stemming from the #MeToo movement, House representatives have introduced the SPEAK OUT Act (HR 8227), which would prohibit the enforcement of predispute nondisclosure agreements when employees report sexual harassment in the workplace. A companion bill is expected to be introduced by a bipartisan group of Senators. The focus on predispute NDAs means that the proposed federal law would not apply to NDAs included in post-dispute settlement agreements. New Jersey passed a similar state law in 2019, which greatly limits the enforcement of NDAs related to claims of discrimination, retaliation, or harassment in employment contracts and settlement agreements.
Employers should consult with counsel to review any mandatory arbitration clauses in their employment agreements, arbitration agreements, and other contracts to carve out claims of workplace sexual harassment or assault. Although arbitration clauses appear to be protected in other types of employment disputes for now, employers should still carefully review their contract language to ensure compliance. Employers should also continue to track the status of the SPEAK OUT Act and other legislation on the topic of sexual harassment in the workplace.
Attorneys in Ballard Spahr’s Labor and Employment Group are prepared to work with clients to update their policies and to take other preventative steps, such as training and prompt investigation of claims, to avoid and address sexual harassment claims. Find more guidance for employers on our HR Law Watch blog.
The authors express their thanks for the efforts of summer associate Mia Kim in the preparation of this alert.
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