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New Jersey Supreme Court Issues Important Employment Law Decision on Employment Contracts Requiring Arbitration of Wage and Hour Claims

The Arafa Case

The New Jersey Supreme Court issued an opinion in the case of Arafa v. Health Express Corporation in a consolidated appeals about a niche question regarding the interplay of the Federal Arbitration Act (the “FAA”) and the New Jersey Arbitration Act (the “NJAA”) regarding the judge-gavel-1461998219JBc-300x200enforceability of agreements in employment contracts to arbitrate disputes under New Jersey employment law.  The consolidated cases were both brought as class actions by employees whose duties included driving to make deliveries for their employers.  In one of the appeals it was clear that the employees were making deliveries outside the state as well as in it, and were therefore engaged in interstate commerce; in the other it was not clear.  In both cases the employers argued that the cases were not covered by the FAA, which contains an exemption which provides that the FAA will not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce,” which the United States Supreme Court has defined to include interstate deliveries.  Because the drivers were not covered by the FAA due to the exception, the employers argued, they were covered by the NJAA, which did not contain such an exemption, and the arbitration agreements were therefore enforceable.  Thus, the employers argued, the lawsuits in Superior Court should be dismissed and the cases submitted to binding arbitration.  The trial judges in the Law Division of the Superior Court of New Jersey agreed with the employers and dismissed the suits and ordered them to arbitration.  In both cases, the employees separately appealed, and different panels of the Appellate Division of the Superior Court reached different decisions.  To resolve the split, the New Jersey Supreme Court agreed to hear the appeals.

Why does this matter?  If it seems pretty arcane, it has significant real world consequences.  First, the employees sued for unpaid overtime under the New Jersey Wage and Hour Law because New Jersey law and New Jersey courts are seen – rightly or wrongly – as more friendly to employees than federal court, which of course is why the employers didn’t want the case there.  Moreover, arbitration is seen as much more friendly to employers than employees, which is why the two sides were fighting over it.

Second, arbitration has limited discovery, which favors the employers because they have most of the evidence, be it records or the testimony of fellow employees.  Third, depositions generally aren’t allowed, which again hurts employees.  Fourth, arbitration generally does not result in huge awards which sometimes (if rarely) happen in court cases.  Fifth, unlike trials, arbitration is not a public proceeding, so employers can normally keep the matter confidential.  Finally, arbitration decisions are very difficult to appeal.  Employers generally see these as making them more employer friendly.

However, some factors make it decidedly unfriendly for employers.  For instance, appeals are difficult, so when employers lose they are often stuck with the decision.  Moreover, there is less opportunity for settlement, which means more trials and potentially more adverse decisions.

In any event, in this case the New Jersey Supreme Court came down on the employers’ side.  It held that when the FAA does not apply the NJAA does, and in this case this meant that the cases would be arbitrated. It also held that when the agreement to arbitrate was clear, it would be enforced even if it did not list the statute on which the dispute was based.

The New Jersey Supreme Court also used federal law to uphold class action waivers in these employment contracts, under which the employees agreed to bring any claims individually rather than as a class action.  Justice Barry Albin dissented, noting that the majority used federal law to brush aside the Court’s own prior decisions which provided that when claims were small and could not effectively be brought as individual cases, as here, class action waivers would not be enforced by New Jersey Courts.


The Takeaways

  • Federal courts have a clear trend of strict enforcement of clear and voluntary arbitration agreements. New Jersey has a similar trend, but has more exceptions.  This case tends to buck the New Jersey courts’ recent trend to find exceptions to the enforceability of arbitration agreements.
  • Where to file is always a difficult decision. Probably because of those trends and the less favorable treatment of employees in federal court, the employees chose to file their wage and hour claims in New Jersey state court under the New Jersey Wage and Hour Law rather than in federal court under the Federal Fair Labor Standards Act.  Normally this wouldn’t have been a bad move.  However, in this case, because of the loophole in the FAA, had the case been brought under the Fair Labor Standards Act there is a good chance it could have proceeded.  Moreover, if it did, the Fair Labor Standards Act provides for double damages for willful violations while the New Jersey Wage and Hour Law does not.
  • But employees and employers should remember that arbitration agreements are more often than not enforceable, and be guided accordingly.


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