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Beware of Carelessly Drafted Employee Arbitration Agreements

By on October 26, 2016 in Arbitration with 0 Comments

Many employers today utilize employee arbitration agreements as a means of eliminating potential court litigation. In place of pursuing legal claims in a judicial forum, the arbitration agreement substitutes a private resolution mechanism, such as utilization of an arbitrator, to resolve employee legal grievances. Arbitration agreements are an effective way of keeping employee disputes outside of the public realm and, for many employers, there is a significant value in maintaining the privacy of such matters. Arbitration also in most instances is much less expensive than defending claims in a judicial forum. While arbitration agreements in the employment setting are enforceable here in New Jersey, they have to be drafted correctly, or otherwise, a court will not enforce them, as one New Jersey employer found out recently in a case that resulted in a significant appellate court decision addressing the specific requirements to make such agreements enforceable.

In Hernandez v. Fancy Heat Corporation, 2016 N.J. Super. Unpub. LEXIS 1805 (App. Div. August 1, 2016), the plaintiff brought suit claiming that she had been sexually harassed by a coworker. Four (4) days after allegedly reporting the harassment to one of her supervisors, the employee was terminated. The company claimed plaintiff was terminated for performance related reasons, but she asserted to the contrary that the termination happened in retaliation for her reporting the alleged sexual harassment.

The employee filed a complaint in New Jersey Superior Court alleging discrimination under the New Jersey Law Against Discrimination, retaliation, common-law negligence, and violation of the New Jersey Conscientious Employee Protection Act.  The employer sought to dismiss the case based on an arbitration provision included in the employment application that the plaintiff had executed prior to her hiring by the employer. The arbitration clause of the employment application specifically advised the plaintiff that all disputes related to her employment were to be addressed through final and binding arbitration before a neutral arbitrator. The arbitration clause likewise gave specific examples of the kinds of claims that the employee would need to pursue through arbitration, but nowhere in the arbitration clause did it mention that agreeing to arbitration meant that plaintiff would be giving up her right to a jury trial on such employment related claims.

The trial court enforced the arbitration clause, finding that the application’s provision encompassed the claims that plaintiff was seeking to pursue in court. This decision was appealed by the plaintiff, and the New Jersey Appellate Division reversed the trial court’s decision. In reversing the dismissal of plaintiff’s complaint, the Appellate Division ruled that, in order for an arbitration provision to be enforceable, it must specifically alert an employee that agreeing to arbitration means that they are giving up the constitutional right to have legal claims decided in a court of law with the possibility of a jury trial.  This is because, in the Appellate Division’s view, not every employee understands what potential rights are being waived when agreeing to arbitrate employment related claims. Thus, while the Appellate Division ultimately noted that no particular words are required to necessarily make an arbitration agreement enforceable, at a minimum, the agreement must explain that it is a substitute for the right to have the employee’s claim decided in a court of law. Without such an explanation, the arbitration clause will not be enforced.

In light of the Hernandez decision, it is wise for every employer to review all arbitration provisions that may exist in employment applications, employee handbooks, employment agreements or other related type documents to ensure that, at a minimum, the arbitration provision specifically notifies employees that they are giving up their right to have their legal claims decided in a court of law. Such notification should be drafted in a clear and unambiguous fashion so, if ever there is a need to enforce the arbitration right, there will be no reason for the court to deprive the employer of its substitute forum for resolution of the employee’s claim.

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Ralph R. Smith, III, Esq.

About the Author

About the Author:

Mr. Smith is Co-Chair of Capehart Scatchard's Labor & Employment Group. He practices in employment litigation and preventative employment practices, including counseling employers on the creation of employment policies, non-compete and trade secret agreements, and training employers to avoid employment-related litigation. He represents both companies and individuals in related complex commercial litigation before federal states courts and administrative agencies in labor and employment cases including race, gender, age, national origin, disability and workplace harassment and discrimination matters, wage-and-hour disputes, restrictive covenants, grievances, arbitrations, drug testing, and employment related contract issues.

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