NJ Appellate Court Varies on Arbitration Enforceability 

June 6, 2019Alerts

In a precedential decision published on June 4, 2019, a New Jersey appellate panel held that an agreement to arbitrate employment claims individually is enforceable under the New Jersey Arbitration Act (NJAA) even if the agreement may be exempted under the Federal Arbitration Act (FAA). However, in a non-precedential decision issued the next day, a separate appellate panel refused to enforce an arbitration agreement that only referenced the FAA, where the worker’s claims were found to be exempted from the FAA. Ultimately, this issue may require a resolution by the New Jersey Supreme Court.

New Jersey employers should anticipate that state courts will enforce arbitration agreements that may be otherwise exempt from the FAA, even if the agreement holds no express reference to the NJAA. Additionally, New Jersey courts appear inclined to require individualized arbitration under certain circumstances.

Background

First, in Colon v. Strategic Delivery Solutions, LLC, the plaintiffs were independent contractors performing transportation services for Strategic Delivery Solutions, LLC (SDS), a freight forwarder and broker. The independent contractor agreements contained: 1) an agreement to arbitrate; 2) a waiver of trial by jury; 3) a class action waiver; and 4) a statement that New Jersey law governed the agreement and any claims or disputes between the parties. The arbitration provision stated that the “parties agree to comply and be bound by the Federal Arbitration Act.”

The plaintiffs sued SDS in state court alleging they, and a class of similarly situated workers, had been misclassified as independent contractors and should have been paid as employees, including overtime, pursuant to state wage and hour and wage payment laws. On motion by SDS, the trial court dismissed the complaint and ordered that the plaintiffs proceed with their claims individually through arbitration.

On appeal, the plaintiffs argued that, as transportation employees, they were exempt from the FAA. Further, because the agreement did not reference the NJAA, plaintiffs contended no enforceable agreement to arbitrate existed. The appellate panel recognized that the plaintiffs could be exempt from the FAA under Section 1 of that law if, as alleged, they provided interstate transportation services. Indeed, the U.S. Supreme Court recently held in Oliveira v. New Prime, Inc., that an independent contractor agreement constituted a “contract of employment” under Section 1 of the FAA. Because the trial court had not made a finding about whether the plaintiffs’ work involved local or interstate transportation, the appellate panel reinstated the complaint and remanded for such a determination.

However, the court held that even if the plaintiffs fell within the FAA’s transportation worker exemption, the arbitration agreement was nonetheless enforceable under the NJAA. The court rejected the plaintiffs’ contention that the lack of a reference to the NJAA in the arbitration provision meant that only the FAA could apply. Rather, the court held, because the NJAA regulates arbitration agreements made in the State after January 1, 2003, and the parties’ agreement provided that it was governed by New Jersey law and did not exclude the NJAA, the NJAA applied if the FAA did not.

The court also rejected the plaintiffs’ contention that the jury trial waiver applied only to contractual claims, not their statutory wage claims, concluding that the agreement’s waiver of “any right to a trial by jury in any suit,” and the agreement to arbitrate any dispute, constituted a clear and unmistakable waiver that encompassed plaintiff’s wage and hour claims. Likewise, the court held that the plaintiffs would be required to arbitrate their claims individually. This was because the waiver was drafted as to apply to “any type of remedy – ‘arbitration, suit, action or other legal proceeding,’” and not just arbitration. The court distinguished this waiver from a class-arbitration waiver, which the New Jersey Supreme Court had found unenforceable in the context of a consumer contract.

Yet, the very next day a separate New Jersey appellate panel issued a terse, non-precedential opinion refusing to enforce a similar arbitration agreement. In Arafa v. Health Express Corporation, the plaintiff – an independent contractor – likewise attempted to bring class-action claims for misclassification and unpaid wages. The arbitration agreement stated that it was “governed by” the FAA. The court applied the U.S. Supreme Court’s Oliveira holding and found that the worker performed interstate transportation services and that the agreement to arbitrate was, therefore, exempt under Section 1 of the FAA. However, rather than enforcing the arbitration agreement under the NJAA, as the Colon panel did, the Arafa panel simply held that the agreement was unenforceable and remanded the matter to the trial court to reinstate the complaint.

It remains to be seen whether any of the parties in either case will petition the New Jersey Supreme Court for review in light of the apparent split within the Appellate Division. Because the Arafa decision is a model of brevity, it is not clear whether the independent contractor agreement contained a provision requiring that New Jersey law applied to any disputes, which was the contractual hook the Colon panel relied upon in finding the arbitration agreement enforceable under the NJAA. Another interesting aspect of the case that suggests a petition for review may be likely is that the plaintiffs in both cases are represented by the same law firm.

Looking Ahead

Employers should consult with legal counsel to review and update their arbitration agreements to ensure that they address the issue of controlling law and class-action waivers.