New Jersey Adopts Strict Rule for Employment Arbitration Clauses

New Jersey Adopts Strict Rule for Employment Arbitration Clauses

On June 13, 2001, the New Jersey Supreme Court issued an opinion that may have a significant effect on how courts interpret employment-related arbitration clauses. The opinion in Garfinkel v. Morristown Obstetrics & Gynecology Associates, 2001 WL 649859, ___ N.J. ___ (2001) holds that if an arbitration clause is ambiguous on its face, it cannot be enforced, regardless of whether the employee voluntarily agreed to it. The Court also provided guidance on what language it will find enforceable in arbitration clauses. This opinion marks a much stricter view of arbitration clauses than had generally been required in this state before. The decision should impel employers to take immediate steps to ensure that their arbitration clauses meet the new requirements for enforceability.

Arbitration Clauses

"Arbitration clauses," often found in personnel policies, employee handbooks, and employment agreements, traditionally state that disputes between the employer and the employee will be resolved by a neutral third-party arbitrator rather than in the courts. Arbitration clauses are generally favored by employers, since they allow employers to avoid the costly, time-consuming process of court litigation, the decisions of unpredictable juries, and the possibility of appeal. These provisions have varied widely: some have been broad and used general language, while others have been more specific in scope and language.

Arbitration clauses have long been acceptable to both the New Jersey courts and the New Jersey Division of Civil Rights. Recently, they received added endorsement as a result of the United States Supreme Court's ruling in Circuit City Stores v. Adams. The Supreme Court held that most employers can require employees to sign agreements requiring arbitration of employment disputes as a condition of employment. However, under Garfinkel, arbitration clauses will only be enforced where they unambiguously state what rights are to be waived.

Facts of Garfinkel

In 1996, Dr. Garfinkel accepted a position with Morristown Obstetrics & Gynecology Associates, Inc. He signed an Agreement with his new employer covering the terms of his employment, such as salary, job duties, and so forth. The Agreement also contained a clause which said both parties agreed to arbitrate "any controversy or claim arising out of, or relating to the Agreement, or the breach thereof."

Two years later Garfinkel was fired, allegedly because he "did not attract patients well because he was male." He filed suit against his employer in state court, alleging a violation of the New Jersey Law Against Discrimination, which prohibits discrimination on the basis of sex.

Garfinkel's claim was dismissed by the state trial court and upon appeal, was also dismissed by the appellate court. Both courts held that because of the language of the arbitration clause, Garfinkel was limited to resolving his dispute in arbitration, and was barred from seeking a remedy in court. Both lower courts suggested that Garfinkel, a "highly educated medical professional" who was represented by an attorney in the contract negotiation, should have been aware of any ambiguity or unfavorable aspect of the clause before he signed.

Garfinkel appealed these decisions to the New Jersey Supreme Court. In a unanimous opinion, that court reversed the lower courts' opinions, finding that the arbitration clause was not enforceable. The Supreme Court acknowledged that while arbitration is a valid way of resolving disputes, the eradication of discrimination is not only in the interests of the individual, but also is a clear public policy of this state. It further recognized that if such rights are to be waived by a written clause or agreement, the agreement should clearly state its purpose. The Court dismissed the notion that anyone, even a "highly educated professional," should be held to an ambiguous arbitration clause: if the agreement is ambiguous on its face, the issue of whether the employee voluntarily signed it should not even be addressed.

The Court found that the language of Garfinkel's clause appeared to cover disputes involving a term of the agreement itself, but because the clause was silent with regard to statutory claims, it could not be considered a waiver of Garfinkel's rights under any statute, such as the Law Against Discrimination. According to the Court, the clause must state that the employee is agreeing to arbitrate all statutory claims arising out of the employment relationship or its termination, including employment discrimination claims, if there is to be a waiver of such a claim.

Suggestions for Employers

Employers have a valuable tool in arbitration clauses, but only if the clauses are enforceable. In New Jersey, traditionally a pro-employee state, it is not surprising that the courts have instituted a more demanding standard for employers who want to obtain a waiver of certain employee rights. Employers should sit up and take notice of this new rule for effective arbitration clauses.

The Garfinkel decision has potential to increase employment litigation by encouraging plaintiffs' attorneys to challenge arbitration clauses. Consequently, employers should take stock of their arbitration clauses presently in effect in their employee handbooks, policy manuals, and individual employment agreements in light of the rigid standard enunciated by the Court.

Specifically, employers would be wise to use language at least equivalent to that which the Court said would "pass muster," and preferably, to follow the language that the Court recommended as "the better course," which would include the following:

Where the language in an employer's arbitration clauses in handbooks, policy manuals or employment contracts falls short of the Court's directives in Garfinkel, such language should be amended to ensure the effectiveness of the clause - taking care that any changes to contracts already in effect are properly negotiated. Employers also should make the appropriate changes in the wording of future arbitration clauses.