U.S. Supreme Court Confirms that Agreements to Arbitrate Employment Disputes Are Enforceable

U.S. Supreme Court Confirms that Agreements to Arbitrate Employment Disputes Are Enforceable

A recent ruling by the United States Supreme Court has confirmed that employers may now enforce arbitration agreements with employees in both federal and state courts, thereby requiring employees to submit any employment-related disputes to arbitration before going to court. Circuit City Stores v. Adams, No. 99-1379 (March 21, 2001). This decision also rejected an argument which plaintiffs have often made to avoid arbitration - the federal arbitration statute does not apply to employment contracts.

The New Jersey and Federal Arbitration Acts

In New Jersey, both a state statute, the New Jersey Arbitration Act, ("NJAA"), N.J.S.A. 2A:24-1, et seq., and a federal statute, the Federal Arbitration Act ("FAA"), 9 U.S.C. § 1, et seq., require courts to enforce written arbitration agreements. The statutes were enacted, in large part, to counter the reluctance of judges to enforce arbitration agreements. Numerous state and federal courts have held that these statutes recognize a strong policy in favor of arbitration.

While the NJAA does not restrict the types of agreements subject to arbitration, the FAA applies only to contracts "evidencing a transaction involving commerce," 9 U.S.C. § 2, and excludes "contracts of employment of seamen, railroad employees, or any other class of workers engaged in interstate commerce." 9 U.S.C. § 1. The issue before the Supreme Court in Circuit City was whether the FAA applies generally to contracts of employment; the employee contended it did not on the basis of both Section 2 and the exclusionary language in Section 1. Most appellate courts which had previously addressed the issue (including the Third Circuit) had held that the FAA applied to contracts of employment except for those expressly excluded by the FAA, i.e., transportation-related employment. The Ninth Circuit, however, had held in Circuit City that the Section 1 exclusion applied to all contracts of employment involving commerce. This decision would have effectively barred arbitration of most employment disputes.

The Court's Decision

The Supreme Court held that the FAA's exclusion for "workers engaged in interstate commerce" applies only to employees involved in transportation. In so holding, the Court reaffirmed its previous interpretation of the words "involving commerce" in Section 2 of the FAA as recognizing the FAA's broad reach and held that it included employment contracts generally. To hold otherwise would make the exclusion in Section 1 unnecessary. The Court had also previously held that the FAA was applicable in state courts and, in fact, preempted state laws that were hostile to arbitration.

The Court further reasoned that the references in Section 1 to specific types of employment contracts, i.e., contracts of employment of seamen and railroad employees, would also be unnecessary if the Ninth Circuit's interpretation that the exclusion applied to all employment contracts was accepted. In other words, if Congress intended to exclude all employment contracts, rather than just those of employees involved in transportation, it would have said so.

The Circuit City decision has significance in New Jersey because it eliminates one of the last potential obstacles to the enforcement of arbitration clauses in the employment context. Now the only significant issues are whether the parties have reached an agreement to arbitrate and the scope of the arbitration agreement.

Requiring Arbitration

Whether an employer should take advantage of the protection given to arbitration agreements by the FAA and NJAA, as well as the form and scope of such an agreement, depends, of course, on the circumstances particular to the employer and employee involved and the employer's philosophy. There are potential advantages (e.g., a less expensive, faster method of resolving disputes; a reduced risk of runaway verdicts) and disadvantages (e.g., will more claims be filed? Is an employer less likely to win?).

In any event, employers now have the option of arbitrating employment disputes but it requires advance planning. For employees who sign contracts of employment, arbitration provisions can be included directly in the contract to be signed by the employee and required as a condition of employment. For employers who want to require arbitration for large groups of employees or the entire workforce, there are additional options. In Circuit City, the arbitration provision was contained in an employment application. An increasing number of courts, including some New Jersey state and federal lower courts, have held that arbitration agreements contained in employment manuals are enforceable, under the appropriate circumstances. See, e.g., Alamo Rent A Car, Inc. v. Galarza, 306 N.J. Super. 304 (App. Div. 1997); see also Fregara v. Jet Aviation Business Jets, 764 F. Supp. 940 (D.N.J. 1991). Some companies also find it preferable to enact separate arbitration policies.

New Jersey (and other) courts have also held that arbitration can be compelled, pursuant to an enforceable arbitration agreement between an employee and an employer, as to agents, officers, other employees and related companies, although the agreement does not explicitly refer to these other parties if the disputes involving the other parties are closely related and part of the underlying dispute between the employee and employer. The courts have reasoned that an employee would otherwise be able to avoid the arbitration clause by suing an individual or other related entity in addition to the employer. See, e.g., Bluemer v. Parkway Ins. Co., 277 N.J. Super. 378 (Law Div. 1994).

Scope of Arbitration Agreements

Regardless of the form, it is important that employers consider what types of disputes they want the agreement to cover. Because such an agreement is considered a contract, courts will carefully examine it to determine whether the particular dispute is covered by the language. The New Jersey Appellate Division has held that a clause requiring arbitration of "[a]ny dispute . . . arising out of the employment or termination of employment" was broad enough to include all "employment-related disputes," including a claim under New Jersey's whistleblower statute and a claim of defamation. Singer v. Commodities Corp., 292 N.J. Super. 391, 401 (App. Div. 1996).

In the past, employees have often argued that compelling arbitration of statutory discrimination claims contravenes the policies of those statutes. The Circuit City Court rejected this contention and pointed out that an agreement to arbitrate a discrimination claim does not require a party generally to forgo substantive rights, but rather only requires that any infringement of those rights be addressed via arbitration rather than a judicial forum. See also Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 111 S. Ct. 1647 (1991). The New Jersey Appellate Division also explicitly held that an employee may contractually give up statutory remedies for discrimination. Alamo Rent A Car v. Galarza, 306 N.J. Super. 384 (App. Div. 1997). It is possible, however, that an arbitration agreement is so one-sided, or precludes specific substantive rights, that a court may decline to enforce it. See, e.g., Hooters of America, Inc. v. Phillips, 173 F. 3d 933 (4th Cir. 1999).

Ultimately, it is important that the employee know he/she is waiving or relinquishing certain rights, e.g., the right to a trial by jury. Consequently, it is crucial not only that the language be clear, but also that the employer is able to prove that the employee was aware of the arbitration requirement. The use of acknowledgments can be helpful when the agreement or policy is distributed on a widespread basis such as through a handbook.


Circuit City eliminates one of the remaining potential roadblocks to the enforcement of arbitration agreements on a general level. It continues the trend, not only in the federal courts but also in the state courts, of encouraging the use of private dispute resolution techniques rather than the court system to resolve employment (and other) disputes.