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Key Supreme Court Decision on Arbitration is Not Likely to Affect State Workers’ Compensation Laws

In the recent decision of Epic Systems v. Lewis, 138 US 1612 (2018), the Supreme Court affirmed a preference for arbitration, ruling that agreements between employers and employees requiring individual arbitration are enforceable in employment contracts, even as a condition of the employment itself. Though the decision specifically addresses arbitration agreements limiting collective actions, the ruling could be extrapolated to validate other agreements between employers and employees. While this decision is unlikely to lead to arbitrations displacing New Jersey workers’ compensation statutory scheme, the Court’s dedication to arbitration could have indirect effects sooner rather than later.

Epic Systems v. Lewis

In Epic Systems the Supreme Court sought to settle the issue of whether arbitration agreements entered into as a condition of employment are enforceable. More specifically, the particular arbitration agreements at issue required individualized arbitration and banned collective judicial or arbitral proceedings such as class actions. The Supreme Court addressed three consolidated claims that “differ[ed] in detail but not in substance” as the Court noted. The example offered by the Court at the outset of the decision touched on the specific facts of one of the three cases: Ernst & Young LLP v. Morris.

In that case, Mr. Morris accepted employment with Ernst & Young and entered an agreement to arbitrate any disputes that may arise between him and the employer. The agreement specified that the arbitration must be on an individual basis. Different disputes with other employees would need to be heard in separate proceedings.

After his separation from employment, Mr. Morris raised wage and hour claims and alleged the employer violated the Fair Labor Standards Act (FLSA) for misclassification of employees, i.e. paying salaries without overtime. Mr. Morris sought to litigate this claim in federal court on behalf of a nationwide class. The employer argued that the employment agreement required all disputes be subject to arbitration and further required the dispute be brought by Mr. Morris alone.

Writing for the 5-4 majority, Justice Neil M. Gorsuch held that federal courts have long favored arbitration in light of its speed, simplicity, and inexpensiveness. Justice Gorsuch found no conflict with other federal laws and dispensed with the arguments that the class waivers in arbitration agreements violated Section 7 of the National Labor Relations Act (NLRA) which protects employees’ rights to engage in “concerted activities” in pursuit of their “mutual aid or protection.”

In upholding the validity of the arbitration agreements in all three consolidated claims, the Court held that employers do not violate the NLRA or the Federal Arbitration Act (FAA) by requiring employees to sign arbitration agreements that waive their rights to bring class action suits. The Court stressed that the FAA requires that arbitration agreements be enforced just like any other contract.

Though the specific facts of Epic Systems case do not relate to an agreement to arbitrate workers’ compensation claims, the Court’s analysis and commitment to arbitration agreements generally, forecast an application in a variety of disputes between employers and employees.

Effects in Employer/Employee Relationships

The Epic Systems decision has been generally regarded as a win for employers who may be more emboldened to include broad arbitration agreements in contracts of employment. Employers may feel more assured that, if contested, such agreements will be upheld as valid and enforceable. Of course, employers must weigh the potential benefits of arbitration such as expediency and lower litigations costs against the possible downside such as limited appellate rights.

That being said, surely this decision will impact the employer/employee disputes related to workplace conditions including those claims typically brought under the Fair Labor Standards Act, Title VII of the Civil Rights Act, and the Family Medical Leave Act as employees often seek to litigate these claims in a collective front.

Arbitration in New Jersey

The question we now face is how far the high Court might go to endorse arbitration agreements and whether that preference will change the landscape of employment contracts in New Jersey.

There is no question that arbitration is a favored means of dispute resolution in federal court. Pursuant to the Federal Arbitration Act, agreements requiring arbitration of certain disputes are to be enforced in the same manner and to the same extent as any other contractual provision. Indeed the FAA was passed by Congress “to reverse the longstanding judicial hostility to arbitration agreements … and to place arbitration agreements on the same footing as other contracts.” Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 24 (1991) (wrongful firing claim under ADEA subject to arbitration agreement).

Despite this clear directive under the FAA, in New Jersey, state courts have been fairly hostile to arbitration agreements and previously refused to enforce agreements that did not provide adequate notice of an individual’s right to sue, seek a jury trial, or file a class action law suit. Conversely, the Third Circuit has towed the line and has regularly upheld agreements to arbitrate.

Will Arbitration Replace Workers Compensation In New Jersey?

Despite the Supreme Court’s commitment to the validity of arbitration agreements and the FAA’s preference for arbitration as the favored means of dispute resolution, absent some legislative directive, it is unlikely that arbitrations will replace the workers’ compensation system in New Jersey.

First, New Jersey’s workers’ compensation scheme is statutory and Section 39 of the statute expressly declares that employers cannot limit an employee’s right to pursue workers’ compensation claims in New Jersey. Section 39 states that any “agreement, composition, or release of damages made before the happening of any accident” is contrary to public policy. This language appears specifically crafted to address agreements to arbitrate or agreements to completely waive the right to pursue a workers’ compensation claim.

However, the question remains whether the Federal Arbitration Act would supersede state law and allow arbitration to displace workers’ compensation claims. Indeed, two recent Supreme Court cases of AT&T Mobility v. Concepcion, 563 S. Ct. 333 (2011) and Kindred Nursing Ctrs. Ltd. P’ship v. Clark, 137 S. Ct. 1421 (2017) have upheld agreements to arbitrate in the face of contrary state common law and emphasized that the FAA permits arbitration agreements to be declared unenforceable ‘upon such grounds as exist at law or in equity for the revocation of any contract’, e.g. fraud, duress, unconscionability.

Nevertheless, not only would it be a stretch to conclude that the arbitration agreements could be used to circumvent an entire statutory scheme designed as remedial legislation, such a challenge might take a lifetime of litigation to obtain final judicial guidance on the issue.

Potential Indirect Effects in New Jersey

Even if New Jersey’s workers’ compensation system is not replaced with valid agreements to arbitrate, the preference for arbitration may have indirect effects. Such effects might be felt in third party litigation, typical of motor vehicle accidents and slip and falls, when an injured worker files a civil action in connection with the work-accident. As it currently stands, it is unlawful for employers to require waivers of third party claims. Vitale v. Schering–Plough Corp., No. 078294, 2017 WL 6398725 (N.J. Dec. 11, 2017) In Vitale, the New Jersey Supreme Court relied on Section 39 of the workers’ compensation statute to find that a waiver signed by an injured worker prior to the compensable accident was invalid. In light of the US Supreme Court’s decision in Epic Systems, it remains to be seen whether an agreement limiting third party claims to arbitration would be treated the same as an all-out waiver.

Another application of arbitration one may envision relates to employers with multi-state employees. Though Epic Systems dealt with arbitration agreements, it also underscored the Court’s preference to allow employers and employees to freely contract between themselves. Indeed the opening line of the majority decision reflects this philosophy when Justice Gorsuch asks “[s]hould employers and employees be allowed to agree that any disputes between them will be resolved through one-on-one arbitration?”  Applying this reasoning to multistate employees, it is not unimaginable for a court to validate choice of law or choice of venue agreements in employment contracts that commit to litigate work-related injuries in particular states and/or venues.

Conclusion

The Courts’ decision in Epic Systems does not directly threaten to undermine the workers’ compensation statutory scheme in New Jersey. However, the Court’s decision does represent a broader affirmation and commitment to the validity of arbitration agreements. It appears New Jersey’s workers’ compensation statute is on solid footing in its proscription of agreements subversive to the statute’s remedial purpose. However, it is unclear what indirect effects we can expect for employers and carriers alike.

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