The Federal Arbitration Act (FAA) was originally enacted in 1925 to overcome the American judiciary’s longstanding refusal to enforce agreements to arbitrate disputes, and to place such agreements on the same basis as other contracts.  Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 270-71 (1995).

For nearly 60 years after the FAA was enacted, the U.S. Supreme Court left the enforceability of arbitration agreements largely undisturbed. However, beginning in the 1980s, the Supreme Court began a shift towards an expansive interpretation of the FAA and stricter enforceability of arbitration agreements.

Allied-Bruce Terminix set the stage for the application of the Act to arbitration clauses in employment contracts. This issue depended on interpretation of the Act’s exemption provision, which states “nothing herein contained shall apply to contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.” 9 U.S.C. § 1. In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991), the Supreme Court held that this exemption provision was meant to be narrowly interpreted, and further held in Circuit City Stores, Inc. v. Adams, 532 U.S. 105 (2001) that the exemption provision exempts only a limited number of employment contracts.

In the ensuing years, the use of arbitration agreements in employment exploded, creating controversy. For example, the U.S. Department of Labor has stated that many employers insert, or “bury,” mandatory arbitration clauses in the paperwork that employees must accept if they want a job. These clauses prohibit employees from bringing claims before a judge or jury for wage theft, discrimination, and other violations of federal law, according to the agency.

However, recent statutory changes and newer case law are making it more difficult for businesses to continue mandating the arbitration of employment disputes.

Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act

In March 2022, Congress enacted a law preventing employers from requiring employees to arbitrate disputes related to sexual assault or harassment.  The Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA) amended the Federal Arbitration Act (FAA) by adding a provision stating that “[n]otwithstanding any other provision of this title, at the election of the person alleging conduct constituting a sexual harassment dispute or sexual assault dispute, … no predispute arbitration agreement … shall be valid or enforceable with respect to a case … [that] relates to [a] sexual assault dispute or sexual harassment dispute.” Thus, victims of sexual assault or harassment can pursue claims in court and on a class-wide basis, even if they are bound by a pre-dispute arbitration agreement.

By passage of this law, Congress forced many employment-related claims out of arbitration and back to the court system. However, as noted by courts interpreting the EFAA, the statute only applies to claims arising after the act’s effective date. The EFAA “does not apply retroactively.” Delo v. Paul Taylor Dance Found., Inc., 685 F. Supp. 3d 173, 180 (S.D.N.Y. 2023).

Expanding Definition of Workers Engaged in “Interstate Commerce”

In a retreat from its earlier decisions in Gilmer and Circuit City Stores, the Supreme Court’s decision in Bissonnette et al v. LePage Bakeries Park St., LLC (144 S.Ct. 905 (April 12, 2024)), holding that employees exempt from coverage under the FAA are those who are engaged in transportation work (whether or not they work in the transportation industry) seemingly opens the door to pre-arbitration litigation on whether or not an employee is subject to this exemption.

In this case, the judgment of the Second Circuit was vacated, and the Court held that a “transportation worker” — such as a delivery driver for a bakery — need not work in the transportation industry to fall within the exemption from the FAA, provided by §1 of the Act. Further, the Court stated that the Second Circuit accordingly erred in compelling arbitration on the basis that the petitioners work in the bakery industry. “We express no opinion on any alternative grounds in favor of arbitration … including that petitioners are not transportation workers and that petitioners are not ‘engaged in foreign or interstate commerce’ within the meaning of §1 because they deliver baked goods only in Connecticut,” the Court stated.

Public Policy Exceptions

In addition, the New Jersey Superior Court, Appellate Division recently disregarded a New York choice of law provision in a mandatory employment arbitration agreement, holding that an agreement was unenforceable because of New Jersey public policy requiring that the agreement did not include “clear and unambiguous language” explaining that jury trial rights were being waived Aguirre v. CDL Last Mile Solutions, LLC et al, 2023 WL 11264459 (N.J. Super. June 14, 2024). The plaintiffs, New Jersey residents employed as delivery drivers for CDL (headquartered in New York), worked exclusively in New Jersey, and alleged they were misclassified as independent contractors and, as a result, improperly paid.

The case highlights major considerations for employers that are drafting and implementing arbitration agreements, and one can expect this decision to result in challenges to typical employment arbitration provisions in New Jersey and beyond.

Conclusion

Passage of the EFAA has already impacted the number of employment disputes that are no longer subject to mandatory arbitration, and that number will rise as fewer disputes will pre-date the act’s effective date. Additionally, recent Supreme Court decisions like Bissonnette seem to show that the court has shifted away from its previous pro-arbitration stance by adopting a more comprehensive approach to the types of workers whose claims are exempt from arbitration mandates. Finally, public policy challenges in states like New Jersey will likely continue to challenge the use by employers of mandatory arbitration agreements.

Francis Curran, Esq. is Senior Counsel for Tully Rinckey PLLC in Albany.