As expected, on March 18, 2019, Governor Murphy added New Jersey to the growing list of states that have chosen to legislate significant contractual limitations upon an employer’s right to enter into certain nondisclosure agreements (NDAs).  In addition, Governor Murphy’s recent signing of S. 121 (“the Act”), now places the Garden State in the shark pool attacking the permissibility of alternative dispute resolution proceedings (i.e., mandatory arbitration agreements) related to discrimination, retaliation, and/or harassment claims. 

The passage of S. 121 should not come as a surprise to those operating businesses within New Jersey and possibly elsewhere.  In the wake of the #MeToo movement, employers are seeing several major legislative shifts relating to employee claims of harassment, retaliation, and discrimination. One notable trend is that legislators continue to target NDAs and release provisions in employment-related contracts as possible avenues for reform. The underlying theory often used by those advocating for such significant legislative change is that confidentiality mechanisms have the effect of improperly “silencing the victims” and allowing the “wrongdoers to continue to engage in bad acts.”  Mandatory arbitration agreements, which provide for a non-public venue and other built-in confidentiality components, have faced similar scrutiny. New Jersey’s legislature and Governor Murphy have, apparently, endorsed these viewpoints.  

Details of the New Law

The Act includes several wide-sweeping provisions. First, the Act voids “any provision in any employment contract that waives any substantive or procedural right or remedy relating to a claim of discrimination, retaliation, or harassment,” as against public policy. The Act explicitly states that no right or remedy provided by the New Jersey Law Against Discrimination (NJLAD)¹—“or any other statute or case law”—may be prospectively waived. As mandatory arbitration agreements take away the right to a court forum and a jury trial, this law now prohibits those agreements. These restrictions  do not apply to the terms of a collective bargaining agreement (CBA).  In other words, the new law does not impact union-represented workforces, so a CBA’s arbitration provisions remain intact and enforceable.

Second, the Act makes any term in an employment contract or settlement agreement unenforceable against a current or former employee if it has the “purpose or effect of concealing the details relating to a claim of discrimination, retaliation, or harassment” (such as an NDA). These limits on NDAs apply to new agreements executed on or after the Act’s effective date. While the measure does not appear to apply retroactively, the Act’s restrictions would apply to new or renewed agreements with existing employees, and to modifications of previous agreements. NDAs regarding non-public trade secrets or proprietary information, as well as noncompete agreements, are carved out of the Act.

The Act seemingly distinguishes between not allowing an NDA regarding the “details relating to a claim” of discrimination, retaliation or harassment, which is prohibited, as opposed to an NDA used to keep the fact of settlement itself, the settlement amount, and “underlying facts” confidential.  Meaning, the latter terms appear to still be permissible for NDA coverage.² 

Employers, however, should be aware of some implicit ambiguity that exists between Paragraphs 2.a and 2.b. of the new law.  While a logical reading of these  provisions would result in the above-noted NDA limits/permissibility, this could be the subject of potential litigation to clarify the meaning of the words “underlying facts.”  Another significant aspect of the Act is that it provides that if the employee “publicly reveals sufficient details of the claim so that the employer is reasonably identifiable,” then an NDA for “settlement and underlying facts” is also unenforceable against the employer. To warn employees of this consequence should they divulge such details, any settlement agreement related to a claim of harassment, discrimination or retaliation must include a bold, prominent notice (as mandated in Paragraph 2.b. of the new law) that sharing such information will free the employer from the NDA provision, such as the following:

AS PERTAINS TO THE NONDISCLOSURE PROVISION CONTAINED IN THIS AGREEMENT, THE PARTIES UNDERSTAND AND AGREE THAT, WHILE THE PARTIES HAVE AGREED TO MAINTAIN THIS SETTLEMENT AGREEMENT AND THE UNDERLYING FACTS OF THIS SETTLEMENT AGREEMENT CONFIDENTIAL, THIS NONDISCLOSURE AGREEMENT BETWEEN THE PARTIES WILL NOT BE HELD ENFORCEABLE AGAINST THE COMPANY IF THE INDIVIDUAL CHOOSES TO PUBLICLY REVEAL SUFFICIENT DETAILS OF THEIR UNDERLYING CLAIM TO SUCH A DEGREE THAT THE COMPANY IS ABLE TO BE REASONABLY INDENTIFIED.   

Another component of S. 121 of which employers should take note is that the Act prohibits retaliation against individuals who refuse to sign agreements containing either waivers or NDAs that are unenforceable under S. 121.  If an employer attempts to enforce any provision proscribed by the Act, and the employee successfully sues, the employer would then be responsible for attorneys’ fees and costs related to the case. The Act additionally grants aggrieved individuals a private right of action. Individuals have two years from the accrual of any cause of action to sue in Superior Court, and prevailing plaintiffs may recover a variety of remedies as well as reasonable attorneys’ fees and costs.

Is it #Time Up for Arbitration Agreements in New Jersey?

,The United States Supreme Court has issued a variety of very significant decisions within recent years strongly endorsing the Federal Arbitration Act’s (FAA) allowance for employers to enter into binding alternative dispute resolution agreements with employees.  Yet, state legislators continue to pass laws challenging the propriety of arbitration mandates.  The Act does not directly address “pre-dispute” arbitration agreements, or its potential effect on their use in New Jersey. However, the Act does expressly curtail prospective waivers of both substantive and procedural rights related to discrimination/retaliation/harassment claims.  Stated differently, the new law attacks the ability of any employer to require that any such dispute involving discrimination, harassment, and/or retaliation be adjudicated in arbitration.  This component of the new law not only implements a standard similar to that found in New York, but also creates a standard even more expansive related to the type of claims barred from arbitration. 

The clear impact of S. 121’s anti-arbitration provision contained in Paragraph 1 of the new law is that litigation will surely arise on many levels.  First, courts will almost certainly experience a deluge of lawsuits, as increased disputes that cannot now be arbitrated will proceed to court handling.  Second, it is only a matter of time before a court is asked whether the FAA preempts the new law.  As the U.S. Supreme Court decisions have held, the FAA applies generally to arbitration contracts involving interstate commerce, unless the parties have explicitly agreed otherwise, and reflects a preference for arbitration as a means of resolving disputes efficiently and decreasing the burden on courts. The Supreme Court has repeatedly enforced arbitration agreements governed by the FAA requiring arbitration of statutory discrimination claims. Preemption is not self-enforcing; the party seeking to arbitrate (typically, the employer) often must make a motion to compel arbitration on the basis of preemption.   

Finally, one additional point that should not be overlooked is that the Act could also be interpreted to preclude any waiver to a jury trial granted under the NJLAD or under “or any other statute or case law.” Once again, however, the FAA could preempt application of this state law to a FAA-governed arbitration agreement.

Conclusion

The new law took immediate effect on March 18.  Employers should consider reviewing any employment agreement and settlement agreement templates currently in use and modifying terms as needed to ensure compliance with the Act. In this regard, a subtle issue that could be overlooked, if not careful, relates to “non-disparagement clauses” (which are often contained in such employment/settlement agreements). Specifically, employers need to be wary of overbroad non-disparagement clauses, which could, potentially, run afoul of S. 121’s mandate against NDAs. Thus, it may be prudent for employers to consider including carve-out language in their non-disparagement clauses to account for the S. 121 standards. As for the other core issue, until the courts resolve the FAA preemption issue, it may be difficult to enforce arbitration agreements in the litigation context. In addition, employers should add into any settlement agreements pertaining to harassment, discrimination or retaliation, the prominent warning for employees concerning the enforceability of the NDA if they reveal details that would make the employer reasonably identifiable. Moreover, employers should continue to monitor the situation related to how the “scope and intent” of S. 121 is developed through the courts – specifically, the subtle contradiction between Paragraphs 2.a. and 2.b., as noted above.