NJ Appellate Division Refuses to Enforce Choice-of-Law and Arbitration Clauses in Employment Contracts: What Employers Need to Know

In a February 26, 2024 decision, the New Jersey Superior Court, Appellate Division, in Aguirre v. CDL Last Mile Solutions, LLC et al., reviewed the enforceability of arbitration agreements in employment relationships. The court in Aguirre highlighted critical considerations for employers drafting and implementing arbitration agreements.

If you have employees in New Jersey, it’s essential to understand the ramifications of this ruling and how it shapes the legal landscape of dispute resolution in the state.

Case Overview

About a hundred New Jersey residents, plaintiffs in this case, are delivery drivers working exclusively in New Jersey. They filed a lawsuit against their employers, CDL Last Mile Solutions, LLC, a Delaware LLC headquartered in New York; Anthony Curcio; Katty Ponce, and Subcontracting Concepts, LLC, also a Delaware LLC, headquartered in New York (collectively the  “Defendants”). The lawsuit alleges numerous violations of New Jersey’s employment laws. Upon their hiring, Plaintiffs signed independent-contractor agreements entitled “Owner/Operator Agreement.”

Defendants sought to dismiss Plaintiffs’ action by invoking the choice-of-law provision and arbitration clause contained in the Agreement, stating that the Agreement would be governed by the laws of the State of New York and that disputes would be “settled by arbitration under the policies of the Federal Arbitration Act and New York State’s Arbitration provisions.” Defendants argued that New York law should apply in determining the enforceability of the arbitration clause and that the arbitration clause was enforceable under both New Jersey and New York law.

Plaintiffs countered by arguing that New Jersey law should apply because New York law was contrary to New Jersey public policy requiring “clear and unambiguous language” explaining rights being waived when agreeing to arbitration.

Court’s Analysis and Decision

The court reasoned that the lower court’s reliance on Package System, Inc. v. Kayser (3d Cir. 2001) in deciding to apply New Jersey law was misplaced because the Agreement at issue here specified that New York law should apply. In holding that New Jersey law had a “materially greater interest” as it related to the choice-of-law question, the Appellate Division found that outside of Defendants residing in New York, New York had no connection to the matter. Rather, New Jersey had a materially greater interest in its law applying because Plaintiffs executed the agreements in New Jersey, they lived and worked in the state, the warehouse was located in New Jersey, and their injuries occurred in New Jersey. The court further reasoned that New York law would be contrary to New Jersey’s long-standing policy of protecting the right of access to its courts.

Next, in holding that the arbitration clause was unenforceable, the Appellate Division’s decision focused on several pivotal aspects of New Jersey’s legal framework governing arbitration agreements:

1. Clear and Unambiguous Language: The court reiterated the need for arbitration agreements to be drafted in clear and unambiguous language. Agreements must explicitly state the rights the employee is waiving, particularly the right to a jury trial.
2. Mutuality of Obligation: The court highlighted the principle of mutuality, examining whether both parties (employer and employee) were equally bound by the arbitration agreement. The decision stressed that any perceived imbalance could render the agreement unenforceable.
3. Adherence to the FAA and NJAA: The ruling underscored the importance of aligning arbitration agreements with the requirements of both the Federal Arbitration Act (FAA) and the New Jersey Arbitration Act (NJAA). Employers must navigate these statutes carefully to ensure enforceability.
4. Public-Policy Considerations: The court also considered the broader implications of enforcing arbitration agreements, including their effect on the public’s access to the judicial system and the protection of workers’ rights under New Jersey law.

Implications for Employers

This decision serves as a critical reminder for employers in New Jersey, New York, and other states about the importance of meticulously drafting and implementing arbitration agreements applicable to New Jersey employees.

To enhance the enforceability of such agreements, employers should:

• Review and Update Agreements: Regularly review arbitration agreements to ensure they meet current legal standards and make explicitly clear the rights the employee is waiving.
• Ensure Fairness and Mutuality: Design arbitration agreements that are fair and impose mutual obligations on both parties.
• Provide Clear Disclosures: Explain in straightforward language how the arbitration process works and how it differs from traditional court proceedings.

Conclusion

The Appellate Division’s decision is an essential reminder for employers with employees in New Jersey, offering key insights into the enforcement of choice-of-law provisions and arbitration agreements. By adhering to the guidance highlighted in this decision, employers can better navigate the complexities of employment disputes and arbitration, fostering a fair and legally compliant workplace. 

Buchanan is ready to assist employers concerned about the impact of this ruling to help ensure their arbitration agreements and dispute-resolution policies comply with the latest legal developments.