In the wake of the #MeToo movement, states across the country have started adopting progressive measures designed to protect alleged victims of sexual harassment from being forced into silence through confidentiality and non-disclosure agreements, while allowing them to share their stories. These measures also include efforts to protect victims of discrimination and retaliation in the workplace. While noble in intentions, such efforts are causing an equal and opposite reaction amongst employers who are alleged to have engaged in such unlawful acts against their employees or for fostering an environment where such conduct is condoned—even when such allegations are never substantiated by the claimant.

Strategically, employers accused of discrimination, retaliation or harassment by a current or former employee are often times willing to offer the claimant a nominal settlement amount, without any admission of liability, guilt or fault, in order to make the claim “go away” before it hits the newswire or to avoid the high costs associated with litigation. Those settlement agreements, which often include broad releases, would typically also contain confidentiality and/or non-disclosure provisions to ensure that those claims remained under wraps. However, under the recent wave of legislation, employers—including those in New Jersey as of March 2019—are being deprived of this opportunity to quell claims of discrimination, retaliation or harassment through settlement. Employers are similarly being denied the opportunity to enforce arbitration agreements that would otherwise force any such claims to be adjudicated in a private, as opposed to a public, forum. Ultimately, this may have unintended consequences in employment disputes that could undermine the good-natured intentions of the legislature.

NJ’s Amendments to the Law Against Discrimination

New Jersey recently enacted Senate Bill 121 (the “Law”) on March 18, 2019, which amends the New Jersey Law Against Discrimination (NJLAD). These amendments to the NJLAD apply to all contracts and settlement agreements entered into, renewed, modified or amended on or after March 18, 2019. Notably, however, the Law does not apply retroactively as it does not affect agreements entered into before that date.

The Law amends the NJLAD in two important ways. First, the law provides that non-disclosure provisions in “any employment contract or settlement agreement” that have the purpose or effect of concealing “the details relating to a claim of discrimination, retaliation, or harassment,” are “deemed against public policy and unenforceable” against current and former employees. That is, it renders unenforceable confidentiality and non-disclosure provisions in settlement agreements designed to resolve discrimination-, retaliation- or harassment-related claims. As such, the new law renders any mandatory non-disclosure provisions wholly unenforceable.

Even though the Law deems these confidentiality/non-disclosure provisions unenforceable, the Law still permits employees and employers to enter into agreements containing such provisions if the parties agree to do so. However, those provisions no longer have any “teeth” in their application. In cases where the parties agree to include a confidentiality/non-disclosure provision, the agreement now must also include a bolded, prominently placed notice advising that “although the parties may have agreed to keep the settlement and underlying facts confidential, such a provision in an agreement is unenforceable against the employer if the employee publicly reveals sufficient details of the claim so that the employer is reasonably identifiable.” Therefore, employers and employees may still choose to insert non-disclosure provisions in settlement agreements relating to discrimination, retaliation and harassment claims, but employees are now permitted to disregard these provisions if they so choose (albeit employers lack that same right). The efficacy and utility of non-disclosure provisions in such agreements is greatly compromised. Ironically, while the legislation was designed to afford greater protections to employees asserting claims against workplace discrimination, harassment and retaliation, the absence of confidentiality assurances for employers may result in employers being less willing to settle those claims early in the process, and to instead allow claims to play out in the public eye or in court (or arbitration, as discussed further below).

While the new Law renders the employer unable to enforce the confidentiality/non-disclosure provisions of the settlement agreement against the employee, those same provisions will be enforceable against the employer unless the employee “publicly reveals sufficient details of the claim so that the employer is reasonably identifiable.” In that way, the Law arguably provides a “remedy” to employers by releasing the employers from their non-disclosure obligations under the agreement so long as the employee first publicly reveals sufficient details of the claim and the employer’s identity. What constitutes “sufficient details” and “reasonably identifiable” remains to be seen. It is also doubtful that the employer—the one typically wanting to maintain confidentiality—would ever have a desire or need to disclose the terms of the agreement, further highlighting the one-sidedness of the legislation.

In addition, the Law also states that any provision in an employment contract “that waives any substantive or procedural right or remedy relating to a claim of discrimination, retaliation, or harassment” shall be deemed “against public policy and unenforceable” and that employees cannot prospectively waive any other right or remedy under the NJLAD, other statute or case law. Thus, any employment contract that requires an employee to waive his or her right to a jury trial or arbitrate a claim of discrimination, retaliation, or harassment, is now void as a matter of law. It is important to note that the law does not define “employment contract,” thus creating an ambiguity that will be subject to interpretation by courts. By way of example, plaintiffs attorneys can argue that “employment contract” also refers to settlement and severance agreements. Notably, the aforementioned provision does not apply to employees who are subject to collective bargaining agreements. While the Law carefully avoids using the word “arbitration,” its obvious purpose is to prevent employers from requiring employees to sign arbitration agreements. Yet to the extent that the Law purports to bar or prevent enforcement of arbitration agreements, there is a mounting argument that it may be preempted by the Federal Arbitration Act (FAA).

Are the Arbitration Limitations in the NJLAD Amendments Preempted by the FAA?

Similar to the recently adopted New Jersey Law, New York has enacted a statute prohibiting arbitration of claims of unlawful discriminatory practices of sexual harassment. Effective July 11, 2018, NY CPLR §7515 (“Section 7515”) mandates that employment agreements and other contracts in New York may no longer include mandatory arbitration clauses for sexual harassment claims. As it currently stands, Section 7515 only applies to claims of unlawful discriminatory practice of sexual harassment, but an amended bill is pending before Governor Cuomo to add claims of unlawful discrimination to this section.

Section 7515 further bars settlements of sexual harassment claims from including non-disclosure provisions unless the complainant elects to include such a provision. However, New York employers have recently started to challenge such provisions as being preempted by the FAA.

Indeed, this very issue was recently addressed by the Honorable Denise Cote of the Southern District of New York, in a case in which the court granted an employer’s motion to compel arbitration of claims involving sexual harassment, despite the provisions set forth in Section 7515. In Latif v. Morgan Stanley & Co, plaintiff Mahmoud Latif filed employment discrimination and sexual harassment claims against his former employers, Morgan Stanley & Co. LLC and Morgan Stanley Services Group, Inc. (collectively, “Morgan Stanley”), as well as seven individual employees of Morgan Stanley. Latif’s written offer of employment with Morgan Stanley specifically included an arbitration agreement which required all common law claims and “statutory discrimination, harassment and retaliation claims” to be arbitrated as opposed to being litigated in open court. The only issue presented to the court on the motion to compel was whether Latif’s sexual harassment claims remained subject to the arbitration agreement in light of New York’s enactment of Section 7515.

In granting Morgan Stanley’s motion to compel arbitration, the court emphasized the FAA’s policy favoring the enforcement of arbitration agreements, which is “not easily displaced by state law.” Specifically, Judge Cote observed, “State law is preempted to the extent it stands as an obstacle to the accomplishment and execution of the full purposes and objective of the FAA … When state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflict rule is displaced by the FAA.” The court further stressed that Section 7515 renders agreements to arbitrate sexual harassment claims null and void “[e]xcept where inconsistent with federal law,” and found that applying Section 7515 to invalidate the parties’ arbitration agreement would be “inconsistent with the FAA.”

While the Latif decision is not binding on the courts of New Jersey, it certainly raises a potential argument that will inevitably be raised by one or more New Jersey employers in the months and years to come who may similarly challenge whether the NJLAD amendments are preempted by the FAA. Notably, the Law does not include a carve-out recognizing inconsistencies with federal law like New York’s Section 7515, so it remains to be seen how New Jersey courts will address the issue of preemption.

While there is a great deal of uncertainty and speculation surrounding the meaning, scope and enforceability of the new Law, one point is clear: the Law will unquestionably have a far-reaching impact on the way in which employers, employees and employment attorneys handle discrimination, retaliation and harassment claims going forward.

Jason R. Finkelstein is a member of the Litigation Department of Cole Schotz in Hackensack. He concentrates his practice on complex commercial litigation matters, including advising and counseling clients involved in employment disputes. Emily Park is an associate in the Litigation Department. She handles a wide range of cases including employment matters.