State Arbitration Law Applies to FAA-Exempt Workers: New Jersey Supreme Court

The Supreme Court of New Jersey has ruled that the New Jersey Arbitration Act (NJAA) shall apply to arbitration agreements even if parties to the agreements are exempt from arbitration under section 1 of the Federal Arbitration Act (FAA).

The Court issued a combined opinion in two cases arising from arbitration agreements in employment contracts. The plaintiffs in both the cases had claimed that they fell within section 1 of the FAA known as the “exemption clause,” and thus did not want their disputes to be subject to arbitration. Section 1 of the FAA provides that the FAA does not apply to “contracts of employment of seamen, railroad employees, or any other class of workers engaged in foreign or interstate commerce.”

The question in both cases was whether the disputed arbitration clauses would still be enforceable under the NJAA, even assuming section 1 of the FAA applied. The court answered in the affirmative.

The Court, citing a 2019 decision by the U.S. Supreme Court, held that section 1 applies only to transportation workers engaged in interstate commerce. It was undisputed that the plaintiffs in one of the subject cases were exempt. The court remanded the other case for a determination whether the plaintiffs fell within section 1.

According to the Court, in the absence of pre-emption, New Jersey arbitration agreements have been automatically subject to the NJAA since 2003. The Court held that the NJAA is nearly identical to the FAA and incorporates the same policies strongly favoring arbitration.

The Court therefore rejected the notion that the arbitration clauses at issue were not (or otherwise could not be) governed by the NJAA merely because they did not expressly invoke the statute. Moreover, having determined that the NJAA is not pre-empted by the FAA, the court held that the NJAA may apply to arbitration agreements even if parties to the agreements are exempt from arbitration under section 1 of the FAA.