Several employment bills will be heading for floor votes on Monday, including two of particular concern to NJCJI. The “Diane B. Allen Equal Pay Act” continues to regulate much more than “equal” pay and would present a significant danger to employers who do, in fact, compensate all employees equally for equal work. S121/A1242, legislation “Concerning Discrimination” would also interfere with the enforceability of widespread employment contract provisions and run afoul of the Federal Arbitration Act.

Pay Equity

NJCJI members value all employees and do not discriminate in compensation of employees based on gender or any other protected classification. But we continue to oppose this “Equal Pay Act” as currently drafted, as it would impose a new standard that would equate different jobs according to a set of vague factors, with a risk of significant retroactive liability for employers who do not engage in discriminatory pay practices.

A1/S104 would change the standard for “equal pay” to a new and uncertain formulation of “substantially similar” work, as measured by similar “skill, effort, and responsibility.” This change alone will bring significant uncertainty, as it would equate entirely distinct jobs in an unpredictable way. Employers can no longer set compensation based on prevailing labor markets – paying the wages necessary to recruit suitable candidates.

Other states that have adopted a similar standard have recognized that common factors often account for wage disparities, such as local cost-of-living and working conditions, like risk of injury, night shift, and inclement weather. This bill as currently drafted does not permit accounting for such factors, and it is not clear how employers will fill jobs with more challenging and less-desirable working conditions without paying a wage premium.

But whatever the merits of such a standard going forward, the prospect of the retroactive application of that standard, with treble damages imposed on employers for failing to comply with a standard not in effect when compensation was set or paid, presents a risk of significant and inequitable liability.

Sponsors have indicated a willingness to mitigate the inequity of retroactive treble damages by capping the back-pay penalty at six years. However, we remain concerned that the amendment in its current form may not effectively cap the back-pay penalty at six years, given the open-ended language regarding the application of the continuing violation doctrine and discovery rule.

We also remain concerned that the retroactive application of treble damages does not meet standards of basic fairness, as it penalizes employers who had no reason to believe there was anything wrong with their employee compensation structure. Other states that have imposed treble damages in pay equity legislation have limited their application to “knowing or willful” violations of the law and thereby avoided the inequity of retroactive treble damages.

If amended to correct these particular flaws, the bill would still be the most aggressive pay equity legislation in the country. But as currently drafted, it presents a significant risk to employers who do not engage in discriminatory behavior in employment compensation.

Banning Nondisclosure Agreements… and Arbitration

Sparked by a desire to encourage greater transparency in settlement of sexual harassment claims, and concern that non-disclosure agreements (NDAs) can have the perverse effect of allowing such behavior to continue, legislation to restrict the enforceability of NDAs is also scheduled for a floor vote on Monday.

Unfortunately, the bill has also become a vehicle for the plaintiff’s bar, which desires a general prohibition on arbitration agreements in employment contracts. By barring waivers of “procedural rights” in employment contracts, which would include essential attributes of arbitration like waivers of jury trials, full discovery, and the like, the bill would prohibit prospective agreements to resolve employment disputes through arbitration.

When disputes arise in the employment context, there are two possible tracks: it can be resolved through litigation in court, or it can be resolved through arbitration. The substantive remedies are the same. But while proceeding in court will typically take years to resolve, with massive legal fees, arbitration is cheaper, faster, and more efficient.

By reducing legal fees and precluding class actions, arbitration also presents a challenge to the business model of the plaintiffs’ bar. As a result, we have seen an intensive anti-arbitration public relations campaign, coupled with efforts to undermine arbitration in state courts and legislatures.

Hostility to arbitration from those who benefit from the litigation business model is nothing new. Which is why federal law since 1925 has defended arbitration as a favored means of dispute resolution and expressly preempted efforts to undermine the enforceability of arbitration agreements.

This legislation would attempt to circumvent that preemption by defining state contracts to preclude arbitration agreements. But when a state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: the conflicting rule is displaced by the FAA. And the result is the same when state law prohibits essential attributes of arbitration.

As a practical matter, a prohibition on arbitration agreements does not benefit the average employee. Arbitration is a faster, more cost-effective way of resolving disputes, and the lower transaction costs inure to the benefit of all employees. Litigation costs, by contrast, function as a transfer of wealth from lower and middle-class employees, to more highly-compensated attorneys.

The New Jersey legislature’s attempt to interfere with the protections of the Federal Arbitration Act will result in protracted litigation, culminating in the legislation eventually being invalidated in federal court. And in the interim, it would impose massive litigation costs on employers and employees alike.

This week the New Jersey Senate Labor Committee voted to release legislation that would make New Jersey the only state in the country to ban arbitration agreements in all employment contracts.

Much of the discussion on S121 focused on helping the victims of sexual harassment. And indeed, one element of the bill would specifically address non-disclosure agreements for discrimination or sexual harassment settlements. But the prohibition on waivers of “procedural rights” would apply to all employment contracts and would prohibit all prospective agreements to resolve any type of employment dispute through arbitration.

When disputes arise in the employment context, there are two possible tracks: it can be resolved through litigation in state or federal court, or it can be resolved through arbitration. The substantive remedies are the same, regardless of which mechanism is selected. But while proceeding in court will typically take years to resolve, with massive legal fees, arbitration is cheaper, faster, and more efficient. And money not spent on the legal fees associated with exhaustive court proceedings and discovery is instead available for employee compensation and business development.

But by reducing legal fees and precluding class actions, arbitration also presents a challenge to the business model of the plaintiffs’ bar. And as a result, we have seen an intensive anti-arbitration public relations campaign, coupled with efforts to undermine arbitration in state courts and legislatures.

Hostility to arbitration from those who benefit from the litigation business model is nothing new. Which is why federal law since 1925 has defended arbitration as a favored means of dispute resolution and expressly preempted efforts to undermine the enforceability of arbitration agreements. The Federal Arbitration Act mandates the enforceability of arbitration agreements, providing that they are “valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”

S121 would attempt to circumvent that preemption, essentially by defining state contracts to preclude arbitration agreements. But when a state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: the conflicting rule is displaced by the FAA. And the result is the same when state law prohibits essential attributes of arbitration.

In its landmark decision of AT&T Mobility v. Concepcion, the U.S. Supreme Court cited several “obvious illustrations” of unenforceable state restrictions: agreements that fail to provide for judicially monitored discovery; that fail to abide by the Federal Rules of Evidence; or that waive a right to a jury trial. The Court explained that all such state restrictions would be invalid, as they would interfere with “fundamental attributes of arbitration” and would create a scheme “inconsistent with the FAA.”

S121 would attempt to impose all of these “obvious illustrations” of invalid state restrictions on all New Jersey employment contracts.

These state restrictions are preempted even when not limited to arbitration agreements. As Justice Kagan recently wrote for a 7-1 majority in Kindred Nursing Centers v. Clark, the FAA not only preempts state efforts to directly bar arbitration, it “also displaces any rule that covertly accomplishes the same objective by disfavoring contracts that (oh so coincidentally) have the defining features of arbitration agreements.”

As a practical matter, a prohibition on arbitration agreements does not benefit the average employee. Arbitration is a faster, more cost-effective way of resolving disputes, and the lower transaction costs inure to the benefit of all employees. Litigation costs, by contrast, function as a transfer of wealth from lower and middle-class employees, to more highly-compensated attorneys.

The New Jersey legislature’s attempt to interfere with the contractual protections afforded by the Federal Arbitration Act will result in protracted litigation, culminating in the legislation eventually being invalidated in federal court. And in the interim, it would impose massive litigation costs on employers and employees alike.