Employment agreements are commonplace in a wide range of industries and are valuable in establishing expectations of the employee and employer at the outset of their relationship. Such agreements typically address a variety of issues, including compensation, benefits and post-employment non-competition and non-solicitation, among other things. Frequently, these agreements also include dispute resolution provisions, such as choice-of-law clauses.
New Jersey courts, as a matter of public policy, have developed limitations on the interpretation and enforceability of choice-of-law clauses in employment agreements in order to prevent employees from losing the valuable protections of state employment statutes. This article explores the scrutiny applied by New Jersey courts to such clauses, and highlights the critical importance of the parties’ understanding of the legal landscape in structuring their relationship and in any subsequent litigation between them.
Analysis Considers Public Policy Implications
In the last few decades, the United States has seen a surge in the number of companies with offices, stores and/or employees in many, if not all, of the 50 states. It is not unusual, and in fact may be considered good practice, for employers with such multi-state contacts to enter into employment agreements with their employees that include choice-of-law clauses. However, despite the parties’ best intentions, their choice-of-law selection may not be honored for all employment-related claims that may arise down the road.
Even where an agreement specifies the law to be applied, New Jersey courts considering employment agreements—generally state courts and federal district courts sitting in diversity—must still engage in the choice-of-law analysis under New Jersey law. Under New Jersey’s choice-of-law principles, contractual choice-of-law provisions are generally upheld, provided that the choice does not offend New Jersey’s public policy. See, e.g., Collins v. Mary Kay, 874 F.3d 176, 183-84 (3d Cir. 2017); Kramer v. Ciba-Geigy Corp., 371 N.J. Super. 580, 598 (App. Div. 2004). New Jersey courts will not apply the parties’ chosen law if it “has no substantial relationship to the parties” or its application “would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue.” See Kramer, 371 N.J. Super. at 598 (quoting Restatement (Second) of Conflicts of Laws §187 (1971)).
Generally speaking, courts find that, where the parties have selected the law of the state in which the employer is headquartered, that state has the requisite “substantial relationship” to the parties such that the parties’ chosen law will be upheld, even where the employee performs all of his or her work in another state. See Collins, 874 F.3d at 184 n.6. However, New Jersey courts are often more cautious when the parties’ choice-of-law selection may have adverse implications on an employee’s ability to assert claims under New Jersey’s employment law statutes. Indeed, as a matter of New Jersey public policy, courts do not permit employees to waive their substantive rights under such statutes. See Rodriguez v. Raymours Furniture Co., 225 N.J. 343, 364-65 (2016) (holding that, while parties may agree that employment-related claims must be submitted to arbitration, thereby waiving the right to a trial by jury, they cannot agree to waive substantive rights under employment statutes by, for example, contractually limiting the applicable statute of limitations). Thus, where an employee has performed most or all of his or her work in New Jersey, New Jersey courts apply a number of interpretative tools in their arsenal to prevent a choice-of-law selection in an employment agreement from depriving the employee of claims under New Jersey’s employment statutes, including the Law Against Discrimination (LAD), the Wage Payment Law (WPL) and the Conscientious Employee Protection Act (CEPA).
Courts May Narrowly Interpret or Decline to Enforce Choice-of-Law Clauses
In the typical case where these issues arise, a plaintiff-employee asserts claims against the employer for violations of New Jersey employment statutes. The defendant-employer responds by seeking to limit or dismiss such claims based on the existence of a choice-of-law clause in the parties’ employment agreement that identifies a state other than New Jersey. In such circumstances, if the employee raises appropriate arguments in defense, a New Jersey court may refuse to limit or dismiss the statutory claims.
First, the court may conclude that the language employed by the parties in the choice-of-law clause is ambiguous or not sufficiently broad to encompass statutory claims. For example, the Third Circuit in Nuzzi v. Aupaircare, 341 F. App’x 850, 852-53 (3d Cir. 2009), relying upon the New Jersey Supreme Court’s decision in Garfinkel v. Morristown Obstetrics & Gynecology Associates, 168 N.J. 124 (2001), held that the choice-of-law clause in parties’ employment agreement, which covered “any claims or disputes arising out of, or related to this Agreement,” was not broad enough to encompass the employee’s statutory claims. In contrast, as explained by the New Jersey Supreme Court in Martindale v. Sandvik, 173 N.J. 76, 95-96 (2002), contractual language that refers specifically to statutory claims or broadly includes all claims relating to the employment relationship reaches both contractual and statutory claims.
Second, even where the language employed by the choice-of-law provision is sufficiently broad to encompass statutory claims, the court may decline to enforce the provision on public policy grounds if the chosen state’s laws do not offer the employee equivalent statutory protections. See, e.g., Schunkewitz v. Prudential Secs., 99 F. App’x 353, 355-56 (3d Cir. 2004). Considerations include not only the comparative strength of the two states’ statutory protections, but also whether the employee would be able to assert employment-based claims under the other state’s statutes. Many states, including New Jersey, limit the availability of statutory claims to employees working within the state. See, e.g., Papalini v. Sensient Colors, No. 11-6392 (D.N.J. Apr. 18, 2012). Thus, if the employee does not work within the state designated in the choice-of-law clause, he or she may not be entitled to relief under that state’s statutes. In such circumstances, New Jersey courts may refuse to enforce the choice-of-law clause to statutory claims to prevent an employee from being left without statutory remedies.
Employers and Employees Must Consider Limitations on the Scope and Enforceability of Choice-of-Law Clauses
When negotiating employment agreements, the parties should be cognizant of the limitations on their ability to create broadly enforceable choice-of-law clauses, particularly where their dispute may one day wind up in the courts of New Jersey. Employers—very often the drafters of the employment agreement—should be mindful at the time of drafting that New Jersey courts may closely scrutinize such clauses to prevent employees from losing valuable claims under New Jersey’s employment statutes. Employers should consider that, unless the choice-of-law clause itself mentions statutory employment claims or refers expansively to all claims relating to the employment relationship, New Jersey courts likely will not apply the clause to an employee’s statutory claims. Moreover, even where employers select language in the choice-of-law clause that is sufficiently broad to reach statutory claims, New Jersey courts will decline to enforce the choice-of-law selection as to an employee’s statutory claims if enforcement would, in essence, leave the employee without vital statutory employment protections. Thus, the application of New Jersey’s statutory protections to New Jersey-based employees may be unavoidable, regardless of the language utilized by the employer in the clause.
Employees, on the other hand, should be aware that the language of the employment agreement may not be dispositive as to the scope of their rights, as courts may narrowly construe choice-of-law clauses in employment agreements or decline to enforce them as to statutory claims in the aforementioned circumstances. However, it is the plaintiff-employee’s obligation to raise arguments concerning both the scope and enforceability of the choice-of-law clause. Despite the robust scrutiny employed by New Jersey courts to protect employees’ statutory claims, the courts will not automatically limit the impact of such clauses in the absence of specific challenges brought by the affected employees, a fact that was demonstrated in a recent Third Circuit decision.
In Collins v. Mary Kay, the Third Circuit affirmed the district court’s grant of a Texas-based employer’s motion to dismiss a New Jersey-based employee’s claims under New Jersey’s WPL, based on Texas forum-selection and choice-of-law clauses in employment agreements signed by the parties. 874 F.3d at 178-79. The employee had argued only that her statutory claims did not fall within the scope of the clauses, and the Third Circuit noted the employee’s regrettable failure to challenge the clauses’ enforceability as to statutory claims. The court stated that, while “[w]e are mindful of the predicament that could arise for a plaintiff who (a) performs work in her home state for a company headquartered in another state, (b) seeks the substantive protections guaranteed by her home state’s wage payment law; and (c) is subject to forum selection and choice-of-law clauses in her employment agreement that point outside of her home state,” it is “incumbent” on the plaintiff-employee to bring a challenge to the enforceability of such clauses. Id. at 187.
In conclusion, both employees and employers are best served by educating themselves, both at the time of contracting and after disputes arise, of the treatment afforded by New Jersey courts to choice-of-law clauses in employment agreements. Ultimately, despite the parties’ intentions, such clauses may not be as broad, or as broadly enforceable, as the selected language suggests.
Mongiello is an associate in the Litigation Department of Cole Schotz in Hackensack.