How Employers Can Utilize Contractual Provisions to Reduce Their Exposure in Employment Related Claims

Paula Lopez, December 11, 2014.

There is no question that in recent years there has been a significant increase in employment claims filed against employers.  While there are federal, state and local laws prohibiting discrimination in the workplace, state and local laws tend to be more expansive than federal statutes by offering greater protections to employees that can often result in larger rewards.  As a result, employees often prefer to bring employment claims under state statutes like New York’s Human Rights Law (HRL) and New Jersey’s Law Against Discrimination (LAD). Courts in New York and New Jersey have given employers an arsenal of contract provisions that can be utilized to reduce the volume of employment claims filed against them and control the cost of litigating such claims.  For instance, employers can incorporate provisions relating to the arbitration of employment claims, class action waivers (in both court and arbitration), and waivers of jury trials into their employment agreements and applications—which will be enforced. Recent decisions upholding a contractual provision shortening the limitation period for filing employment related claims in New York and New Jersey have strengthened employers’ arsenals.

The statute of limitations for bringing a claim under New York’s HRL is three years, while the statute of limitations for bringing a claim under New Jersey’s LAD is two years.  A contractual provision included in an employment application that reduces employees’ time to file any employment related claims to six months was held to be enforceable by intermediate appellate courts in both New York and New Jersey.  Both cases involved the same employer, Raymour & Flanigan, and the identical contractual provision was included in the company’s employment application.  The provision included in a section immediately above the signature line entitled “Applicant’s Statement” stated the following:

I AGREE THAT ANY CLAIM OR LAWSUIT RELATING TO MY SERVICE WITH RAYMOUR & FLANIGAN MUST BE FILED NO MORE THAN SIX MONTHS AFTER THE DATE OF THE EMPLOYMENT ACTION THAT IS THE SUBJECT OF THE CLAIM OR LAWSUIT.  I WAIVE ANY STATUTE OF LIMITATIONS TO THE CONTRARY.

In the New Jersey case, Rodriguez v. Raymours Furniture Co., Inc. t/a Raymour & Flanigan, both the trial court and the Appellate Division held that the contractually shortened statute of limitations was enforceable and granted Raymour & Flanigan summary judgment dismissing an action filed nine months after plaintiff’s termination.

The plaintiff in Rodriguez filed an action claiming that he was terminated in retaliation for filing a worker’s compensation claim and discriminated against based on his disability, in violation of New Jersey’s LAD.   The Appellate Division’s decision in Rodriguez held that contractual reductions of a limitations period are enforceable so long as they are reasonable, not against public policy and not prohibited by statute.  The decision provided a thoroughly reasoned and in-depth analysis of its bases for enforcing the contractual waiver of the applicable statute of limitations.

In addressing the plaintiff’s argument that the provision is unconscionable because the six month limitation is included in a contract of adhesion, the court acknowledged that in light of the unequal bargaining power between the employer and applicant, the employment application is a contract of adhesion but, that alone, is not a reason for rendering the provision unenforceable.  The court cited to U.S. Supreme Court decision Gilmer v. Interstate/Johnson Lane Corp., which held that “the [m]ere inequality in bargaining power … is not a sufficient reason to hold that [such] agreements are never enforceable in the employment context.”

The court then considered whether the circumstances surrounding the employee’s execution of the application were procedurally unconscionable and found that they were not.  Critical to the court’s determination were the following factors:

• Provision was contained in a short two-page contract;
• Provision was conspicuous in the contract (it was in bold, all caps, oversized print);
• Provision was contained in the Applicant’s Statement directly above the signature line;
• Provision was in clear, uncomplicated language; and
• The employee was not pressured into signing the application—he took it home and filled it out with the help of a friend and returned it the next day.

The court then looked at whether the application was substantively unconscionable—did it contain harsh, one-sided terms?  In determining that the application was not substantively unconscionable, the court considered four factors: “(1) the subject matter of the contract, (2) the parties’ relative bargaining positions, (3) degree of economic compulsion motivating the ‘adhering party’, and (4) the public interests affected by the contract.”

With regard to the first factor—subject matter of contract, the court relied on long-standing case law recognizing a contractually shortened limitations period as a valid and legitimate provision to be included in employment contracts.  In addition, the court noted that six months is the statutory limitations period for filing an administrative claim under LAD with the New Jersey Division on Civil Rights. As to the second and third factors—bargaining power and economic compulsion, the court held that even though Raymour & Flanigan was in a superior bargaining position, the employee was not forced to pursue the application if he did not agree with its terms and was free to apply for another job with another employer. The court stated that “anyone who needs a job is under some level of economic compulsion, but plaintiff has presented no evidence that his circumstances were any more egregious than those faced by another applicant seeking employment.” In addressing the final factor—public interests affected, the court held that a contractually agreed-upon six-month limitations period is not contrary to New Jersey’s public policy in favor of protecting workers’ rights and prohibiting discrimination in the work place because the shortened period is reasonable.

The court distinguished the enforceability of a contractually agreed-upon six month limitations period in the context of Federal claims subject to the exclusive jurisdiction and exhaustion of administrative remedies with the Equal Employment Opportunity Commission (“EEOC”). The court noted that a six-month contractual limitations period for such claims would be unenforceable because it often takes more than six months for the EEOC to review a claim and determine whether it will take action on behalf of a claimant or issue a right to sue letter.  Therefore, a six-month limitations period would abrogate “a claimant’s ability to bring a claim and … be contrary to the public policy established for federal claims subject to EEOC jurisdiction.”

While the Appellate Division’s holding in Rodriguez remains good law, the New Jersey Supreme Court has granted the plaintiff certification to appeal the decision.  Whether the Court will reverse the decision remains to be seen.  However, in light of the Appellate Division’s thoroughly reasoned decision that is in-line with long-standing judicial precedent, a reversal seems unlikely.

As mentioned above, the identical provision at issue in Rodriguez was litigated last year in New York in the case, Hunt v. Raymour & Flanigan.  Hunt involved employment discrimination and unlawful retaliation claims brought by a former employee of Raymour & Flanigan pursuant to Executive Law § 296 and Administrative Code of the City of New York § 8-107.  The action was filed a little over nine months after the employee’s termination.  Raymour & Flanigan’s pre-answer motion to dismiss based on the six-month contractual limitations period contained in the employment application was denied by the trial court.  On appeal, the Appellate Division, Second Department reversed the trial court’s decision and dismissed the action.

The Second Department held that “parties to a contract may agree to limit the period within which an action must be commenced to a period shorter than that provided by the applicable statute of limitation.  Absent proof that the contract is one of adhesion or the product of overreaching, or that [the] altered period is unreasonably short, the abbreviated period of limitation will be enforced.”  Without going into the in-depth analysis undertaken by the Appellate court in Rodriguez, the Second Department held that by signing the employment application, the employee agreed to the shortened statute of limitations. Its application to Federal claims was not addressed by the court.  No further appeal was sought by the plaintiff and Hunt remains good law in New York.

Therefore, even though employment claims are on the rise, employers in New York and New Jersey have tools available to them that can be incorporated into their employment agreements and applications to help offset the volume and costs associated in defending against employment claims.