New Jersey Appellate Division Rules Employee in Sexual Harassment Case Entitled to File Suit on All Claims Despite Employing Having Signed an Mandatory Arbitration Agreement

McDermott v. Guaranteed Rate, Inc. Decision Holds Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA) Invalidates Arbitration Agreement for "Entire Case" in Sexual Harassment Disputes

On December 26, 2025, the New Jersey Appellate Division issued a significant employment law decision clarifying the scope of the federal Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act of 2021 (EFAA). In Megan McDermott v. Guaranteed Rate, Inc., et al., the court held that when an employee pleads a viable sexual harassment claim covered by the EFAA, the employee may proceed in the lawsuit on all claims in the lawsuit - not just those directly tied to harassment - even if the employee had previously signed a mandatory arbitration agreement with the employer.

This decision strengthens employee protections in New Jersey and places meaningful limits on employers’ use of arbitration clauses in workplace harassment cases.

What Is the Ending Forced Arbitration of Sexual Assault and Sexual Harassment Act (EFAA)?

The EFAA, signed into law on March 3, 2022, was enacted to curb the widespread use of mandatory arbitration agreements that forced sexual harassment and sexual assault claims into confidential proceedings. Under the EFAA, employees are empowered to invalidate pre-dispute arbitration agreements and class-action waivers for qualifying claims.

Key Provisions of the EFAA

• No Mandatory Arbitration - Arbitration may be compelled only if the employee voluntarily agrees after the dispute arises.

  
  

• Broad Coverage - Applies to sexual harassment and sexual assault claims brought under federal, state, or tribal law, including retaliation claims.

  
  

• Applies Regardless of Contract Date - Even arbitration agreements signed before March 3, 2022 are unenforceable if the claim accrued on or after that date.

  
  

• Court Decides Applicability - Judges (not arbitrators) determine whether the EFAA applies to a particular case.

  
  

• Eliminates Forced Secrecy - The statute aims to prevent claims from being hidden in confidential arbitration proceedings.

The Appellate Division’s Ruling in McDermott v. Guaranteed Rate: "Case" Means Case - No “Case Splitting” Under the EFAA

In McDermott, the plaintiff sued her former employer, Guaranteed Rate, Inc., alleging a hostile work environment due to sexual harassment by a supervisor. Her lawsuit also included claims for unpaid wages, breach of contract, and commercial misappropriation.

The trial court attempted to "split" the baby: it kept the sexual harassment claims in court but ordered McDermott to arbitrate her wage and contract claims. The Appellate Division reversed this decision, ruling that such "bifurcation" is contrary to the plain text of the EFAA.

The Court's Reasoning

Writing for the court, Judge Natali emphasized the specific language chosen by Congress in Section 402(a) of the EFAA:

"...no predispute arbitration agreement or predispute joint-action waiver shall be valid or enforceable with respect to a case which is filed under Federal, Tribal, or State law and relates to the sexual assault dispute or the sexual harassment dispute."

The Appellate Division reasoned that:

1. "Case" vs. "Claim": Congress used the broad term "case" in the EFAA, rather than the narrower term "claim" used in other sections of the statute. This signals an intent to exempt the entire lawsuit from arbitration, not just specific causes of action.

   
   

2. No Splitting: The court rejected the trial court’s attempt to "harmonize" the EFAA with the Federal Arbitration Act by splitting claims. Once the EFAA is triggered by a viable sexual harassment allegation, the arbitration agreement becomes unenforceable for the whole proceeding.

   
   

3. Broad Nexus: The court noted that in employment disputes, ostensibly "unrelated" claims (like retaliation or wage theft) are often "materially and substantially informed" by the abusive employment relationship.

Statute of Limitations Ruling

The decision also provided a secondary victory for employees regarding the timeliness of claims. The defendants argued that the plaintiffs' sexual harassment claims were time-barred under New Jersey's two-year statute of limitations because the specific harassing comments occurred years prior.

The Appellate Division rejected this argument, affirming the "continuing violation" doctrine. The court held that a hostile work environment is a cumulative pattern of acts. As long as the harassment continued into the limitations period (e.g., up until the employee’s resignation), the employee can sue for the entire history of the harassment, rendering the claims timely.

Why This Decision Matters for New Jersey Employees

For New Jersey workers, the McDermott decision provides critical protections. The ruling simplifies litigation. Plaintiffs no longer have to fight a "two-front war" with one part of their case in court and another in arbitration. By doing so, it prevents employers from forcing fragmented litigation and ensures that retaliation and related employment claims remain in the same forum.

It preserves the right to a public jury trial for all wrongs suffered at the hands of an employer, provided there is a nexus to sexual harassment. In doing so, it allows employees to litigate harassment cases publicly and transparently.

The Impact on New Jersey Employers and Businesses

For employers operating in New Jersey, the decision carries substantial risk implications Mandatory arbitration clauses are effectively void in any litigation that involves a viable sexual harassment claim, unless the employee enters into the agreement to arbitrate after claim arises. Employers can no longer use arbitration to compartmentalize liability or keep related employment disputes (like wage claims) out of the public eye. Litigation is more likely to be public, costly, and unpredictable and reputational exposure increases significantly.

A Clear Signal From New Jersey Courts

The Appellate Division’s ruling sends a clear message: sexual harassment claims will not be quietly diverted into private arbitration. By refusing to split cases between arbitration and court, New Jersey courts have ensured the EFAA’s protections are meaningful rather than symbolic.

Speak With an Experienced New Jersey Employment Attorney

The legal landscape regarding arbitration and employment rights is shifting rapidly. If you believe you have been subjected to sexual harassment, discrimination, or retaliation in the workplace, or if you are an employer seeking compliance with the latest developments in the EFAA, our New Jersey business litigation attorneys can help. Contact our law firm today to discuss your legal options.