On December 19, 2009, President Obama signed the Department of Defense Appropriations Act of 2010. Included in the USD636 billion spending legislation is a provision that prohibits federal contractors and subcontractors receiving Department of Defense ("DOD") funds for contracts over USD1 million from requiring that an employee or independent contractor arbitrate certain employment claims. Now claims arising under Title VII of the Civil Rights Act of 1964 and any tort related to or arising out of sexual assault or harassment must proceed to court. This new mandate could signal a growing Congressional trend against mandatory arbitration agreements with employees, a trend that may push broader legislation in the future.
Specifically, Section 8116 of the Act provides:
- No funds appropriated by the Act may be expended for any Federal contract for an amount in excess of USD1,000,000 that is awarded more than 60 days after the effective date of this Act -- February 17, 2010 -- unless the contractor agrees not to enter into any agreement with any of its employees or independent contractors that requires, as a condition of employment, that the employee or independent contractor agree to arbitrate any claim under Title VII or any tort related to or arising out of sexual assault or harassment, including assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring, supervision, or retention.
- A covered contractor may not take any action to enforce any provision of an existing agreement with an employee or independent contractor that mandates the arbitration of the claims listed above.
Beginning 180 days after enactment -- June 17, 2010, defense contractors will be required to certify that each covered subcontractor has agreed to the arbitration restrictions for its employees and any independent contractors who perform work on the contract. Covered subcontractors are those holding subcontracts exceeding USD1 million to perform work on the funded project.
- The arbitration prohibitions do not apply extraterritorially to contracts that are wholly outside the U.S. and cannot be enforced in this country.
- The Secretary of Defense may waive the arbitration restrictions upon a personal determination that the waiver is necessary to avoid harm to national security interests of the United States, and that the term of the contract or subcontract is not longer than necessary to avoid the harm.
Practical Guidance/Implications for Employers
There are several important points for DOD contractors and subcontractors to note about the arbitration restrictions set forth in the new Act.
First, the arbitration restriction's reach is wide, as many defense contracts exceed the USD1 million threshold, and the provision applies to all of the covered contractor's employees and independent contractors, not just those working on the federally funded defense project. For subcontractors, the Act is limited to those employees and independent contractors performing work on the subcontract.
Second, the arbitration restriction is not limited to claims of sexual assault or harassment, but is broad in nature. The Act prohibits the arbitration of any claim under Title VII (race, sex, national origin and religious discrimination) in addition to any tort claim arising out of sexual assault or harassment. It does not, however, address the arbitration of common law claims unrelated to sexual harassment or sexual assault, non-Title VII federal employment law claims, e.g., age or disability claims, most wage claims, contract claims, or employment claims under state statutes.
Third, while the Act is broad in certain respects, at least for now, the arbitration restrictions apply only to certain government contracts funded by the Defense Appropriations Act for fiscal year 2010.
Finally, it is not clear how the provisions of the new Act will be implemented and enforced. It is likely, however, that government contract clauses will require contractors to certify compliance with the arbitration agreement restrictions, and that covered contractors and subcontractors requiring arbitration of the listed claims will jeopardize their defense contracts.
Action Item: DOD contractors, subcontractors, and those seeking contracts with the DOD will need to carefully examine their arbitration agreements with their employees and independent contractors to ensure that they comply with the new restrictions. Defense contractors and subcontractors with contracts over USD1 million awarded after February 17, 2010 will no longer be able to enforce provisions in existing agreements that mandate arbitration of these claims without running afoul of the law. Contractors also will need to develop a protocol to ensure its obligations under the Act flow through to any subcontractors with contracts in excess of USD1 million.
Warning: Employers could see more changes in the mandatory arbitration arena in 2010. The same or similar arbitration restrictions to those in the Act may appear in future appropriations bills for other departments, impacting an even greater number of federal contractors. We also will continue to monitor the Arbitration Fairness Act of 2009, which would prohibit the enforcement of predispute arbitration agreements relating to employment, civil rights, franchise, or consumer matters. The bill, which was introduced in February of 2009, still is in committee. Employers considering mandatory arbitration agreements should keep these legislative initiatives in mind as they move forward.