New Mandatory Arbitration Restrictions for Federal Contractors Signal Things to Come

January 7, 2010

On December 21, 2009, President Obama signed the Department of Defense Appropriations Act for fiscal year 2010 (H.R. 3326). Section 8816 of the Act, otherwise known as the “Franken Amendment,” dramatically restricts the use of mandatory arbitration clauses in employment contracts between defense contractors and their employees or independent contractors.

Amendment Overview

Specifically, any defense contractor that receives funds appropriated from the Defense Appropriations Act over $1 million for a contract awarded more than 60 days after December 19, 2009 must agree not to:

  1. 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 resolve through arbitration any claim under Title VII of the Civil Rights Act of 1964 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; or
  2. take any action to enforce any provision of an existing agreement with an employee or independent contractor that mandates the employee or independent contractor resolve such claims through arbitration.

The Franken Amendment also provides that all prime defense contractors that receive covered contract awards more than 180 days after December 19, 2009 must certify that their subcontractors have agreed to the arbitration restrictions in the Act. This certification requirement applies to all subcontractors that have subcontracts in excess of $1 million.

Immediate Implications for Defense and Other Contractors

The biggest repercussion of the Franken Amendment is that it is not limited to employees or independent contractors assigned to a covered Department of Defense contract. Instead, it requires compliance with Section 8116 with respect to all of a federal defense prime contractor’s employees and contract workers. However, for covered defense subcontractors, limits on mandatory arbitration only apply to individuals performing work on a covered subcontract.

The second significant implication is the scope of the Franken Amendment. When Senator Al Franken introduced the bill, the legislation was intended to prevent government contractors from requiring that victims of alleged sexual assault submit their claims to mandatory arbitration. However, the current language in Section 8116 includes a broad reference to “any claim” arising under Title VII. Thus, based on the plain language of the Act alone, it appears that the Act is intended to cover all Title VII claims, not simply those involving allegations of “sexual assault or harassment.”

Lastly, although currently limited to certain federal defense contractors, other federal contractors should be wary that legislation and amendments like the Franken Amendment will be added to more general appropriations bills in the future, imposing similar mandatory arbitration restrictions on all federal contractors and subcontractors.

Harbinger of the Arbitration Fairness Act

While the Franken Amendment applies to defense contractors specifically, it is relevant to all employers, as it represents a shift in labor policy and may represent an early test run for the future passage of the Arbitration Fairness Act. Unlike the Franken Amendment, the Arbitration Fairness Act would prohibit mandatory arbitration in employment, consumer and franchise contracts (House version: H.R. 1020. Senate Version: S. 931). The Arbitration Fairness Act has not moved out of committee. However, given the passage of the Franken Amendment, some form of the Arbitration Fairness Act may proceed in the upcoming year.

For further information on the Franken Amendment or federal contractor compliance generally, please contact the authors or any member of the McGuireWoods Labor & Employment or Employee Benefits teams.