For most employers, Department of Defense (DOD) appropriation legislation normally does not show up on the radar screen. But the 2010 Defense Appropriations Act, signed into law on December 19, 2009, merits employers’ attention. The new legislation includes the "Franken Amendment," which takes the unusual step of prohibiting covered contractors and subcontractors from requiring employees and independent contractors to arbitrate certain employment claims. While the impact is limited to DOD contractors, the Franken Amendment is one of several pieces of proposed legislation—most notably the Arbitration Fairness Act, and the more recently introduced Rape Victims Act—intended to limit the use of mandatory arbitration of employment claims in both the public and private sectors. Also, while the genesis of the Franken Amendment was concern over mandatory arbitration of claims relating to sexual assault and violence against women, the final form of the Franken Amendment broadly covers all claims arising under Title VII.

More specifically, the Franken Amendment prevents any DOD contractor with a contract over $1,000,000 from requiring its employees or independent contractors to arbitrate: (i) claims under Title VII of the Civil Rights Act of 1964 (interestingly, there is no reference to claims under Section 1981 of the Civil Rights Act of 1866); or (ii) any tort related to or arising out of sexual assault or harassment (e.g., assault and battery, intentional infliction of emotional distress, false imprisonment, or negligent hiring supervision or retention). Covered contractors also are prohibited from enforcing any provision of an existing agreement which require such claims to be arbitrated. Notably, these requirements appear to apply to all employees of a covered contractor; they are not expressly limited to employees performing work related to a covered contract. The provisions applicable to contractors apply to contracts awarded 60 days after the effective date of the Act. Although the Act does not specifically identify its effective date, fiscal year legislation typically is effective on either the latter of the first day of the government's fiscal year (October 1) or the date of enactment, which in this case is December 19, 2009. Thus, unless the effective date is later clarified, covered contractors should plan to be in compliance by February 17, 2010.

Covered contractors also must certify that their subcontractors with subcontracts exceeding $1,000,000 agree not to enter into or enforce any provision of an agreement requiring arbitration of the foregoing claims. Unlike the limitations on contractors, the limitations on subcontractors only apply to agreements with individuals performing work related to a covered subcontract. The provisions applicable to subcontractors apply to contracts awarded 180 days after the effective date of the Act (i.e., assuming a December 19, 2009 effective date as discussed above, by June 17, 2010).

This law exempts employment or independent contractor agreements that may not be enforced in a United States court. It also empowers the Secretary of Defense to waive limitations on arbitration agreements to avoid harm to national security.

Covered employers should ensure they are in compliance with this new law by: (i) modifying employment or independent contractor agreements going forward to omit terms requiring arbitration of claims under Title VII or any tort related to or arising out of sexual assault or harassment; (ii) refraining from enforcing existing contracts requiring arbitration of such claims (on its face, the Franken Amendment does not appear to require modification or reissuance of existing contracts); and (iii) ensuring their covered subcontractors do not impose or enforce agreements requiring arbitration of such claims vis-à-vis individuals performing work related to covered subcontracts.