On May 19, 2010, the Department of Defense (DoD) issued an interim rule implementing Section 8116 of the DoD Appropriations Act for Fiscal Year 2010. Section 8116 embodies a controversial amendment introduced by Senator Al Franken (D-Minn.), which prohibits funding certain defense contracts with entities that require their employees to resolve Title VII claims and certain other tort claims through arbitration. This issue bears watching by all employers as it represents an attack on employers’ discretion in implementing the arbitration of employment claims.

The rule prohibits covered contractors from entering into new agreements and enforcing existing agreements that require arbitration of such claims. It also specifies that funds made available by the FY 2010 appropriations legislation may not be expended after June 17 unless a contractor certifies that it requires its covered subcontractors also to agree not to enter into or enforce such mandatory arbitration provisions. The rule applies to any contract in excess of $1 million, except those for the acquisition of commercial items, including commercially available offthe- shelf items.

Debate over Section 8116 has centered on whether it applies broadly to all Title VII claims or is limited solely to those Title VII claims related to or arising out of sexual assault or harassment. Section 8116, by its express terms, applies to “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.” The rule adopts a broad interpretation of this language, and specifies that a covered contractor must agree that it will not:

“(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—

(i) Any claim under Title VII of the Civil Rights Act of 1964; or

(ii) 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. . .”

As the rule contains no language limiting the phrase “claim under Title VII,” it ostensibly covers any and all claims brought under Title VII, irrespective of whether the claim relates to sexual assault or harassment. While the rule precludes covered contractors from imposing mandatory arbitration as a condition of employment, it does not prohibit arbitration per se. Employees may otherwise agree to arbitrate the covered claims. Neither Section 8116 nor DoD’s rule, however, provides specific guidance with respect to when agreement to arbitrate will be considered a condition of employment as opposed to a voluntary choice by the employee. The rule also provides that its application to a particular contract may be waived by the Secretary of Defense if such waiver is “necessary to avoid harm to national security interests of the United States.”

The public comment period on the interim rule runs until July 19, 2010, after which DoD will issue a final rule. Because the rule was issued as an interim rule, its provisions took effect on May 19, 2010, the date of issuance.