It has become increasingly common for employers to require employees to agree to mandatory arbitration of any employment-related disputes. Among some of the advantages, arbitration can be less costly than litigation and avoids the potential risk of exceedingly large jury damages awards. A recently signed bill, however, gives some employers who rely on arbitration clauses reason to pause.

On December 19, 2009, President Obama signed the 2010 Defense Appropriation Bill into law. This bill does more than dole out funds to the Department of Defense. The measure includes an amendment submitted by Senator Al Franken that prohibits Department of Defense contractors with qualifying contracts from requiring their employees to arbitrate Title VII claims and torts "related to or arising out of sexual assault or harassment."

Specifically, the “Franken Amendment” provides that any employer with a defense contract worth more than $1,000,000 must agree not to:

  1. require any employee to agree to mandatory arbitration of any claim under Title VII or any tort related to or arising out of sexual assault or harassment as a condition of employment; or
  2. take any action to enforce any provision of an existing agreement with an employee or independent contractor that requires mandatory arbitration of Title VII claims or torts related to sexual assault or harassment.

The new legislation does not appear to prohibit an employee from voluntarily agreeing to arbitrate a claim, nor does it appear to apply to mandatory arbitration of certain types of claims, such as wage and hour or contract disputes. Nonetheless, the bill’s language makes it clear that the prohibition on arbitration is broad. For one thing, this prohibition applies to all of a contractor’s employees, not just those who work on defense projects. Additionally, another section of the Franken Amendment requires contractors to certify that as of June 10, 2010, their subcontractors have agreed to the arbitration restrictions with respect to work related to the covered subcontract, thus ensuring that the effects of this bill will be felt beyond only those employers who directly contract with the Department of Defense.

All Defense contractors and companies that do business with Defense contractors should immediately review their policies and arbitration agreements, if any, to ensure compliance with the Franken Amendment.