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Ethics Corner 

New Amendment To Change Employee Litigation Rules 

10  2,010 

By Dorn C. McGrath and Caitlin E. Stapleton 

Alternative dispute resolution has been a trend for employment claims as judicial and employee attitudes regarding the benefits of arbitration and burdens of litigation have shifted. The time and cost consumed in litigating employment claims has suggested that many are best resolved by mediation followed by arbitration, if needed. The U.S. Supreme Court has confirmed that even important statutory rights can be subject to mandatory arbitration.

Running counter to this trend is the Franken Amendment, sponsored by Sen. Al Franken, D-Minn., and signed into law as Section 8116 of the 2010 Defense Appropriations Act. It is applicable to solicitations and contracts exceeding $1 million. This law bars defense contractors and subcontractors from requiring employees, as a condition of employment, to agree to mandatory arbitration of discrimination claims under Title VII of the Civil Rights Act of 1964, based on race, color, religion, sex or national origin.

The Franken Amendment also restricts arbitration of tort claims related to sexual assault or harassment, assault and battery, intentional infliction of emotional distress, false imprisonment, and negligent hiring, supervision or retention. Also, existing agreements to arbitrate these claims may not be enforced by defense contractors or subcontractors.

The Franken Amendment seeks to ensure access to courts for claims unrelated to an employment relationship. For example, a serious criminal matter should not be confined to mandatory arbitration. Unfortunately, the anti-arbitration emphasis of the new rule extends much further to include many otherwise commonly-arbitrated employment disputes.

The Franken Amendment was implemented this year by an interim Defense Federal Acquisition Regulation. The Defense Department is reviewing industry and other comments highlighting the difficulties in the current interim rule pending release of the final rule.

For example, as of June 17, the interim rule requires prime contractors to certify that subcontractors are in compliance with the new requirement not to use arbitration for the identified types of claims. Many projects involve multiple subcontractor levels, beyond the direct contractual relationship or control of the prime contractor, yet the current rule is not limited to first-tier subcontracts. Therefore, to ensure compliance, contractors need guidance as to the actual scope of the new rule.

Prime contractors often lack visibility into the lower tiers of subcontracting. Also, lower-tier subcontractors typically are not inclined to disclose, much less negotiate, agreement terms for the prime contractor’s benefit, where they have no contractual relationship. Unless the final rule corrects the overreach of the current requirement, the rule will add yet another layer of complexity to defense subcontracting.

It also is not entirely clear which employees are covered. Under the rule, a prime contractor is restricted from conditioning employment on arbitration agreements for covered claims for any employee or independent contractor. By contrast, for subcontractors, the restriction would appear to apply only to agreements with employees or independent contractors performing work related to a government contract.

The rule does not apply to commercial item contracts or commercial off-the-shelf items. Also, the secretary of defense has authority to waive the Franken Amendment restriction if national security interests so warrant. The exact process and grounds for this waiver are as yet unclear.

Implementing the law for thousands of existing employees raises the question of whether contractors and subcontractors with arbitration provisions will need to sign revised dispute resolution terms with employees. Some contractors and subcontractors now are exempting Title VII and sexual assault or harassment claims from their employee dispute programs. The new law should not affect arbitration of other types of claims in a disputes resolution process.

While nothing bars companies or employees from agreeing to arbitration for the covered claims voluntarily, agreement to arbitrate cannot be a condition of employment, and later confirming that these agreements were “voluntary” may be difficult.

Importantly, the Franken Amendment applies only to funds appropriated or made available by the FY 2010 Appropriations Act for any contracts, modifications, task orders, or delivery orders.  It remains to be seen after Sept. 30, whether any subsequent fiscal year appropriations or authorizing statutes will include this provision, and some contractors may have difficulties knowing if FY 2010 funds are being used for a specific contract.

Government contractors continue to see new FAR provisions that manage aspects of conducting business. In promoting contractor compliance, the Franken Amendment expands the enforcement role of prime contractors with the new certification requirement covering lower-tier subcontractors. The importance of developing and maintaining a compliance system to implement this expanded role is important not only throughout a government contractor’s own organization, but also to all companies supporting its work.

Dorn McGrath is a shareholder (mcgrathd@gtlaw.com) and Caitlin Stapleton is an associate (stapletonc@gtlaw.com) in the Greenberg Traurig, LLP government contracts practice group. The views expressed are solely those of the authors.

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