The Beginning of the End for Employment Arbitration?

A New Law Prevents Defense Contractors from Arbitrating Employment Disputes with Employees and Subcontractors

On December 19, 2009, President Obama signed into law the Fiscal Year 2010 Department of Defense Appropriations Act. In this $63 billion spending measure is a provision, known as the “Franken Amendment” because it was originally introduced by Senator Al Franken of Minnesota, that prohibits federal defense contractors and subcontractors with contracts in excess of $1 million from enforcing existing employment arbitration agreements or entering into new ones with their employees or independent contractors.

Under Section 8816 of the Act, in order to receive funds appropriated under the Defense Appropriations Act on contracts in excess of $1,000,000, a defense contractor or sub-contractor must agree not to enter into or take any action to enforce any agreement that requires, as a “condition of employment,” that an employee or independent contractor agree to resolve through arbitration any claim under Title VII of the Civil Rights Act of 1964 (e.g., claims of race, sex, national origin and religious discrimination, harassment and retaliation), or any tort claim 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.

This anti-arbitration provision currently applies only to large defense contractors and sub-contractors and it only precludes arbitration of employment claims, but not others.  It is unclear if the Act also precludes the arbitration of common law claims unrelated to sexual harassment or sexual assault, state law employment claims, or claims under other federal employment statutes besides Title VII, such as the Americans with Disabilities Act, the Age Discrimination in Employment Act, the Fair Labor Standards Act, or the Family Medical Leave Act.

It is unclear whether failing to comply with the Act will merely invalidate the arbitration agreement, jeopardize the defense contract, or both.  The Franken Amendment is the first time Congress has ever precluded any employers from using mandatory pre-dispute arbitration agreements.

A More Comprehensive Anti-Arbitration Bill Is Pending In Congress.

Although the anti-arbitration provision of the Defense Appropriations Act affects only large defense contractors and sub-contractors, there is a bill pending in Congress that could prohibit virtually all U.S. companies from entering into or enforcing pre-dispute agreements to arbitrate employment, civil rights and consumer disputes. Reintroduced in early 2009, the Arbitration Fairness Act of 2009 would bar all pre-dispute arbitration clauses in employment contracts (except collective bargaining agreements), consumer transactions, franchise agreements, and agreements to arbitrate disputes arising under any civil rights statute.  If passed, the Arbitration Fairness Act would force most employment and consumer disputes currently resolved by private arbitration into the courts.  The Arbitration Fairness Act remains in committee for now, but it is expected that Congress will consider the bill later this year once health care reform legislation is resolved.

Where Is Employment Arbitration Headed?

These congressional initiatives against employment arbitration come at a time of turmoil in this area of the law.  Concerns about the unfairness of some companies’ arbitration procedures have caused private arbitration organizations (such as the National Arbitration Forum, JAMS and the American Arbitration Association) to change their rules or stop conducting certain kinds of arbitrations.  State courts and legislatures are often hostile to arbitration, but the U.S. Supreme Court and most federal courts have endorsed arbitration as a quicker, cheaper, and less formal alternative to litigation.  However, this Congress has shown little hesitancy in legislatively overruling other Supreme Court precedent.  Only one thing is clear:  the future of employment arbitration is up for grabs.

Please tell us what you think:  Is this the beginning of the end of employment arbitration?

Employment Arbitration: Law and Practice

Employment Arbitration: Law and Practice

For more comprehensive information and guidance on employment arbitration, see Employment Arbitration: Law and Practice by Arnstein & Lehr partner and Employment Law Practice Group chair Paul Starkman , Gail Golman Holtzman, Donald J. Spero.

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