December 30, 2009Client Alert

New Restrictions Instituted on Use of Arbitration Clauses by Federal (Sub) Contractors

On Saturday, December 19, 2009, President Obama signed the Department of Defense Appropriations Act, 2010 (the “DDAA”) into law. Contained within the DDAA was a provision that will cause most military contractors (and later sub-contractors) to no longer be able to enforce mandatory arbitration clauses in employment contracts.

Section 8116 of the DDAA mandates that for any Federal contract with funds made available under the DDAA in excess of $1,000,000, that is awarded more than 60 days after December 19, 2009, the contractor must agree not to enter into any agreement, or take any action to enforce any provision of an existing 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 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.

For any contracts awarded more than 180 days after December 19, 2009, the contractor is also required to certify that each covered subcontractor agrees to the same terms above. A covered subcontractor is any entity that has a subcontract in excess of $1,000,000.

The prohibitions do not apply to agreements with employees or independent contractors that may not be enforced in a court of the United States, and the Secretary of Defense may waive these requirements for the purposes of a particular contract or subcontract if the Secretary or the Deputy Secretary personally determines that the waiver is necessary to avoid harm to national security interests of the United States, and that the term of the contract or subcontract is not longer than necessary to avoid such harm. The Secretary of Defense is required to transmit to Congress, and simultaneously make public, any such determination not less than 15 business days before the contract or subcontract may be awarded.

As a result of the above changes, federal contractors and sub-contractors will need to review their current form employment agreements and revise those agreements accordingly to eliminate any mandatory arbitration provisions. In addition, they will also need to be aware that the arbitration provision in any existing agreement may not be exercised if the contractor/sub-contractor has accepted a Federal contract as described above and thereby made itself subject to the new requirements.

Those businesses that clearly qualify as defense contractors must comply, now. More serious questions are posed for entitles which might qualify as “sub-contractors.” It is unclear under the DDAA how sub-contractors will be defined. OFCCP rules, for instance, define a sub-contract as a contract for services “necessary to the performance” of a government contract. The required nexus to a government defense contract under the DDAA is not defined. Businesses doing business with defense contractors should immediately seek counsel to clarify their status as “sub-contractors.”

If you have any questions about the above changes to employee/independent contractor agreements as it relates to Federal contractor/sub-contractor status, please contact one of the authors of this alert or your Michael Best attorney.

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