Today's link discusses the case of Diane Schroer, who applied for and was offered a position with the Library of Congress. Prior to starting work, she told her future boss she was in the process of transitioning. The following day, Schroer received a call rescinding the offer, telling her that she wasn't a "good fit" for the Library of Congress. She sued, and the Library asked the judge to dismiss her case, arguing that Title VII doesn't cover transgender discrimination. The U.S. District Court for the District of Columbia disagreed, finding that it may be sex discrimination. The court says it is going to take evidence on the question.
Ms. Schroer's case is interesting because it was highlighted this past autumn in a full-page ad in Roll Call, the Capitol Hill newspaper that covers all things congressional. See National Center for Transgender Equality
Until recently, the federal courts have consistently ruled that discrimination because of "changing sex" is not discrimination based on sex. In 2004, however, the Sixth Circuit ruled to the contrary in Smith v. City of Salem, and then again in Barnes v. Cincinnati. I suppose it's no surprise that, as discussed before, Cincinnati now has a law on the subject. (See here for my prior discussion, and a reader's comment setting out the unusual definition in the Cincinnati law.) The Supreme Court dodged a chance to hear an appeal on the Barnes case. Article here
For a short discussion of the evolving law of Title VII on this issue, see the Harvard Civil Rights-Civil Liberties Law Review