[Nankee Arora is a fourth-year law student at Jindal Global Law School]
Mandatory arbitration clauses have become increasingly prevalent in employment contracts around the world. Employers seek to bind their employees to arbitration from the inception of their employment contract so in the event a claim arises they can take recourse to the speedier but more importantly confidential and largely two-party dispute resolution mechanism that is arbitration. The cumulative effect of such clauses is the suppression of collective bargaining and labour rights. In India in particular, while arbitration has gained widespread popularity, the question of arbitrability of labour disputes is still undecided. This post seeks to examine how mandatory arbitration clauses threaten to erode the very spirit of arbitration, that is, its voluntary and consensual nature and uses the United States as an example of a jurisdiction where legitimacy was given to such clauses. It will also take up the limited jurisprudence on arbitrability of employment disputes in India to suggest that such clauses are unlikely to be implemented for the public policy reasons.
Mandatory Arbitration Clauses: A Threat
Mandatory arbitration clauses require employers to agree that any future disputes that arise between them and the company will be resolved through arbitration and cannot be taken to court. While it may be argued that the employee is consenting to this dispute resolution mechanism by signing the agreement, the employee has no real choice to negotiate this term given that their employment is contingent on agreeing to the terms of the company. Employers take advantage of the fact that they are in a stronger bargaining position in the employer-employee relationship to enforce such stipulations and curb the employees’ power. This problem is exacerbated in socio-economically weaker nations given that the degree of inequality between the employer and employee is greater and the competitiveness of the job market is higher thereby allowing the employer to stipulate a myriad of conditions that the employee is compelled to follow, rendering consent into a mere façade.
Additionally, although arbitration was brought forward as a speedier dispute resolution mechanism, with mandatory arbitration clauses it is questionable whether the dispute will ever be fully resolved. Firstly, within its ambit, mandatory arbitration clauses internationally include all kinds of disputes, including disputes related to different types of leave, renumeration and even claims of racial or sexual discrimination. Allowing such disputes to remain within the private realm is a blatant public policy violation seeing that wrong-doers would be let off the hook without any public repercussions. Moreover, their history of committing such acts would not be available to their future employees thereby enabling them to become repeat offenders across multiple workplaces.
There is also a question of financial inaccessibility for employees who are compelled to resolve disputes through mandatory arbitration. These employees usually rely on unions and other methods of collective bargaining to realise their rights against their deep-pocketed and influential employers. In the United States, the sum of these factors has resulted in the regime operating in favour of employers. Employee arbitration claims are statistically less likely to succeed than claims brought before court and, even if the arbitration does succeed, the quantum of damages is significantly smaller than those awarded by courts. Thus, even lawyers are hesitant to take up employment claims arising from mandatory arbitration. Therefore, the cumulative effect of arbitration clauses is to curb employee claims all together and to silence any dissent at the workplace.
Judicial Position on Mandatory Arbitration Clauses in the US
Even though these clauses are restrictive and directly threaten employee rights, they have largely been upheld in the United States (US) since 1991 and have been broadened in scope by the judiciary. However, there have been legislative efforts in the recent past to undo their validity.
The validity of mandatory arbitration clauses in employment disputes has been established in the US since the 1991 Supreme Court case of Glimer v. Interstate/Johnson Lane. The Federal Arbitration Act, 1925 provided that courts had to mandatorily enforce pre-dispute arbitration contracts with certain exceptions that included contracts of employment. The Court no longer saw it fit to afford this exception to employees in Glimer, stating that ‘little guy’ exception can no longer be availed by employees. This position was broadened in Epic Systems Corp v. Lewis wherein the Supreme Court, along with upholding the validity of one-on-one mandatory arbitration clauses, held that clauses prohibiting class action suits are legally permissible. There have been legislative attempts to curb the use of mandatory arbitration clauses. A law has already been enacted to ban mandatory or forced arbitration in sexual harassment cases. A wider legislation covering broader categories of disputes, titled ‘Force Arbitration Injustice Repeal (FAIR) Act’, is also being deliberated. It proposes to ban the enforcement of pre-dispute arbitration agreements entirely. While this Bill has been passed by the Democrat-led House of Representatives in March 2022, it is unlikely to garner support in the evenly divided Senate. While Republicans argue that such a bill would deprive workers of a cheaper and speedier alternative to court proceedings, the aforementioned arguments clearly suggest that these attributes are being used unfavourably against employees and the FAIR Act recognises these practical implications.
Arbitrability of Employment Disputes in India
While there is no official source stating whether such clauses are likely to be enforced in India, the issue can be evaluated by examining the current position of the courts on the arbitrability of employment disputes in India. Two different High Courts faced with the same question arrived at the conclusion that labour disputes should not be arbitrable.
This question of the arbitrability of labour disputes first arose before the Bombay High Court in Kingfisher Airlines v. Captain Prithvi Malhotra and Others. This case dealt with the labour proceedings instituted by various staff members of the now non-operational Kingfisher Airlines for the recovery of unpaid wages and other salary benefits. While the staff instituted proceedings in the especially empowered labour courts, Kingfisher Airlines contested that the Court lacked jurisdiction because the employment agreement contained an arbitration clause. However, Kingfisher Airlines’ application for reference to arbitration was denied and the Labour Court retained jurisdiction over the proceedings.
In the appeal, the Bombay High Court arrived at the same conclusion as the Labour Court, that is, labour disputes are not arbitrable under the Arbitration and Conciliation Act, 1996. The Court referred to the decision of the Supreme Court in Booz Allen and Hamilton v. SBI Home Finance which decided that the arbitrability of a claim must be determined by evaluating whether the claim is being asserted in personam or in rem. The Court held that the question of arbitrability must go beyond this consideration and evaluation whether the resolution of the claim must be specifically decided by a particular court or tribunal for public policy reasons. The Bombay High Court held that the adjudication of labour disputes has been reserved for Labour Courts under the Industrial Disputes Act, 1947 (the ‘ID Act’) and the interpretation of the scheme of the ID Act reflects strong public policy reasons to support this conclusion. It also held that the ID Act provides for special modes of arbitration that allow collective labour disputes, and so any arbitration of labour disputes would have to be according to the specific provisions of the Act and not the Arbitration and Conciliation Act, 1996 (the ‘A&C Act’)
Five years later a similar question was raised in the High Court of Karnataka in Rajesh Korat v. Innoviti. Unlike in Kingfisher Airlines, the reference to arbitration was allowed by the Labour Court; however, in the appeal much of the reasoning of the Karnataka High Court resembled that of the Bombay High court. The Karnataka High Court also concluded that there were strong public policy reasons to allow the labour courts to have special and exclusive jurisdiction to adjudicate industrial disputes matters. The Karnataka High Court, however, went beyond the reasoning of the Bombay High Court to hold that the ID Act is a self-contained body of law, and that the A&C Act has no application to matters falling within the ambit of the ID Act. It was also suggested that any arbitration of labour disputes would be in accordance with the ID act and not the A&C Act.
These two judgements clearly identify the public policy ramifications of having employment disputes restricted to arbitration and stress on adherence to the norms and protections to the labour force afforded to them under the ID Act. What is also notable is that these judgements do not entirely discredit the use of arbitration in labour disputes but suggest that it be conducted in the specially designed format conceived under the ID Act that was adopted keeping in mind the public policy interests that the ID Act seeks to protect. While the Supreme Court is yet to adjudicate on the arbitrability of employment disputes and the legislature is yet to clarify this point of law, the judgements suggest that courts are generally likely to decide in the negative. Even though India emulates the Western markets when it comes to its strategies governing corporate affairs and has often been accused of diluting labour laws to improve its ranking on the Ease of Doing Business Index, the position of the courts suggests that is unlikely that mandatory arbitration clauses will be enforceable in India.
While mandatory arbitration clauses seem like a threat to labour in India, it is unlikely that India will follow the same trajectory as the US in validating them. To uphold mandatory arbitration clauses is to violate the very spirit of arbitration and two High Courts in India have gone one step further and denied the application of arbitration to labour disputes altogether. Allowing arbitration in labour disputes in accordance with the spirit of the ID Act ensures that the benefits that arbitration provides as an alternative dispute resolution mechanism are reserved while the way it is conducted is labour-oriented.
– Nankee Arora