Arbitration has long been advocated as an efficient, private, and commercially sensitive method of resolving disputes. In many commercial contracts, arbitration clauses are standard. In recent times, there has been an increasing trend of inclusion of arbitration clauses in employment contracts/agreements. However, when it comes to employment contracts/agreements related to specific category of employees, the law takes a different view.
Are Employment Disputes Arbitrable?
The short answer is: no, not when the dispute is governed by a specific labour statute.
Employment relationships are not treated the same way as business-to-business arrangements. Disputes over wages, wrongful termination, unfair labour practices, or retrenchment are typically governed by specific legislation such as:
- The Payment of Wages Act, 1936 (“the PW Act”), which deals with unlawful deductions or delayed payments of wages; and
- The Industrial Disputes Act, 1947 (“the ID Act”), which provides for statutory adjudication of termination-related disputes and other industrial issues.
These statutes create exclusive forums and remedies for employees governed by such statutes, which cannot be ousted or bypassed through private agreements like arbitration clauses.
Underlying Legal Principles
Indian courts have consistently held that certain categories of disputes are non-arbitrable, either by express provision or necessary implication of law. The Vidya Drolia v. Durga Trading Corporation1 decision laid down a fourfold test to identify nonarbitrable disputes. Among other things, disputes are not arbitrable where:
- They involve rights or remedies that are statutorily governed,
- The adjudication must take place in a specialised or public forum,
- There exists a public interest element that overrides the private nature of arbitration, and
- The subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).
Employment disputes, particularly involving statutory rights, clearly fall within this framework.
Judicial View: The Supreme Court's Reiteration
This principle has been again reaffirmed by the Supreme Court in Dushyant Janbandhu v. Hyundai AutoEver India Pvt. Ltd.2. In the instant case, the employee approached the statutory authorities under the PW Act and the ID Act to claim unpaid wages and challenge his termination. The employer attempted to invoke an arbitration clause from the employment agreement and even sought appointment of an arbitrator through the High Court of Madras.
The Supreme Court rejected this attempt, holding that:
- Wage and termination-related disputes are non-arbitrable, as they fall under the jurisdiction of statutory labour forums;
- Statutory protections cannot be waived by contract, even through an arbitration clause; and
- Employers cannot use arbitration to delay or deflect valid statutory claims, and any such tactic may attract judicial censure and even costs.
Implications for Employers
- Contractual clauses cannot displace statutory obligations. Even a well-drafted arbitration clause in an employment agreement cannot prevent an employee from accessing statutory remedies.
- Attempting to reroute statutory claims to arbitration may not just fail, it may backfire. Courts have not hesitated to call out such tactics as misuse of process.
- Internal policies and legal strategy should align with statutory frameworks. Legal departments and HR teams must ensure that employee grievances are addressed through correct channels.
Implications for Employees
- Employees have clear and enforceable rights under Indian labour laws, particularly in relation to wages and termination.
- An arbitration clause in the employment contract does not prevent access to statutory bodies like the Labour Commissioner or Industrial Tribunal.
- Courts have consistently taken a pro-employee stance when it comes to safeguarding statutory entitlements.
Conclusion
While arbitration is an alternative dispute resolution in commercial disputes, it is not a one-size-fits-all solution. In employment matters, especially those involving statutory rights and protections, arbitration clauses cannot override the law. Employers are expected to respect the jurisdiction of statutory authorities and engage with employee disputes in good faith, through the correct legal forums.
The law now is clearly settled that employment disputes governed by specific and special labour law legislations are non-arbitrable.
Footnotes
1. (2021) 2 SCC 1
2. 2024 INSC 966
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
