Employment contracts are fundamental in defining the relationship between employers and employees and outlining the terms of employment such as role, compensation, dispute resolution, duties, termination, etc. Ensuring that effective dispute resolution mechanisms are provided in the employment agreement is crucial as most of the employment disputes in India arise from conflicts over the terms of employment or in case of termination, wherein employees claim illegal termination.
The key legislation in India which regulates employee disputes is the Industrial Disputes Act, 1947 ("ID Act"). Special national tribunals, labour courts and other mechanisms have been set up under the ID Act for resolution of employee disputes. Other statues such as the Payment of Gratuity Act, 1972, Payment of Wages Act, etc. also provide for special courts for resolution of employee disputes.
With the rise of alternative dispute resolution (ADR), arbitration is increasingly being considered for dispute resolution in employment matters.1 As businesses seek faster dispute resolution mechanisms, arbitration has emerged as a potential alternative to litigation. However, the arbitrability of employment contract remains complex, shaped by the parties' choice of arbitration, statutory protections, and judicial interpretations. While arbitration offers efficiency and confidentiality, its applicability in employment matters depends on the nature of the dispute and the statutory frameworks governing labour relations. This article examines the evolving legal position on the arbitration of employment disputes in India in light of legislative provisions, judicial rulings and emerging trends.
Legal Framework Governing Arbitration in Employment Disputes in India:
- Arbitration and Conciliation Act, 1996 - The Arbitration and Conciliation Act, 1996 ("AC Act") is the primary legislation governing arbitration in India. It provides a structured mechanism for dispute resolution and promotes arbitration as a preferred alternative to litigation. The AC Act does not explicitly address the arbitrability of employment disputes which creates ambiguity on the said matter. Section 2(3) of the AC Act provides that certain disputes may not be arbitrable if other laws expressly or implicitly prohibit arbitration.2 This provision has been a key factor in various judicial precedents in determining whether employment disputes can be settled through arbitration. Parties can settle disputes through arbitration only when they have entered into a valid arbitration agreement/ arbitration clause (as a part of the employment agreement or otherwise) through which the same has been mutually agreed and the said agreement entails all valid essentials of an agreement.
- Industrial Disputes Act, 1947 - The ID Act provides for voluntary arbitration as a mechanism for dispute resolution. Voluntary arbitration was introduced in the ID Act through amendments to facilitate speedy settlement of employee disputes, protect the interests of workmen and promote industrial harmony. Section 10 A of the ID Act provides a framework for voluntary arbitration as an alternative to adjudication by labour courts or tribunals. It enables employers and workmen to resolve disputes through a written arbitration agreement, ensuring a quicker and less adversarial resolution process. Section 10 A of the ID Act specifies that if an industrial dispute exists or is apprehended and the employer and the workmen agree to refer the dispute to arbitration, they may, at any time before the dispute has been referred to a Labour Court, by a written agreement, refer the dispute to arbitration to such person as an arbitrator as agreed under the arbitration agreement. Further, Section 10 A (5) of the ID Act, specifically excludes application of the AC Act to the arbitrations under the said Section. The Section also provides that the arbitration agreement must specify the arbitrator(s) chosen by the parties and be signed by both the employer and the workmen or their representatives. A copy of the agreement must be forwarded within one month to the appropriate government and the conciliation officer, following which the government must publish it in the official gazette. The arbitrator(s) are required to investigate the matter and submit a signed award to the government. Once awarded, the award carries the same legal effect as an award issued by a labour court or tribunal.
Arbitrability of Employment Disputes
The Indian judiciary has played an important role in evolving the jurisprudence of arbitrarily of employment disputes. Indian courts in various cases have examined whether employment disputes can be resolved through arbitration. To understand the arbitrability of employment related matters, it is essential to first grasp the general scope of arbitration in India. The AC Act does not explicitly list the types of disputes that are non-arbitrable. Instead, the law on this subject has developed through various judicial pronouncements. Drawing on the principles laid down by the Supreme Court in the case Booz Allen & Hamilton v. SBI Home Finance,3 in the landmark judgement of Vidya Drolia v. Durga Trading Corporation4, the Supreme Court laid down a fourfold test to determine when the subject matter of a dispute in an arbitration agreement is not arbitrable:
- when cause of action and subject matter of the dispute relates to actions in rem (actions that affect public), that do not pertain to subordinate rights in personam (private rights) that arise from rights in rem.
- when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable;
- when cause of action and subject matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable; and
- when the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).5
The Court further observed that these tests are not watertight compartments and overlap. When applied holistically and the answer is affirmative, the subject matter of the dispute would be non-arbitrable.
The arbitrability of labour disputes arose in Kingfisher Airlines v. Captain Prithvi Malhotra6 wherein the Bombay High Court applied the principle of the four-fold test. The Court analysed the scheme of the ID Act and observed that the same indicates that an otherwise private dispute between the employer and employee, has been placed on a different plane. The dispute and its resolution, impacts not just the concerned individual employee, but has the potential to impact other employees and consequently the industry. The Court further observed that the distinctive feature of voluntary arbitration provides a detailed procedure on how the arbitration thereunder shall proceed, which includes mandatory forwarding of the arbitration to the appropriate government and the Conciliation Officer. Section 10 A of the ID Act does not entirely leave the matter in the hands of the parties to the arbitration agreement and the private fora of their choice. This shows that an industrial dispute is not treated solely as an individual dispute, but is always approached from the context of the larger picture of the industry as a whole.7 The Court ruled that adjudication of industrial disputes is reserved by the legislature exclusively for the authorities established under the ID Act, as a matter of public policy. Therefore, by necessary implication the same stands excluded from the purview of the private fora of the arbitrator. Consequently, the industrial dispute is rendered non-arbitrable outside the ID Act.8
The ruling of the Supreme Court in Dushyant Janbandhu v. Hyundai Autoever India Pvt. Ltd.9, also serves as an important reference point for understanding the extents of arbitration in employment disputes. The Court ruled that disputes concerning non-payment of wages and the legality of termination, when pending before statutory authorities, are non-arbitrable. The Court observed that the employee's termination was not based on the violation of non-disclosure obligations, and the employer's attempt to introduce this ground was a clear afterthought. It further held that the dispute regarding illegal withholding of salary falls exclusively under the jurisdiction of the concerned authority under Section 15(2) of the Wages Act, while the question of wrongful dismissal lies within the domain of the industrial tribunal under Section 2(A) of the ID Act both being non-arbitrable. Relying on Vidya Drolia v. Durga Trading Corporation, the Court reiterated that matters barred from arbitration under statutes are not arbitrable. It also found that the Employer's Section 11 petition under the AC Act was a tactic to deter the employee from exercising statutory remedies. Accordingly, the Supreme Court allowed the employee's petition and imposed a cost of ₹5 lakhs on the employer.
However, there have been multiple instances where Indian courts have permitted arbitration on the basis of meeting the four-fold test discussed above. For instance, in the case of Weiss Technik India Private Limited v. Ms. Bollupalli Madhalavilatha10, the Telangana High Court reaffirmed that post the 2015 amendment to the Arbitration and Conciliation Act, the role of the court is limited to determining the existence of an arbitration agreement. Once it is established that such an agreement exists, and a dispute has arisen between the parties, the Court is obligated to intervene only for the purposes of appointing an arbitrator, particularly where the parties are unable to agree on one. Importantly, while doing so, the court must refrain from delving into the merits of the dispute. The Court further observed that although the claims may amount to fraud, they relate to a civil aspect of fraud, and are therefore arbitrable and accordingly referred the matter to arbitration. The Hon'ble Delhi High Court ("Delhi HC"), in a recent judgment titled Lily Packers Private Limited Vs. Vaishnavi Vijay Umak and Ors.11 delivered an interesting opinion on the arbitrability of employment disputes pertaining to negative covenants in employment agreements. The judgement validated the legality of the lock-in period and other negative covenants during employment and also held that employment disputes pertaining to negative covenants are arbitrable under Indian laws.
Following these judicial precedents and statutory interpretation, arbitration may be permitted in certain employment disputes, particularly those involving contract violations, misconduct, misdemeanours, lock-in periods, exclusive service clauses, restrictive covenants, training bonds, confidentiality, etc., if the employment agreement provides for arbitration. However, if an employment dispute involves criminal offenses, public policy violations, third-party rights, rights in rem, or other non-arbitrable issues, in those cases courts may exercise their rights to adjudicate the dispute despite an arbitration agreement. It is pertinent to note here that contracts having arbitration clauses are duly and adequately stamped in order to secure its enforceability and validity under law as unstamped arbitration agreements are subject to challenge under law.
Key Challenges in Arbitrating Contractual Employment Disputes
Arbitrating employment disputes in India faces significant challenges due to legal, policy, and power dynamics between employers and employees. One of the primary hurdles is public policy concerns, as labour laws are designed to protect workers' rights and cannot be overridden by private arbitration agreements. Another key challenge is the unequal bargaining power between employers and employees. Unlike commercial contracts, employment contracts often involve standardized arbitration clauses drafted by employers, leaving employees with less negotiation power. This raises concerns about procedural fairness, especially when it imposes high costs, foreign jurisdictions, or institutional rules that disadvantage employees. Lastly, the non-arbitrability of certain industrial disputes presents a legal barrier. Since industrial disputes involve broader questions of public interest, worker protection, and statutory rights, they cannot be resolved through private arbitration. This principle ensures that employees are not deprived of statutory remedies, reinforcing the primacy of specialized labour forums over arbitration in employment matters.
Recent Trends and Evolving Jurisprudence
The arbitration landscape for employment disputes in India is gradually evolving, with courts and policymakers recognizing arbitration as a viable mechanism in employment contracts. Courts have upheld arbitration clauses in high-level employment agreements, particularly where disputes are purely contractual and arbitrable. A significant development is the emergence of hybrid dispute resolution models, such as mediation-arbitration (Med-Arb), where mediation is attempted first, and unresolved issues are then referred to arbitration. This model is increasingly being explored in employment contracts to ensure amicable resolutions while maintaining arbitration as a fallback mechanism. From an international perspective, many jurisdictions, including the United States and European Union, have integrated arbitration in employment disputes with safeguards to prevent unfair practices.12 Countries like Singapore and Hong Kong have well-defined frameworks allowing arbitration in employment matters, provided that employee consent is obtained and procedural fairness is maintained. As India moves towards modernizing its arbitration framework, global best practices may influence legislative and judicial approaches to employment arbitration, leading to a more structured and balanced dispute resolution mechanism.
Conclusion
The arbitrability of the employment relationship in India remains a complex issue, requiring a balanced approach that safeguards employee rights and employer while ensuring efficient dispute resolution. While arbitration offers speed and flexibility, statutory employment disputes remain non-arbitrable due to overriding labour protections and public policy concerns. To address these challenges, reforms should focus on voluntary arbitration agreements, preventing unilateral imposition by employers and ensuring cost-effective mechanisms with fair procedural rules. Legislative clarity is essential to define which employment disputes are arbitrable, potentially through amendments to the legislation or a specialized employment arbitration statute. Strengthening ADR mechanisms within Labour Tribunals and National Industrial Tribunals can facilitate faster dispute resolution while upholding statutory rights. Implementing structured arbitration frameworks, practically-cost effective approach, easily accessible, hybrid dispute resolution models, and procedural safeguards India can create a fair and efficient employment arbitration system that balances employer and employee interests while maintaining legal certainty.
Footnotes
1. Labour Arbitration and Commercial Arbitration, SSRN (July 15, 2021).
2. Arbitration and Conciliation Act, No. 26 of 1996, § 2(3), Acts of Parliament, 1996 (India)
3. 2011 (5) SCC 532
4. (2020) 19 SCC 401
5. Ibid para 45
6. MANU/MH/1921/2012
7. Ibid para 18
8. Ibid para 20
9. 2024 SCC OnLine SC 1678
10. 2021 SCC OnLine TS 3644
11. 2024 SCC OnLine Del 4725
12. J. Smith, Arbitration in Employment Disputes: Comparative Analysis of U.S. and EU Practices, 12 Int'l J. Arb. L. 89 (2023).
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