Utilising Arbitration In Resolving Employment Disputes: Scope And Limitations

Globalization has led to an increase in cross-border employment relationships. Companies now employ individuals from other countries to access global talent, while employees are equally drawn to cross-border opportunities as they view working in a foreign company as a life-changing opportunity.

This dynamic has enabled companies to expand globally and remain competitive in a rapidly evolving market. However, as with all contractual relationships, employment disputes inevitably arise. These disputes, which range from wrongful termination and discrimination to contractual breaches, present unique challenges in cross-border employment relationships where legal frameworks, cultural norms, and ethical standards differ significantly.

For employers and employees alike, understanding the most effective means of resolving such disputes is crucial. Among available mechanisms, arbitration has emerged as a preferred alternative to litigation, particularly in international employment contexts.

Understanding Employment Disputes and Arbitration

An employment dispute arises from disagreements between an employer and employee relating to the rights of the employee, the obligations, or the conditions of employment.

Arbitration is a process through which a neutral third party (the arbitrator) hears both sides and renders a binding decision outside of traditional court proceedings. Arbitration is valued for its efficiency, confidentiality, flexibility, and enforceability, making it particularly attractive for cross-border employment disputes that may involve multiple jurisdictions.

In an increasingly globalized world, arbitration offers a neutral forum to resolve disputes involving parties from different legal systems. However, its applicability in employment contexts is still evolving and sometimes controversial, as labour rights are seen as a matter of public policy, and imposing arbitration clauses can be seen as depriving an employee of the opportunity to meaningfully exercise their rights.

An arbitration begins with an arbitration agreement, as it expresses the parties' consent to submit disputes to arbitration rather than to the courts. Such an agreement may be contained within an employment contract or concluded separately after a dispute arises. Under the Nigerian Arbitration and Mediation Act 2023¹, an arbitration agreement is one in which the parties agree to submit to arbitration all or certain disputes arising between them in respect of a defined legal relationship. Under the Arbitration and Mediation Act, an arbitration agreement must be in writing.

In Nigeria, although employment contracts are not explicitly listed under the Act's definition of "commercial agreements," parties to an employment agreement may nonetheless adopt arbitration as a dispute resolution mechanism, and the National Industrial Court has referred such cases to arbitration where it is contained in the employment agreement.

In the United States, the Supreme Court has upheld the enforceability of mandatory arbitration clauses in employment contracts², as allowed under the Federal Arbitration Act. However, decisions such as Armendariz v. Foundation Health Psychcare Services Inc³shows that while the Supreme Court supports binding arbitration of employment disputes, whether contractual or tort-based (such as discrimination or harassment claims), for an arbitration agreement to be enforceable, the process must be fair, impartial, and not unduly restrictive, ensuring that employees retain a genuine opportunity to vindicate their rights in a just forum⁴.

In Kenya, the courts have held that an arbitration clause in an employment contract may be unenforceable if the clause is "incapable of implementation/being performed" (the "absurdities" test). For example, in Nyamweya & another v Riley Barasa Services Limited [2013] eKLR, an arbitration clause was held unenforceable under such reasoning.

Hence, arbitration clauses in employment agreements are recognized; the key question is usually whether such an agreement is freely and voluntarily entered into, given the inherent power imbalance between employer and employee.

Advantages of Arbitration in Employment Disputes

To begin the arbitration process, a notice of arbitration has to be sent out to the other party, as arbitration proceedings are deemed to have begun when the notice has been received by the other party⁵.

Arbitration gives the parties the freedom to choose the rules and procedure they want to be bound by, including the number of arbitrators, and parties want to govern the dispute. Section 15 (1) of the Arbitration and Mediation Act 2023 provides that the arbitration tribunal shall decide the disputes in accordance with the rules of court chosen by the parties. However, where the parties fail to decide which rule to be bound by, the arbitrators will decide the conflict of law rules that will be applicable⁶.

The UK Employment Lawyers Association (ELA), in its 2017 Report on Arbitration and Employment Disputes, highlighted the growing use of arbitration clauses in employment agreements. There are several reasons arbitration may be suitable for resolving employment-related disputes:

1. Confidentiality

Arbitration offers privacy and confidentiality, valuable when disputes involve sensitive workplace issues such as discrimination, harassment, or dismissal. Parties may prefer to avoid public scrutiny or reputational damage that can accompany litigation.
However, this confidentiality can also raise public policy concerns, especially where employees are compelled to agree to confidential settlements that limit transparency or accountability.

2. Efficiency and Flexibility

Arbitration allows parties greater control over procedural rules, timelines, and the choice of arbitrator. This flexibility often leads to faster and less adversarial proceedings than traditional court litigation. The principle of party autonomy, a hallmark of arbitration, enables both sides to tailor the process to their unique needs.

3. Simplified Rules of Evidence

Unlike litigation, arbitration often employs simplified evidentiary rules, reducing procedural complexity and cost. This can be particularly advantageous where the dispute involves multiple jurisdictions or different legal systems.

4. Enforcement of Arbitral Awards

One of the most significant benefits of arbitration is the ease of enforcement.
Under the New York Convention on the Recognition and Enforcement of Arbitral Awards (1958), ratified by over 159 countries, arbitral awards are recognized and enforced almost globally as if they were judgments of local courts. This offers a distinct advantage in cross-border employment contracts, where the employer or employee may reside or operate in different jurisdictions.

Limitations of Arbitration in Employment Disputes

Despite its advantages, arbitration with regard to employment disputes is not without controversy. Key limitations include:

a. Power Imbalance and restricts access to justice:
Employees often lack equal bargaining power as their employers can set the terms for arbitrations to be more favourable to them and frustrating for the employee. An example of this was seen in Uber Technologies Inc. v. Heller (2020 SCC 16) where David Heller, an Uber Eats driver, filed a class action for employment benefits under Ontario's Employment Standards Act. His contract labelled him an independent contractor and required disputes to be arbitrated in the Netherlands under ICC rules, at a prohibitive cost of about US$14,500. The Ontario Superior Court initially stayed the proceedings in favor of arbitration. The Court of Appeal for Ontario reversed this, finding the arbitration clause unconscionable. The Supreme Court affirmed the Court of Appeal's decision, holding that the clause was unfair and oppressive, effectively denying Heller access to justice.

b. Public Policy Concerns:
The confidential nature of arbitration is a bit problematic as it can also conceal systemic workplace issues from public scrutiny, undermining broader policy goals of fairness and accountability. Arbitration makes it difficult for the public and regulatory bodies to identify and address systemic problems in the workplace. International arbitration for employment disputes is complex, as it balances contractual freedom with public policy concerns that protect employees, who are seen as not being a commodity. In UDOM UFOK OBOT V COMMUNICATION NETWORK SUPPORT SERVICES LTD, the National Industrial Court explained that "labour is not a commodity," as stated in the ILO's founding documents, emphasizing that workers should not be treated as mere items of commerce.

c. Risk of Inconsistent Decisions:
Arbitration lacks a formal system of precedent, meaning arbitrators are not bound to follow previous decisions. As a result, similar cases may yield different outcomes depending on the arbitrator's interpretation of the facts or applicable law. This absence of uniformity can create uncertainty for both employers and employees, undermining predictability and fairness in the resolution of employment disputes.

Conclusion

As globalization continues to blur geographical boundaries in the workplace, international arbitration presents an increasingly relevant tool for resolving employment disputes efficiently and privately. Its strengths make it an attractive option for employers and employees operating across borders.

However, arbitration's suitability in employment contexts must be carefully assessed against concerns of fairness, voluntariness, and public interest. The challenge lies in balancing efficiency with ensuring that arbitration remains not only a convenient mechanism for employers but also a fair and accessible forum for employees.

Footnotes

1 Section 2 of the Arbitration and Mediation Act 2023

2 Gilmer v. Interstate/Johnson Lane Corporation (1991) 50 U.S. 20

3 (August 24, 2000) 00 C.D.O.S. 7127

4 https://higgslaw.com/is-your-employment-arbitration-agreement-enforceable/

5 Article 3 of the Arbitration and Mediation Rules

6 Section 15(3) of the arbitration and mediation act 2023

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.