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12 March 2024 Arbitration clauses in employment contracts

In our daily practice, we see an increase in employment law disputes. Whether this trend is due to a social change (decreasing reluctance to let a difference of opinion escalate in court) or whether it is - quite profanely - due to the fact that more and more private individuals have legal expenses insurance, we cannot judge. 

Employers, who are increasingly confronted with reference letter claims, bonus payment requests, (allegedly) abusive dismissals and other claims, are asking themselves whether there are efficient and up-to-date alternatives to the traditional state court procedures, which are perceived as slow, expensive and formalistic. 

Would it be possible and sensible to resolve such employment law disputes in arbitration proceedings? In this blog, we show in which situations arbitration clauses are permissible. We then set out the advantages and disadvantages of arbitration proceedings in employment law disputes.

I. What are arbitration clauses and arbitration proceedings?

An arbitration clause is a contractual provision whereby parties can agree in a contract to use an alternative method of conflict resolution in the event of a dispute. Instead of taking legal action before ordinary (state) courts, the parties decide to resolve potential disputes before an arbitration tribunal (private court). The decision of an arbitration court can be recognized and enforced by means of legal enforcement.

II. When is arbitration possible?

The question of whether an employment law claim is arbitrable, i.e. whether it can be the subject of arbitration proceedings, is influenced by several factors. It is important whether the employment relationship is national or international and whether the dispute arises in the context of individual (between employee and employer) or collective (e.g. between employers' associations and trade unions) employment law.

A. Swiss employment relationship (domestic arbitration)

1. Individual employment law disputes

Article 354 of the Swiss Code of Civil Procedure ("CPC") stipulates that, in principle, any claim can be the subject of arbitration proceedings, provided that the parties are free to dispose of it (criterion of free disposal). In a leading decision, the Federal Supreme Court had to deal with the question of whether individual employment law disputes are also freely disposable and therefore arbitrable. In its decision, it held that claims arising from the mandatory provisions of employment law could not be renounced. Consequently, employment law disputes regarding domestic relationships are not arbitrable, with a few exceptions. With this rejection of arbitration proceedings in the area of individual employment law, the Federal Supreme Court wanted to ensure better protection for the rights of employees in Switzerland.

In practice, this means that an arbitration clause agreed in the employment contract cannot be enforced against the employee if, for example, he wishes to assert his claim for compensation for unfair dismissal. In such a case, the relevant state court has jurisdiction to adjudicate the dispute.

An exception only applies if the employee and employer only reach an arbitration agreement retrospectively - at the earliest one month after the end of the employment relationship. In such a scenario, the parties are free to go to arbitration. However, concluding an arbitration agreement retrospectively often proves difficult in practice, particularly because employees generally have little interest in arbitration proceedings, which tend to be more costly.

Conclusion: Due to the restrictive interpretation by the Federal Supreme Court, arbitration is effectively not applicable in national and individual employment law cases. If the employment relationship is purely Swiss, the clause contained in the employment contract is likely to be inadmissible as a rule. Apart from this, arbitration proceedings are generally more expensive. The parties benefit from numerous advantages of the simplified state procedure (lower costs, quicker settlement of proceedings, etc.), especially if the amount in dispute is less than CHF 30,000.

2. Collective employment law

The situation is different in collective employment law, which deals with disputes between employers' associations and trade unions. In practice, collective employment agreements regularly provide for the appointment of private arbitration courts. Often, the basic procedural provisions - i.e. agreed rules on how the proceedings before the arbitration tribunal should be conducted - are also set out directly in the collective employment agreement.

In addition to the high degree of confidentiality, the parties to a collective employment agreement benefit from arbitration proceedings, as they are free to choose the arbitrators. This makes it possible to guarantee professional and personal competence.

B. International employment relationship (international arbitration)

In contrast to domestic arbitration, the requirements for eligibility for arbitration in an international context are less restrictive in one key respect: while Article 354 of the CPC stipulates that the claim must be freely disposable, Article 177 paragraph 1 of the Federal Act on Private International Law (PILA) provides for a more flexible rule. According to this latter provision, any pecuniary claim can be the subject of arbitration proceedings.

In the context of international arbitration, most employment law claims, including those under individual employment law, are considered arbitrable (e.g. outstanding salary payments or compensation for unfair dismissal). This is due to the fact that in employment law, monetary claims and therefore pecuniary claims are usually the subject of legal disputes. International arbitration proceedings before specialized arbitration tribunals based in Switzerland are therefore also possible in the context of employment law and are frequently used in practice. One well-known example is the Court of Arbitration for Sport (CAS) in Lausanne, which is notably responsible for arbitration proceedings in international professional sport.

III. When does arbitration make sense?

The decision for or against arbitration in an employment law context should be well thought through and based on the specific circumstances and preferences of the parties involved. Should arbitration proceedings with an employment law subject matter actually be permissible, the following aspects should be included in the consideration of whether arbitration proceedings would also make sense: 

  • Advantages:

    • Confidentiality: Arbitration proceedings generally offer a higher level of confidentiality compared to public court proceedings. This can be particularly interesting for the parties if sensitive information must remain confidential.   
    • In-depth expertise of the arbitrators: By allowing the parties to choose the arbitrators, it can be ensured that the arbitrators have in-depth knowledge of employment law. For example, the CAS is highly specialized in sports law (frequent disputes involving team athletes include outstanding salary payments or compensation claims due to unjustified contract termination). It offers dispute resolution for internationally active professional athletes. 
    • Flexibility: Parties to arbitration proceedings have the option to choose the procedural rules, the language of the arbitration proceedings and the place of arbitration. This means that the interests of the parties are taken into account more effectively. 
    • Enforceability: Arbitration awards can be enforced internationally. This can be particularly advantageous in cross-border employment relationships. 
  • Disadvantages: 

    • Costs: A significant disadvantage of arbitration proceedings is the potentially high financial burden. The parties must bear the fees for arbitrators, lawyers' fees and procedural costs. This can lead to considerable expenses, especially if the proceedings are complex and extend over a longer period of time. It is not in the interests of the parties to forego the available free, simplified state procedure, particularly in the case of employment law claims with amounts in dispute of up to CHF 30,000.
    • Limited recourse: In contrast to state court proceedings, arbitration proceedings offer only limited possibilities for appeal. A decision by an arbitration tribunal can only be appealed to the Federal Supreme Court. 
    • Duration: Depending on the complexity of the matter, arbitration proceedings can take longer than state court proceedings. For this reason, several factors must always be taken into account when considering whether arbitration proceedings are actually worthwhile in a specific case. 

* * *

In view of the above, there are only a few constellations in which an arbitration clause or arbitration proceedings are permissible at all. This is also the reason why arbitration proceedings are rare in employment law disputes. However, if an arbitration clause is permissible and the circumstances are suitable, arbitration proceedings can be an efficient and modern alternative to state court proceedings.

Do you have any further questions on this topic?

Our employment law team will be happy to help you at any time.

Authors: Marc Ph. Prinz and Marko Dobec