Alternative methods of dispute resolution III

The final form of third-party intervention in labor negotiations is binding arbitration. Under a system of binding arbitration a neutral third party listens to both sides of the dispute and then issues a decision that the parties are committed to accept. Binding arbitration is the most intrusive form of third-party intervention because it allows an outsider to dictate the terms of the settlement.

There are several forms of binding arbitration. Interest arbitration is the use of arbitration to determine the terms and conditions of a new contract, while rights arbitration on the other hand is used to adjudicate grievances or disputes over the interpretation or application of the terms of an existing contract. The use of binding arbitration to settle grievance disputes is quite common and is one of the most distinctive features of collective bargaining. Virtually every collective bargaining agreement provides for a grievance process where workers can seek redress against an owner, company or management decisions or policies that are thought to violate the contract. Most grievance procedures involve a series of hearings culminating in binding arbitration if the dispute cannot be resolved at an earlier stage. The major impetus behind the widespread adoption of rights arbitration is the desire of both the employees and the employers to replace the strike with an alternative form of dispute resolution that is less disruptive to the day-to-day employment relationship and that imposes lower costs on both sides.

In the private sector interest arbitration is much rarer. When it comes to negotiation of a new contract, few unions or companies are willing to give up their right to strike or to place their futures in the hands of an outside arbitrator.

Interest arbitration is much more common in public sector bargaining primarily because many public sector workers do not have the right to strike and an alternative form of dispute resolution is necessary. The positive side of interest arbitration is that it permits bilateralism between the employees and employers in public sector negotiations without the threat of a strike. Interest arbitration also has several negative aspects. It is often alleged that interest arbitration has a chilling effect on the motivation of the employer and the employees to bargain and make concessions. Without the prospective costs of a strike neither side loses as much by being intransigent. Also if both sides anticipate that the arbitrator will split the difference between their respective positions, they have a strong incentive to exaggerate their final positions in order to win a more favorable settlement. Interest arbitration may also lead to what is known as a narcotic effect in bargaining. The narcotic effect refers to the possibility that once the bargainers have used arbitration they may automatically resort to arbitration in subsequent negotiations rather than reach a settlement on their own. The bargainers may for example find it easier to rely on a third party to resolve their dispute rather than undertake the hard work and political risks within their own organizations of fashioning an agreement. A final negative impact at least from the perspective of public officials and taxpayers of interest arbitration is that it seems to result in higher wages and benefits for workers relative to negotiated settlements.

These negative side effects of interest arbitration have led to the development of final offer arbitration. Under final offer arbitration the arbitrator chooses the final offer of one side or the other as the settlement. The hope is that the ‘all or nothing’ nature of the award will provide a strong incentive to both sides to moderate their positions and reach a settlement on their own - it also leaves a stronger residue of bad feelings between the employees and the management because it produces a clear winner and loser.