A collective agreement, also known as a collective bargaining agreement, is an agreement made between the management of a company and a trade union of employees that typically work for the company. The collective agreement will regulate all terms and conditions for the employees in the workplace and the duties of the employer. Both the United States and Canada recognize collective bargaining agreements. The purpose of a collective bargaining agreement is to avoid each individual employee in a specific trade from having to 'bargain' with their potential employers to create reasonable working terms and conditions. Because the employees under a trade union all in the same trade, they are grouped together. The conditions are then bargained for on behalf of the group.
Arbitration is a method of settling disputes between two parties. In the case of labor and employment, arbitration occurs between the employer and the trade union, and they are discussing the terms and conditions under which the members in the trade union will potentially work for the employer. There is a third party present during arbitration who hears both sets of evidence and makes the final decision which is enforceable in court. When leaving arbitration after the third party adjudicator rules, both parties agree to honor the terms and conditions they agreed on. A disadvantage of arbitration is that the wealthier or more powerful of the two parties may have stronger influence in the decision ruling, however, when a trade union represents a group of employees, the power tends to become balanced. Many parties tend to use arbitration because it is a much cheaper solution to bringing a dispute to court.