Thursday, February 10, 2011

Issue 20

Dear Committee Members
Happy New Year, and welcome to the 20th edition of the International Employment Lawyer.
Many thanks to all the committee members who submitted articles for inclusion in this edition - we have articles on key employment issues arising in a number of jurisdictions including New Zealand, Spain, Canada and the US.
The next edition will be published in June. Please contact me if you are interested in submitting an article or if you have any questions.
Helen Colquhoun, Withers LLP (New York)

Worker Classification and Finding the Correct Employer

By Jim Klein and Susan P. Serota, Pillsbury Winthrop Shaw Pittman
The US tax authorities have launched a major project on worker classification, with a particular focus on the issues of worker classification, payroll tax reporting, and executive compensation. While most US companies think of this as a problem of characterizing services as either employment or independent contractor services, multinational employers should be thinking of the issue as also determining the correct employer among their multinational affiliates. Very significant employee benefit, social security, tax withholding and corporate deduction issues hinge on the correct and (usually) consistent determination of employment status.

For most large employers, there is generally a good sense of who are their employees. While there may be significant numbers of independent contractors, large employers are aware of the serious implications of mischaracterization of individuals as independent contractors when they are really employees.

For the large multinational employers, the issue is similar -- but with the crucial difference that they also should define who is the correct employer. For example, in an all-US context, the status of an individual as an employee may be clear, and that employee’s employer may also be clear. However, if there is some confusion as to whether a US employee is employed by, say, the parent organization, or a wholly-owned US subsidiary, the reasonable response may be “who cares?” That’s because all the employees are covered by social security, all their compensation is deducted on a consolidated corporate return, all their pay is on a common payroll and often all employees have the same benefits, without regard to which company within the US controlled group is their employer. But when some of the possible affiliated employers are not US companies, the issues get more serious.

Let’s review briefly the US test for employment between an employer and an employee. While there can be shades of difference, this test of employment is usually the same for payroll taxes, income tax withholding, employer compensation deductions, social security coverage and ERISA-based benefit plan coverage. This test has been captured by the IRS in its “20 factor test” set forth in Rev. Rul. 87-41 which now can be summarized as providing that employment results from a relationship between a service recipient and a service provider, where the service recipient (employer) tells the service provider (employee) what services to provide, when and how they should be provided. In other words, the IRS in reviewing the degree of control of the employer over the worker considers (1) behavioral control – the right to direct or control how the worker does the work; (2) financial control – whether the employer has the right to control the economic aspects of the worker’s job; and (3) the type of relationship – is there a written contract in place, whether benefits are provided, and whether there is an expectation that the relationship will continue indefinitely. While this test is usually applied to determine if a service provider is an employee, it is also an important indicator of the exact identity of the employer.

For example, let’s assume we are dealing with executive E, who is clearly in an employment relationship with the US parent company, P. While E is working for P, E is covered by US social security and US benefit plans, is subject to US tax withholding and reporting, and all of E’s compensation is deducted by P.

Now let’s assume P sends E to work in another country where it has significant business operations, say, the UK. P has presumably already faced the major legal and tax decision of how P will carry on these business operations in the UK. It is possible that P has decided to have a direct presence in the UK, hiring employees there, renting office space, entering into sales contracts, etc. If P has decided to take this “direct” approach, P will have a branch operation in the UK, and while still a US corporation, with all the legal and tax implications of that status, P will also be operating in the UK, have a permanent establishment there, have UK employees, etc. and would be a taxpayer and employer in the UK.

While this approach is taken by many US businesses, by far the more common approach is that P will form a UK subsidiary, F. F will carry on P’s business in the UK. P will try to avoid having a permanent establishment of P in the UK, and will isolate its legal, tax and employment obligations in the UK to be obligations of F.

Now let’s return to our executive E. When P sends E to the UK (and P may be sending many other Es to the UK under its business plan), P will probably take the position that E is an employee, but an employee of F, the UK subsidiary. While there are some differences, generally the US and the UK have the same tests for employment. Evidence that E is an employee of F may be from E’s immigration status, E’s agreeing to abide by the customs and practices of the UK office, and would also be evidenced by the fact that P does not think E (and E’s eventual cohorts) is carrying on P’s business. P does not think it has a branch in the UK, nor does P think it has a permanent establishment in the UK.

But when we turn to the compensation and benefit issues noted at the outset of this article, the question becomes “has P been consistent?” For example:
  • Did P make F a “participating employer” for employee benefit plan purposes? If not, then technically E would drop out of medical, pension, 401k, etc. coverage.
  • Is E treated as still in US social security? US social security rules state that coverage for social security (FICA) purposes is mandatory for services inside the US, but for services outside the US, E has to be a “US person” (let’s assume E is a US citizen, and hence a US person) and E’s employer must be an “American Employer” [IRC section 3121(b)]. But E is an employee of F, a UK corporation. This means E is not in US social security. While there is a social security “totalization” treaty between the US and the UK, this does not grant US social security coverage. The treaty merely sorts out the correct coverage for individuals caught in two systems. For the treaty to apply, it requires such coverage under US domestic law, and then grants exemption from UK social security (a few treaties grant coverage, but they are unusual in the US network).
  • Who is deducting E’s compensation? The UK would probably grant a tax deduction to F for this compensation, but the US will deny a corporate tax deduction for P for an employee who is not employed by P. So P should not be deducting pay, and also should not be deducting contributions and benefits under pension, 401k, medical, etc. when they are given for service with F.
  • Who has an obligation to withhold and report on E’s compensation? While many employers follow the trail of payroll and currency, that is not determinative. Assume E is paid in sterling. Much of E’s compensation will be subject to UK income tax withholding, and under US rules there need not be US withholding for a US citizen working outside the US and subject to local withholding. But if there are elements of compensation taxable in the US and not in the UK, there will be US withholding required on that compensation. While F may believe that is not F’s problem, F has an obligation under the US-UK income tax treaty to assist in the administration of US tax laws, and of course P has an obligation as a US taxpayer to abide by these US rules. Therefore there could be an obligation to withhold and remit US dollars to the IRS, even for a sterling payroll employee.

What about “secondment?” This is the often cited justification for ignoring these employment issues. P declares that E has been “seconded” to the UK, and somehow that answers all the questions about inconsistent treatment as an employee. Unfortunately, this term “secondment” (in a US dictionary it will usually be defined as a British military term) does not answer these legal issues which are grounded in US concepts of employment.


Can the employment tests be different in different countries? Yes, certainly. For most civil law jurisdictions (as opposed to those jurisdictions grounded in common law) there may be a very different test. In that case, inconsistency is fine. For example, a French subsidiary of P, F2, may properly consider E2 to be its employee under French tests, and yet under US tests E2 might be an employee of P.


The bottom line: As the IRS’s new audit program looks more closely at employee status, keep in mind that part of that determination of employment status is finding the right employer. This is of particular importance for companies with multinational businesses.



Susan P. Serota is a partner and Jim Klein is a counsel in the New York office of Pillsbury Winthrop Shaw Pittman and are members of the firm’s Executive Compensation and Benefits section.

Canada: Between a Rock and a Hard Place

Canada – Between a Rock and a Hard Place: Conflicting Obligations between U.S. Security Requirements and Canadian Human Rights Legislation

By Trevor Lawson, Partner, McCarthy T├ętrault LLP, Toronto, Ontario, Canada

Overview

Changes in technology and globalization of the world economy have led to a significant increase in the number of people and the amount of data that moves across international borders into other countries, and particularly into the United States. These exchanges can often be anything but seamless. Differences in the values of legal system on issues such as human rights, protection of personal information and security have been emphasized in this manner, as complying with the laws of one country can often lead to violating the laws of another.

For many companies with international operations, these issues are complicated by the fact that in the United States, where security concerns have increased significantly since 2001, it is not uncommon for laws to be created which impact not just how employees are treated in the United States, but also how they are treated in other jurisdictions, including Canada. Recently, the Quebec Human Rights Tribunal decision Commission des droits de la personne et des droits de la jeunesse c. Bombardier Inc. (“Bombardier”)[1] considered the impact of U.S. aviation security regulations on Bombardier’s duty under Canadian law to not discriminate when offering a pilot licensing program. This article will discuss the employment implications of the decision for multinational organizations seeking to do business in Canada, or Canadian companies with operational ties to the United States.

The Bombardier Case

A Canadian pilot of Pakistani origin and Muslim faith filed a claim under the Quebec Charter of human rights and freedoms (“Charter”) alleging discrimination in the provision of a public service, and discrimination infringing on his right to safeguard his dignity and reputation. The pilot had twenty-five years of flying experience, and was seeking to be trained on various Bombardier aircrafts for employment opportunities between 2004 and 2008. The Bombardier Aerospace Training Centre (“BATC”) in Montreal offered the training under both U.S. and Canadian licensing programs. United States security regulations, however, required potential trainees under the U.S. license to obtain security clearance from the U.S. Department of Justice (“DOJ”) prior to 2005, and after 2005, the U.S. Transport Security Administration (“TSA”).

In March 2004, the complainant was denied security clearance by the U.S. DOJ, and therefore could not train at Bombardier under a U.S. license. While the complainant sought continued review of the denial from the U.S. DOJ, he requested to be trained under the Canadian license, which did not require security clearance. The Head of Standards and Regulatory Compliance at Bombardier in Montreal refused the complainant training under the Canadian license on the basis that he had been denied U.S. security clearance. As the BATC was the only centre in Canada which offered appropriate training under the Canadian license, and as the complainant was not able to train under the U.S. license, the complainant was not able to accept numerous work offers between 2004 and 2008.

The complainant claimed discrimination against the BATC solely in relation to Bombardier’s denial of his training under the Canadian license. The Tribunal found that the reason behind the decision to refuse the complainant Canadian training was primarily that he had been refused U.S. security clearance, and should therefore be considered a potential terrorist.[2] The Tribunal further accepted expert evidence that U.S. post-9/11 security regulations had a discriminatory impact under Canadian human rights jurisprudence on Arabic and Muslim individuals based on the prohibited grounds of ethnicity or national origin.[3] Where these actions together resulted in the complainant being denied a service ordinarily offered to the public in Canada, the Tribunal held that a prima facie claim of discrimination under the Charter had been proven.[4]

In defence of the discrimination claim, Bombardier argued that it had applied a bona fide and reasonable standard, and that it would have constituted undue economic hardship for the training centre to grant the complainant training when it faced potentially severe sanctions from the U.S. authorities if it did so. The Tribunal dismissed the defence of a bona fide and reasonable standard on the basis that the BATC had applied an absolute standard for aviation security that was not required by the Canadian government. The Tribunal held that application of the absolute standard did not consider the individual circumstances of the complainant, especially since Bombardier did not know the reason behind why the complainant had been denied U.S. security clearance, and that it was not reasonable for the BATC to adopt a national security standard of its own initiative.[5]

With regard to the claim of undue economic hardship from sanctions for the violation of U.S. regulations, the Tribunal held that Bombardier had not submitted proof that the U.S. regulations applied to the Canadian licensing process. Although the U.S. regulations provided for sanctions if their own licensing processes were compromised, Bombardier could not point to any Canadian or U.S. authority which indicated that the U.S. regulations applied to the Canadian licensing process.[6] The Tribunal further held that Bombardier’s Head of Standards understood that the U.S. regulations did not apply to Canadian training, and that Bombardier could therefore not be subject to penalties through its Canadian licensing program. As a result, the defence of economic hardship became purely “hypothetical.”[7]

For its breach of the Quebec Charter, the Tribunal awarded the complainant $309,798.72 USD in damages for loss of employment income between 2004-2008[8], $25,000 CAD in moral damages for discrimination and loss of reputation, and $50,000 CAD in punitive damages for the intentional interference of a protected right by the Head of the Standards and Regulatory Compliance. The Tribunal held that Bombardier was also liable for the punitive damages awarded for the intentional actions of its employee under specific provisions of the Quebec Charter. Finally, the Tribunal ordered Bombardier to cease applying U.S. security standards to its Canadian licensing program.
Although the Bombardier case involves a human rights complaint based on the provision of services, the case is instructive on discrimination and multi-national employer obligations in the employment law context as the legal analysis for discrimination in employment under Canadian human rights jurisprudence is similar.

Existence of a Conflict

In the employment context, a preliminary observation to be made from Bombardier is that Canadian organizations must ensure that U.S. legislation does in fact require that organization to apply the U.S. regulatory standard in the Canadian context. As the Bombardier case demonstrates, where an U.S. regulatory standard is found to not be applicable, Canadian human rights tribunals and courts will not be sympathetic to an argument that, where subject matters and areas of regulation are comparable between Canada and the U.S., it is reasonable to apply an U.S. standard, or that a company should be able to adopt an U.S. standard of its own initiative.
With respect to the U.S. International Traffic In Arms Regulations (“ITAR”), which prohibits individuals holding citizenship outside of Canada and the U.S. from accessing specified information without security clearance from the U.S. State Department, the Quebec Commission des droits de la personne et des droits de la jeunesse has publically stated that it considers the application of ITARs in Canada to be discriminatory to employees based on their ethnic or national origin. In 2007 and 2008, human rights complaints of discrimination in employment settled in Ontario and Quebec, respectively, with employers agreeing to make reasonable efforts to minimize any discriminatory impacts of ITARs on their Canadian-based employees.

The issue of conflict is also relevant in instances where U.S. regulations may, upon first examination, seem to apply. If there are exceptions within the regulatory framework, or if there exist mechanisms to apply for exemptions from the regulatory requirements, there may in fact be no conflict and Canadian-based companies will be required to fully comply with Canadian human rights obligations. Potential exemptions to U.S. regulatory requirements will be considered below as a means of accommodating employees as well.

Effect of U.S. Security Legislation

As the Bombardier case illustrates, U.S. legislation which has direct or indirect adverse effects for individuals based on protected characteristics in Canadian human rights legislation will be characterised as prima facie discriminatory. Where Bombardier accepted that post-9/11 U.S. security regulation was discriminatory on the base of ethnicity or national origin, policies which incorporate security requirements based on citizenship, ethnicity, or national origin into employment applications or work distributions will likely be found discriminatory.

U.S. Regulations as a Bona Fide Occupational Requirement

Where a case of prima facie discrimination has been established, Canadian arbitrators and human rights tribunals have recognized that clear U.S. regulatory requirements which conflict with Canadian human rights legislation may be claimed as a bona fide occupational requirement, and that employers have accommodated their individual employees to the point of undue hardship.[9] This argument was unsuccessful in Bombardier as the U.S. standards clearly did not apply, but it has been accepted in the cross-border bus and trucking context, where U.S. requirements for mandatory drug testing were considered bona fide occupational requirements, as long as Canadian employers accommodated disabled employees to the point of undue hardship.[10]

In order for a policy instituted under an U.S. regulatory requirement to satisfy the bona fide occupation requirement test under Canadian human rights legislation, a Canadian employer must show that the policy was rationally connected to the position of employment, that the standard was adopted in good faith, and that the standard is reasonably necessary for the work-related purpose. A policy structured to impinge on an employee’s rights as little as possible in order to fulfill the cross-border regulatory requirements will likely satisfy the rational connection and good faith aspects of the test. However, under the third branch of the test of necessity, the employer must further show that it attempted to accommodate the employee to the point of undue hardship.[11]

Under this framework, there are several best practice steps that Canadian organizations can take to comply with both U.S. and Canadian legal requirements.

1. Creating a reasonable policy in compliance with U.S. regulations

To the extent that U.S. regulations require employers to implement policies which distinguish between employees on grounds which are prohibited by Canadian human rights legislation, employers should be careful to implement policies which only inquire into prohibited grounds to the extent required by the U.S. regulation. For example, if an U.S. regulation requires information on the nationality of an employee, an employer should carefully review the regulations to determine what information is required, and whether there are exemptions to the requirement. Once determined, an employer should only ask for information necessary to comply with the law, and should identify to the employee the specific purpose for requesting the information. Employers should be careful not to consider this information for purposes other than to comply with the U.S. regulatory requirements.

2. Accommodating employees distinguished by U.S. regulations

In order for an employer to argue that it applied a bona fide occupational standard in incorporating U.S. regulatory requirements, an employer must show that it accommodated an employee to the point of undue hardship. This will likely include applying for any possible exemptions from applicable U.S. regulations, or reassigning a disqualified employee to alternate duties which do not fall within the U.S. restrictions. Attempts to accommodate an employee should take place after an individual has been distinguished based on a prohibited ground. Accommodations must also be tailored to the individual circumstances of the employee. As Bombardier demonstrates, the application of an absolute standard will not be sufficient to qualify as individualised accommodation.

Finally, in attempting to comply with both U.S. and Canadian legal obligations, employers should be wary of refusing to hire employees, of denying employees opportunities, or of terminating employees prior to seeking individual accommodations.

Conclusion

Although Canadian courts and human rights tribunals have yet to set clear guidelines for multinational employers bound by conflicting national legal norms, the Bombardier case provides insight into how the application of U.S. security regulations will be considered under the Canadian human rights framework. Taken together with the current human rights jurisprudence on employer obligations in applying U.S. drug testing laws, organizations may begin to navigate how to structure employment policies while caught in a cross-jurisdictional double bind.

[1] 2010 QCTDP 16.
[2] Ibid. at paras. 298-300.
[3] Ibid. at para. 309.
[4] Ibid. at paras. 311-315.
[5] Ibid. at paras. 320-338.
[6] Ibid. at paras. 350-358.
[7] Ibid. at para. 357.
[8] Minus $66,639.00 CAD in income earned during that time period.
[9] Milazzo v. Autocar Conaisseur Inc., 47 C.H.R.R. 468 (C.H.R.T.); Allied Systems (Canada) Company and Teamsters Local Union 938, 2008 CanLII 13354 (Slotnick).
[10] Milazzo v. Autocar Conaisseur Inc., supra at paras. 174-176, 187.
[11] British Columbia (Public Service Employee Relations Commission) v. BCGSEU, [1999] 3 S.C.R. 3; British Columbia (Superintendent of Motor Vehicles) v. British Columbia (Council of Human Rights), [1999] 3 S.C.R. 868.

New Zealand: Amendment Allows For Trial Periods For Any 'New' Employee

By Michael Quigg and Tim Sissons
Quigg Partners

On 1 April 2011, amendments to New Zealand’s Employment Relations Act 2000 will come into force allowing all New Zealand employers to include ‘trial periods’ in the employment agreements of new employees. While the change has been welcomed by businesses, recent case law suggests that employers need to approach the provisions with care if they want to be protected from unfair dismissal claims.

What is a trial period?

A trial period is a period of up to 90 days at the beginning of an employee’s employment. If properly provided for in an employment agreement, it means that if an employee is given notice of dismissal during that period, they will be unable to bring a personal grievance or other legal proceedings in respect of the dismissal.

Although similarly named, trial periods and probationary periods are not the same. While the Employment Relations Act provides for both, it only offers a statutory bar against personal grievances and other proceedings in respect of trial periods. Probationary periods are therefore of much less utility for employers.

Who can use trial periods?

Trial periods have been available since 2008 to those who employ 19 or fewer people. From 1 April 2011, all employers will be permitted to introduce them. However, trial periods can only be used for new employees.

How do they work in practice?

Although apparently broad in the freedom they give employers, trial periods in fact need to be treated with some care. A number of potential pitfalls were illustrated in a recent decision of New Zealand’s Employment Court.

Smith v Stokes Valley Pharmacy (2009) Limited [2010] NZEmpC 111 involved an attempt by a small employer to rely on a trial period as a bar to a personal grievance claim raised by one of its employees (Ms Smith). The Court signalled its approach to the legislative provisions covering trial periods by noting the need to interpret them “strictly and not liberally”.

The Court found that because Ms Smith had already worked one day by the time she handed her employer the signed agreement which provided for the trial period, she was not “an employee who has not been previously employed by the employer” as required by the Employment Relations Act for a trial period to be permissible. Accordingly, the Court held that the trial period was not in compliance with the law, and therefore the benefits of it were not available to the employer.

The Court also found that trial periods require an employer to give an employee notice of termination, rather than terminating summarily. In Ms Smith’s case, she was given less notice than her employment agreement provided for. On the basis that “termination of employment on short notice is, unless accepted, ineffective notice”, the Court held that even if the trial period provisions had been valid, Ms Smith was not dismissed on notice as required by the law. Accordingly, for this reason also, her employer could not rely on the trial period in defending Ms Smith’s personal grievance claim.

Conclusion

Although trial periods were seen by some as a truly ‘grievance free’ period, the Courts are likely to take a strict approach to employers’ compliance with the legislative requirements. Even apparently insignificant departures from those requirements (such as an employee working one day before handing her employer a signed agreement) may render a trial period ineffective. Employers would therefore be well advised to seek assistance when introducing trial periods, or when considering relying on them, so as to ensure that they receive the protection that trial periods can offer.

Attorney-Client Privilege Across Borders: Critical Issues for In-House Counsel

Jordan W. Cowman and Ausra Laurusaite-Kromelis
Akin Gump Strauss Hauer & Feld LLP

“Never write what you can speak; never speak what you can wink,” as the sage expression goes. “And never put anything in an e-mail,” Eliot Spitzer added recently. These admonishments will ring true to in-house counsel advising multinational companies doing business in the European Union, in light of recent developments regarding privilege in EU-level regulatory cases.

Imagine that you are an in-house counsel for a large transnational company, which conducts an extensive internal analysis to improve its global antitrust compliance program. You are asked to follow up on some reports from your European and U.S. operations that there may be some antitrust issues in both Europe and the U.S. that need to be reviewed, and the client needs your legal advice. In-house counsel based in several countries are involved. Memoranda and e-mails containing sensitive data and self-critical analysis are exchanged between lawyers and company executives.

All of these communications are made between in-house lawyers and the client for the purpose of giving legal advice; none of it is disclosed to third parties. Thus, you can rest assured that attorney-client privilege will protect them from seizure and use as evidence against your client by, say, the European Commission conducting an antitrust probe, right? Think again.

Erosion of Attorney-Client Privilege?

Domestically, the erosion of attorney-client privilege has been noted in the past several years. Back in April of 2005, the Association of Corporate Counsel (ACC) set out to investigate the view that in the post-Enron world the assertion of an attorney-client privilege was somehow less appropriate, and noted “an increasing concern in recent years that prosecutors, regulators, civil litigation opponents and courts seem to be inappropriately mixing up the long-standing recognition and respect for a client’s right to confidential counsel with the current focus on corporate transparency (and a related belief that anything kept secret is somehow a red flag to inappropriate activity).”
[1]
Nevertheless, the principle that attorney-client privilege, as a part of due process afforded by the Constitution, protects attorney-client communications of both outside and in-house counsel are privileged remains intact in the United States, even though diminishing in recent years. Doing business in foreign jurisdictions, however, often under conflicting regulations, subjects a company to special challenges regarding disclosure and confidentiality matters, especially when an American company expands to a jurisdiction whose legal system is not based on English common law and whose attorney-client privilege rules are very different from those in the U.S. It is particularly important that in-house counsel are aware of these rules in every jurisdiction in which their company operates.

Development for In-House Lawyers: Akzo Nobel Case

In its highly anticipated September 14, 2010, decision in Akzo Nobel Chemicals Ltd. and Akcros Chemicals Ltd. v. European Commission, the European Court of Justice (ECJ), the highest court in the European Union, definitively ruled that communications between in-house counsel and their clients regarding EU competition matters are not protected by legal professional privilege (LPP), a concept similar to the U.S. attorney-client privilege.

The Akzo case arose from the February 2003 investigation by the European Commission (EC) of the alleged anti-competitive practices by Akzo Nobel N.V., a large multinational company and the world’s largest maker of paints. Over a period of a two-day raid of the UK offices of Akzo Nobel Chemicals Ltd. and its subsidiary Akcros Chemicals Ltd., the Commission, assisted by the UK Office of Fair Trading, seized a large number of documents, including two sets that Akzo argued were protected by attorney-client privilege. The first category included documents that were drafted by the company’s general manager to one of his superiors, for the purpose of obtaining legal advice by outside counsel, and contained handwritten notes regarding contacts with the counsel. The second set of documents included e-mails exchanged between general manager and the company’s in-house competition counsel, the member of the Netherlands’ Bar. Akzo argued that both sets were privileged, and thus not subject to seizure and review by the Commission.

After a series of hearings, the European Court of First Instance (CFI), EU’s second highest court, in its September 2007 decision rejected Akzo’s claims of privilege, pointing out the limits on the protection of confidentiality of communications between in-house lawyers and their clients laid down by the ECJ almost three decades ago. Despite the fact that under UK national law in-house lawyers can claim legal professional privilege on behalf of the client by whom they are employed, and notwithstanding the Netherlands’ scheme where in-house legal advisers and private practice lawyers are subject to the same professional disciplinary code, the court held that privilege did not apply.

The ECJ in its September 2010 ruling affirmed the CFI’s decision. According to the ECJ, LPP does not apply to in-house lawyers because they do not enjoy the same degree of independence as outside lawyers due to their close economic ties to the company. As a result, neither bar membership nor professional ethical obligations associated with it are sufficient to make an in-house lawyer capable of dealing with conflicts of interest between professional obligations and the wishes of the client.

Lessons for Protecting the Privilege

When dealing with the client’s overseas offices, U.S. in-house counsel should be aware that privilege may not attach to attorney-client communications and that correspondence sent to the EU may be seized by the EU competition authorities in a regulatory probe. Additional confusion arises from the fact that LPP under EU law is different from that in many of the 27 EU member states. Not only is the approach of civil law countries significantly different from that of the common law (for example, under UK law LPP applies to in-house lawyers), there is also no uniformity among the EU civil law countries regarding privilege.

Key points, then, are that 1) identical evidence receives different privilege status in parallel proceedings in various countries, and 2) while in-house privilege does not apply on the EU level, it can still be relied upon in matters involving national laws of some EU member states. In order to increase the likelihood that privilege is preserved, you should, among other things:

- Familiarize yourself and your client with privilege laws in all relevant jurisdictions;
- Be mindful regarding what communications are sent overseas;
- Involve outside counsel early upon discovering a potential violation of EU antitrust laws or when developing internal compliance programs;
- Establish protocols and procedures to maximize privilege.

Finally, avoid creating unnecessary documents, and never write what you can speak (or wink)!


[1] Association of Corporate Counsel, Executive Summary: Association of Corporate Counsel Survey: Is the Attorney-Client Privilege Under Attack?, Apr. 6, 2005; available at http://www.abanet.org/buslaw/attorneyclient/publichearing20050421/testimony/hackett1.pdf.

Legal Developments in Spain

By Isabel Puig, Baker & McKenzie (Barcelona)
Last September the Congress of Deputies approved the final text of the Labor Reform that gathers a package of significant changes to the main employment regulations. We summarize the significant changes to the text, which was published in the Official State Journal of September 18:
  1. The term of temporary contracts for specific jobs or services is limited to 3 years, which may be extended by another 12 months under the sector’s collective bargaining agreement. After that time, if the worker continues in the company, the contract becomes permanent.
  2. In successive temporary employment contracts which, due to their term (24 months in a given period of 30 months), convert the contract into permanent, the Reform includes that the successive employment contracts can be not only in one company, but also in different companies of the same groups and in cases of transfer of undertakings. The employer will have 10 days from the automatic conversion of the contract into permanent to give the employee a document verifying that (s)he is now a permanent employee.
  3. The causes for dismissing employees under a Collective Redundancy Procedure have been made more flexible. Among economic causes is a decrease in profits, not only losses. Technical, organizational, or production causes are allowed, not as before to guarantee the viability of the company but to improve the organization of resources and strengthen the company’s competitive position. In any event, the company must verify the reasonableness of the measures. It is recommended that workers be relocated or enter training to improve their chances of finding employment. The term for the negotiation process with the workers’ representatives has been shortened. The process cannot exceed 30 days (15 days for companies with less than 50 employees). The agreement reached must be validated and the dismissals authorized by the Labor Authorities. The authorization period is shortened from 15 to 7 days.
    Employees in companies in which workers have no legal representatives are allowed to designate a commission democratically from among the employees of the company or from among representatives of the most or sufficiently represented trade unions.
  4. In order to make an employee redundant on the basis of absenteeism, the Reform has reduced the percentage of time which all employees lose due to absenteeism from 5% to 2.5%. This is in addition to the individual worker’s allowed absences (20% of working days in a given period).
  5. The period for consultation with the workers’ representatives for collective geographical mobility is reduced to 15 days for collective transfers. In companies in which workers have no legal representatives, the consultation may be carried out through a commission democratically designated by the workers from among the employees of the company or among representatives of the most or sufficiently represented trade unions.
  6. Substantial changes in working conditions may be made to prevent the deterioration of the company’s situation, besides improving the company’s situation and perspective through a better organization of resources.
    The consultation period with the workers’ representatives is reduced to 15 days for collective changes. In companies in which workers have no legal representatives, the consultation may be carried out through a commission democratically designated by the workers from among the employees of the company or among members of the most or sufficiently represented trade unions. In such event, the designation must take place within 5 days of the beginning of the consultation period.
    Any change to a collective bargaining agreement is limited to the term of that collective bargaining agreement and will always be temporary. For such changes, if no agreement can be reached with the workers’ representatives, the out-of-court settlement mechanisms established in the collective bargaining agreement must be used.
  7. The salary increases provided for in the collective bargaining agreement may remain unapplied when, otherwise, the company’s economic situation and perspectives could suffer and thus affect the maintenance of jobs.
    If an agreement is reached with the workers’ representatives, it shall be assumed that the stated causes exist, and the agreement may only be challenged in the event of fraud, willful intent, coercion, or abuse of the law.
    The agreed salary increases may only be left without application for the term of the collective bargaining agreement and, in any event, no more than 3 years.
  8. Salary in kind may not exceed 30% of an employee’s salary, even for top management. Salary in kind may not lower a worker’s total salary below the minimum wage.

Together with these modifications, the Reform also included measures on refund of social security contributions for employment contracts of certain group of employees who experience reemployment difficulties. Anyhow, it is expected that a second package of employment measures will be passed during the following months.

Isabel Puig, Associate at Baker & McKenzie Barcelona

Severance Releases and International Employees

By Donald Dowling and Renata Neeser, White & Case LLP

Challenge: A multinational leaves itself exposed to unfair double-dipping if it pays severance pay to a terminated international employee in exchange for an incomplete release that lets the fired employee turn around and sue in a country where the release is not enforceable.
Pointer: Before paying an international employee to release severance claims, proactively structure a release that complies with waiver principles, and execution procedures, of each possibly-applicable jurisdiction.

Expatriates tend to set off on their overseas postings with every expectation that after the assignment ends they will “repatriate” back to their home country. But circumstances change. Too often a multinational ends up needing to fire an expatriate or some other international employee such as a cross-border secondee or a mobile worker whose principal place of employment, at the time of termination, is unclear.

Any employer that pays a terminating employee a generous severance package that includes extra consideration beyond the legal minimum has the right to the benefit of its bargain: a “release” barring a termination claim, wherever filed, seeking reinstatement or more termination pay. This is why so many employment agreements, expatriation letters, corporate severance pay policies, and individual termination packages link a severance payment to the proverbial “full release of claims in a form acceptable to the employer.”

But what release “form” should an employer find “acceptable” in the international-employee context? Almost every country has employment-release standards—ideal boilerplate release text and release execution formalities for an employee effectively to waive employment-severance claims. Complications arise whenever two (or more) jurisdictions’ employee-protection laws might possibly reach a single employee, because a release tailored to the standards of just one of the jurisdictions leaves the employer exposed to a lawsuit filed in the courts of the other. That is, any employer that tailors a border-crossing employee’s severance release to just one jurisdiction leaves itself exposed to a dismissal lawsuit filed in a different jurisdiction with a nexus to the employment.

Too many multinationals assume that just one of two possibly-applicable sets of employment laws should control a dual-jurisdiction employment relationship. Multinationals offering severance packages that include extra consideration beyond the legal minimum can feel tempted to structure a dual-jurisdiction severance release to meet just one would-be “lead country’s” release standards. A multinational might pepper into a release a catch-all clause purporting to release “all claims” in a second jurisdiction, or “all claims worldwide,” but this peppered-in catch-all clause is rarely enough.
Three examples illustrate the problem:

Example 1—Terminations in France follow rigid procedures. Binding French severance releases must be in French and meet specific formalities. If a U.S.-to-France expatriate with a U.S. choice-of-law clause in his expat assignment letter gets terminated from a French place of employment, the U.S. choice-of-law clause may lull a multinational employer into structuring a U.S.-compliant, English-language release. Even if that release peppers in a catch-all clause purporting to release “all claims in France and worldwide,” the document likely falls short of French release standards and will offer little defense to a French labor-court claim.

Example 2—A terminated U.S.-citizen expatriate working for an American employer in Australia can invoke the extraterritorial reach of U.S. age discrimination laws. A severance release drafted to conform to Australian release standards—even one that peppers in a catch-all clause purporting to waive “all claims in the U.S. and worldwide”—falls short of the complex release strictures under the U.S. Older Worker Benefit Protection Act [OWBPA], such as the OWBPA 7 or 21 or 45-day waiting periods. This Australia-compliant release—even with its peppered-in “all U.S. claims” clause—will offer little defense to a U.S. age discrimination claim.

Example 3—Any binding release of severance claims under Mexican law needs to be ratified by the Mexican labor board. If a fired mobile employee working on both sides of the U.S./Mexico border signs a U.S.-compliant English-language release—even one that peppers in a clause purporting to release “all claims in Mexico and worldwide”—the document, unauthenticated by any Mexican agency, will offer little defense to a Mexican labor-court severance pay claim.
These three hypotheticals are exceptional, because they involve border-crossing employees. Most employees are local workers who are hired, reside, and work for an employer in a single country, subject to that one jurisdiction’s law and courts. Severance releases for these single-country employees merely need follow the strictures of the place of employment. Dual-jurisdiction releases become important only where a terminated employee could bring viable employment-law claims in the courts, or invoking the laws, of more than one jurisdiction. Three scenarios most commonly raise this issue:

Extraterritorial laws: The fired employee is a citizen of (or in some cases was originally hired in) some different home country that presumes to extend its statutory/codified employment protection laws extraterritorially. Only a handful of countries extend employment laws abroad, chiefly the U.S. and Venezuela (as to certain scenarios only), and in limited cases France.

Extraterritorial contract provisions: The fired international employee has an employment contract subject to home-country law—even if it is an underlying pre-expatriation contract that was suspended or “hibernated” during the overseas assignment and “springs back to life” only upon termination. Or else a fired employee can invoke a choice-of-law clause in the employment/expatriation documents that expressly selects some legal regime other than that of the current place of employment. Multinationals may trip up if they put too much faith in the power of a home-country choice-of-law clause to divest the application of host-country employee-protection laws: Yes, a choice-of-home-country-law clause will pull in home country employment laws, but it will not usually divest the simultaneous application of host-country employee-protection laws that apply by public policy. See our Global HR Hot Topics of June and July 2008.

Unclear place of employment: Sometimes the fired mobile employee’s place of employment (in the terminology of the Europe’s Rome Convention, the “habitual place of employment”) is unclear. Imagine, for example, a regional sales director living in Switzerland with an office in Austria and customers predominantly in Germany. In these cases a fact question arises as to which country is the place of employment.

In these three types of cross-jurisdictional terminations, the best way to craft the proverbial “binding release of claims in a form acceptable to an employer” that pays severance money beyond applicable legal minimums will often be to combine the boilerplate release language, and all the necessary release-execution procedures, of each affected country’s law into one single release (or put into separate, simultaneously-executed releases: Separate releases may be necessary where a local government agency ratifies the release and foreign provisions would complicate the process).

This can make for a cumbersome release document. Consider, for example, a binding release for a fired U.S. citizen over age 40 who “habitually” works in the London office of an American multinational. Even if the employment agreement has a U.S. choice-of-law clause (and even notwithstanding Europe’s recently-amended Rome Convention), both U.S. discrimination laws and UK unfair/wrongful dismissal protections will protect the employee simultaneously. So the employee must execute a release of U.S. discrimination claims plus a release of any UK unfair dismissal action and (separately) any English law wrongful dismissal (i.e., breach of contract) claim. The hybrid release document needs to graft enforceable U.S. OWBPA release language onto the text of a UK “compromise agreement” (employment release), including all the waiver “bells and whistles” of both systems, accommodating both the 7 or 21 or 45-day waiting periods of the U.S. OWBPA and the co-signature of the employee’s own solicitor lawyer necessary for a binding UK compromise agreement.

In some countries—Brazil, for example—a binding release of employment separation claims is impossible unless a fired employee files and dismisses a termination lawsuit in labor court. In those jurisdictions, no language inserted into any release document will give an employer a dispositive defense to a locally-filed severance lawsuit—the best an employer can get is effectively an employee-signed receipt for severance money tendered. Even so, the international severance-documentation analysis remains the same: An employer should document the separation, and tender severance pay, in the way that meets best practices of each jurisdiction whose employee-protection laws might protect the terminated international employee.