Wednesday, June 15, 2011

Welcome to the June edition of the International Employment Committee newsletter. This quarter we have a bumper issue, with articles from a number of jurisidictions including Canada, China, Ireland, Spain, the UK and the Netherlands. Many thanks from the Committee to all those who have contributed to making this such a successful edition.

Please let me know if you are interested in contributing to future editions. The next edition will be published in September.

Helen Colquhoun, Withers Bergman LLP

Canada: Important Changes in Foreign Worker Recruitment

By Sergio Karas

On August 18, 2010, the Minister of Citizenship and Immigration announced significant changes that affect employers hiring foreign workers. These changes took effect on April 1, 2011.

The Temporary Foreign Worker Program is jointly administered by Human Resources and Skills Development Canada (HRSDC) and Citizenship and Immigration Canada (CIC). However, HRSDC is responsible for issuing Labour Market Opinions, authorizing employers to hire temporary foreign workers in the appropriate circumstances. Labour Market Opinions (LMOs) attempt to ensure that hiring temporary foreign workers does not affect negatively the Canadian labour market. Before issuing a LMO, a HRSDC officer must be satisfied that the presence of the foreign worker will have a neutral or positive impact on the Canadian labour force. Many other factors influence the issuance of LMOs including whether the employer has made reasonable efforts to hire a Canadian, advertised the position in accordance with the minimum advertising guidelines issued by HRSDC, whether there is a labour dispute in the business, and whether the employer is offering the appropriate wages and working conditions when seeking to employ a foreign worker.

Over the last few years, given the increasing demand for foreign workers in Canada, especially in selected technical occupations, the federal government has sought to ensure that Canadians are not displaced in favour of foreign workers and that, at the same time, foreign workers are treated fairly and equitably. To that end, many initiatives were pursued by the federal government, some in partnership with the provinces.

The changes are generally meant to prevent the perceived abuse of the Temporary Foreign Worker Program by some unscrupulous employers. The changes include:

- A more rigorous assessment of the genuineness of the job offer.
- A two year prohibition from hiring temporary foreign workers for employers who fail to meet their commitments to workers with respect to wages, working conditions, and occupation.
- A limit on the length of time a temporary foreign worker may work in Canada before returning home.

Employers seeking to hire foreign workers, including live-in caregivers, now have to demonstrate that the job offer is genuine. This may prompt HRSDC officers to engage in further investigations, sometimes contacting the employer directly, and other times relying on information gathered from prior applications made by the same employer. In addition, employers will be assessed against past compliance with Temporary Foreign Worker Program requirements before a LMO will be granted, and those employers who are found to have violated worker rights may be refused authorization to hire a foreign worker. This raises interesting questions as it is unclear how far HRSDC officers will go in their investigations, or, what type of violations could be considered sufficiently serious to deny an employer the right to hire a foreign worker. Possible red flags could include complaints filed against the employer by previous foreign workers, violations of health and safety standards, early terminations of other foreign workers on a routine basis, and potentially, other patterns of behavior shown by employers. The question of whether or not a job offer is genuine will be much harder to determine as many employers who use the Temporary Foreign Worker Program, particularly in the construction industry, are sometimes related to the foreign worker and they use that program as a stepping stone to gain permanent residency. Other relevant factors to monitor for possible violations could include variations in wages due to performance, temporary lay-offs, or periods without earnings. No doubt, such details may raise concerns with HRSDC officer.

The regulatory changes add a new administrative penalty against employers: where an employer is found not to have complied with previous commitments to other foreign workers, it may be denied access to the Temporary Foreign Worker Program for the period of two years. In addition, offending employers’ names will also be published on the Citizenship and Immigration Canada website, purportedly to inform other temporary foreign workers of the “danger” associated with a particular employer. Employers will be given the opportunity to explain any mitigating circumstances before such action is taken, but this could probably open an avenue for litigation by employers who feel aggrieved at being “blacklisted”.

The changes do not only affect employers; a new four year cumulative limit is also being imposed on most temporary foreign workers employed in Canada. After a four year term, they will have to wait a further period of four years outside of Canada before becoming eligible to again work temporarily in Canada. The limit does not affect eligibility for Permanent Residence, so it would be prudent to file applications for that purpose as soon as legally allowed; foreign workers may qualify under the Canadian Experience Class or as Federal Skilled Workers with Arranged Employment. Prudent employers who value the services of their foreign workers should consult with competent legal counsel to determine the potential eligibility of their foreign workers to apply for Permanent Residency. In addition, it must be noted that the four year limit does not affect foreign workers who enter Canada under the terms of an international agreement such as the NAFTA. Those workers will continue to be governed by the terms of the appropriate treaty.

The potential consequences of employer misconduct under the new regulatory changes are very serious; also the consequences for foreign workers who will be close to reaching the four year limitation can also create considerable disruption in their lives. It is essential that both employers and employees obtain the appropriate legal advice when hiring foreign workers under the new regime.

Sergio Karas, certified specialist in Canadian Citizenship and Immigration Law. Mr Karas is past chair of the Ontario Bar Association Citizenship and Immigration Section, Past Chair of the International Bar Association Immigration and Nationality Committee, and Editor of the Global Business Immigration Handbook (

Canada: Ontario Courts Weigh in on Workplace Privacy Rights

By Trevor Lawson and Brian Wasyliw, McCarthy Tetrault LLP, Toronto, Ontario, Canada


There currently exists a patchwork of privacy legislation which applies, in varying degrees, to private sector organizations in Canada. In all Canadian jurisdictions, there exists some form of privacy legislation that protects the confidentiality of personal information and limits the manner in which private sector organizations may collect, use and disclose personal information in the course of their commercial activities and, in some Canadian jurisdictions, in relation to their employees. To date, the Province of Ontario has not enacted privacy legislation generally applicable to provincially-regulated private sector organizations in relation to the personal information they collect, use and disclose in the course of their commercial activities or in relation to their employees. In the absence of such legislation, Ontario courts have been increasingly called upon to weigh on the nature and extent of individual privacy rights in Ontario.

Court of Appeal: Employees May Have Expectation of Privacy in the Workplace

In a recently released decision, The Court of Appeal for Ontario concluded that employees may have a reasonable expectation of privacy when using a computer and other equipment provided by their employer for work-related purposes. The Court’s decision in R. v. Cole[1] arose in relation to criminal charges against a teacher (Cole) for possession of child pornography. During a system maintenance review, the school board’s computer technician discovered nude photographs of an underage female, whom the technician believed to be a student of the school. These images were stored on a laptop computer that had been provided to Cole by the school board for work-related purposes. The technician advised school administration of this discovery, and the laptop was seized and searched by the school board.

The school board provided police with the laptop and discs containing Cole’s Internet browsing history and copies of the images in question. The police searched the laptop and the discs without a warrant. The trial judge excluded all of the evidence seized from the laptop and the discs, finding that Cole had a reasonable expectation of privacy in the contents of the laptop and, accordingly, police required a warrant to conduct a search. The trial judge’s decision was overturned on appeal to a judge of the Ontario Superior Court of Justice, who concluded that Cole did not have a reasonable expectation of privacy in the contents of the laptop. The Court of Appeal for Ontario was then called upon to decide this issue.

Why Should Employers Pay Attention to this Decision?

As noted above, the Court of Appeal’s decision arose in relation to a criminal proceeding. Accordingly, the Court was called upon to consider whether the school board and/or the police breached Cole’s right, under section 8 of Canada’s Charter of Rights and Freedoms, to be free from unreasonable search and seizure. For the purposes of its decision, the Court assumed that the school board was subject to the Charter. As such, the Court’s analysis of the school board’s conduct does not have direct application to private-sector employers, who are not subject to the Charter.

However, the Court’s analysis provides some extremely useful insight regarding the Court's approach to the issue of whether employees have a reasonable expectation of privacy in the workplace. Specifically, this decision provides a helpful reminder to all employers of the importance of having clear and unambiguous policies regarding the use of company Internet and e-mail systems, workplace computers (including laptop computers) and other electronic devices provided to employees for work-related purposes. It also clarifies the limitations on an employer’s ability to control the use of its e-mail and Internet systems, computers and other electronic devices.

The Court of Appeal concluded in this case that Cole had a "limited" reasonable expectation of privacy in the personal use of the laptop provided to him by the school board. Although the laptop was owned by the school board, issued for employment purposes and had access to the school network, the school board had granted teachers permission to use their laptops for personal use (including storing personal information on the hard drive) and teachers employed passwords to exclude others from gaining access to laptops. It was significant to the Court that the school board had not implemented a clear and unambiguous policy to advise teachers that their laptops were subject to general or random monitoring and/or search. Accordingly, the evidence seized from the laptop (other than the images of the underage student) and the discs containing Cole’s Internet browsing history were not admissible at trial.

The Court of Appeal found that Cole’s reasonable expectation of privacy was "limited" because he did not have a reasonable expectation of privacy with respect to access to the hard drive of his laptop by the school board’s technician for the limited purpose of maintaining the technical integrity of the school board’s information network and laptop. Given that this was the context in which the technician discovered the images of the underage student and provided them to police, those images were admissible at trial.

Do Employees Have a Reasonable Expectation of Privacy in the Workplace?

The Court of Appeal concluded that employees may have a reasonable expectation of privacy in relation to computers provided to them by their employers, which may be "limited" in certain circumstances. Whether or not such an expectation exists, and if so, the extent of that expectation is to be determined on the totality of the circumstances in each case. The factors that will generally be considered when determining whether an employee has a reasonable expectation of privacy, and the extent of that reasonable expectation, include the following:

· Who has possession or control of the property or place that is searched?
· How is the property or item used?
· How is access, including the right to admit or exclude others from the place or property, regulated?
· What is the individual’s subjective expectation of privacy?
· Is that expectation reasonable, from an objective perspective?

The Court of Appeal noted the following factors in concluding that Cole had a reasonable expectation of privacy in relation to the contents of the laptop:

· Cole had exclusive possession of the laptop and took steps to protect it using a password;
· the school board had provided explicit permission for the laptop to be used for personal use in its written policy;
· teachers had permission to take the laptops home on evenings, weekends and summer vacation;
· there was no evidence that the board actively monitored teachers’ use of their laptops; and
· perhaps most importantly, there was no clear, unambiguous policy permitting the school board to monitor or search teachers’ laptops. The school board’s policy did not advise that information stored on the laptop was subject to search and did not address monitoring, except in relation to e-mail.

What Can Employers Take from this Decision?

Private sector employers will not be subject to a Charter analysis regarding the search of employees’ computers. It is likely however that courts, arbitrators and administrative tribunals will consider the Court of Appeal's reasoning in this case when addressing issues of privacy in the workplace involving private sector employers. While ownership of the property in question has historically been considered to be a significant factor in determining whether a reasonable expectation of privacy exists, it appears that, going forward, ownership may only be a starting point of the analysis.

Accordingly, it is extremely important that employers take additional steps to limit any reasonable expectation of privacy that employees may have in relation to workplace Internet and e-mail systems, computers and other electronic devices provided to them for work-related purposes. To that end, employers should consider:

- implementing a clear and comprehensive policy regarding employees’ rights to access and use the employer’s data and computer systems and equipment; such policy should include a very clear statement advising employees that they should not have any expectation of privacy with respect to data that might be located on a computer or network and clearly advise employees of the reasons for which the employer may access that information;
- ensuring that employees acknowledge that they have read, understand and agree to abide by the policy; this can often be done on the electronic device itself, and should be set to regenerate at a regular interval where an employee is required to again acknowledge their acceptance and agreement to abide by the policy;
- clearly advising employees that copies of employer-owned data remain the employer’s property regardless of where such data is stored; and
- clearly advising employees of any limitations that are desired regarding personal use of employer’s data and computer systems and equipment — for example, regarding unlawful activity or offensive materials.

This policy, like all work-related policies, should be carefully drafted, periodically reviewed and updated as required. Employers should also conduct regular monitoring to ensure compliance with the policy. All employees, including supervisors, should be held to the same standard and violations should be dealt with in a consistent manner.

Court of Appeal to Weigh in on Whether to Recognize Tort of Invasion of Privacy

Workplace privacy rights were also squarely engaged in a recent decision from the Ontario Superior Court of Justice. In the case of Jones v. Tsige[2], Justice Whitaker determined that there is no freestanding tort claim for invasion of privacy existing in Ontario. In other words, an individual cannot sue another person (including another individual or their employer) solely on the basis that their privacy has been invaded by that person.

In this case, Ms Tsige, a bank employee, had accessed the financial records of Ms Jones, also an employee of the same bank (although at a different branch) approximately 174 times over a span of four years. Although Ms Tsige viewed the information, at no point did she make any attempt to print, copy or memorialize the information. There was no business or employment related reason for Ms Tsige to access these records. As it turns out Ms Tsige later indicated that she was reviewing this information in order to determine whether or not her current common law spouse had made, or was making, any support payments to Ms Jones, who is his ex-wife. These events came to light when the bank discovered Ms Tsige’s activities.

Lawsuit Filed for ‘Invasion of Privacy’

Ms Jones sued Ms Tsige for this invasion of her privacy and it fell to Justice Whitaker to determine whether such a suit could be advanced in Ontario. Ultimately, Justice Whitaker determined that it could not. Courts in Ontario have struggled for many long years regarding the existence of an independent cause of action for the invasion of privacy. Justice Whitaker canvassed several prior judicial decisions that had come down on both sides of the issue. Justice Whitaker also noted that:

· Ontario has passed legislation that addresses certain privacy rights, primarily in relation to the collection of personal information by government and public sector organizations[3].
· the federal government has passed legislation which imposes obligations on the bank in relation to the protection of Mr. Jones’ personal information from unlawful use or disclosure
[4]; However, none of legislation cited by Justice Whitaker creates any right for a person to advance a civil action against another person who is alleged to have invaded their privacy rights.
· four other Provinces have enacted legislation to specifically create a statutory tort for the invasion of privacy
[5], and that right also exists in Quebec under its civil law regime;
· Ontario could have enacted legislation similar to these other Provinces, but has to date decided not to do so.

No Common Law Tort of ‘Invasion of Privacy’ Recognized in Ontario (Yet)

Ultimately Justice Whitaker concluded that there was no tort of invasion of privacy existing at common law in Ontario. He noted as follows:

“I would also note that this is not an area of law that requires "judge-made" rights and obligations. Statutory schemes that govern privacy issues are, for the most part, carefully nuanced and designed to balance practical concerns and needs in an industry-specific fashion.
I conclude that there is no tort of invasion of privacy in Ontario. ………”

Ms. Jones is currently pursuing an appeal to the Court of Appeal for Ontario, which will likely provide that Court with its next opportunity to weigh on the issue of privacy rights. We also expect that Ontario Courts will continue to be called upon to define the nature and extent of workplace privacy rights in Ontario in the absence of legislation in Ontario which squarely addresses this issue.

[1] 2011 ONCA 218 (CanLII)
[2] 2011 ONSC 1475 (CanLII)
[3] Personal Health Information Protection Act, 2004 S.O. 2004, c. 3; Freedom of Information and Protection of Privacy Act, R.S.O. 1990, c. F.31; Municipal Freedom of Information and Protection of Privacy Act, R.S.O. 1990, c. M.56
[4] Personal Information Protection and Electronic Documents Act, 2000, c. 5 ("PIPEDA"). In relation to the collection of personal information from employees, PIPEDA applies only to private-sector organizations which fall within the definition of a “federal work, undertaking or business” under Canada’s Constitution Act, 1982 (e.g. banking institutions, airlines, railways and telecommunications companies). PIPEDA does not apply to provincially-regulated private sector organizations in relation to personal information collected from employees.
[5] . Newfoundland and Labrador, British Columbia, Saskatchewan and Manitoba.

China: Some Trends in Collective Bargaining

By Earl V. Brown Jr.

Introduction: China’s Strikes Are Normal Industrial Relations Events

China’s private sector industrial workers are restive. A second, more assertive generation of migrant workers is pushing for improved wages and conditions. Graduates are also spilling out of China’s technical schools onto factory floors to challenge low wage regimes.[1] In one emblematic industrial action, technical “interns” at the Honda transmission plant at Foshan, Guangdong Province, forced management to engage in direct collective bargaining with grass-roots factory representatives to resolve a sustained strike in May-June 2010.[2] During that summer, strikes spread through the auto sector and all over China.[3] Chinese employers and workers forged their own direct mechanisms—like those fashioned at Foshan—to settle these strikes. This paper seeks to outline the legal and regulatory initiatives that may congeal into law to recognize this de facto collective bargaining.

Some saw in this strike wave a challenge to China’s political arrangements. But The Global Times, a State English language paper editorializing about a May 2011 truckers’ strike in Shanghai, had it mainly right when it concluded that industrial labor conflict in China did not portend imminent revolution:

Such conflicts will essentially become a normal part of China's social make-up. Some Western media outlets have paid close attention to the Shanghai strike, and linked it to the “Jasmine Revolution.” Over the past months, more than a few Westerners have politicized any mass event in China, and interpreted it as a fuse to spark a “revolution.” … Take the Shanghai strike. It was essentially a labor dispute in a market economy, a frequent occurrence in the West.[4]

The Current Strikes: Honda Foshan Bargaining as a Home Grown Chinese Solution

When China restructured its state industrial sector (1985-2005), retrenched state workers mounted large scale industrial actions to protest the end of the “iron rice bowl,” the “life-time employment” bargain between the Party and State Owned Enterprise (SOE) workers. Government at all levels issued a welter of special labor relations regulations to replace the “tenure” system of employment with short term contractual arrangements, and to dismantle the social infrastructure attached to the “danwei.”[5] Displaced state enterprise workers had scant negotiating leverage.

Labor protest also developed in China’s new private sector, markedly in foreign firms.[6] Often these disputes involved significant arrearages in wages due migrant workers. This genre of protest often was designed to secure palliative financial assistance from local authorities, as the owners often were bankrupt or had fled. Like their comrades retrenched from SOEs, these workers had few weapons with which to bargain.[7]

By contrast, today’s workers have bargaining chips. First, they were aware that highly integrated and just-in-time manufacturing systems are vulnerable to short interruptions of production. Equally important is a “non-material” factor—the rights consciousness of younger Chinese workers who wish to partake in the rising Chinese prosperity and the options it provides for a more decent life.[8]

Honda’s Chinese operations are important contributors to Honda’s global profits.[9] The Foshan plant produces transmissions without which cars cannot be assembled. Yet, Foshan workers are paid less than assembly plant workers, and far less than Honda’s Japanese employees working alongside Chinese workers. To add to this combustible mix, around 900 of the 1800 Foshan factory workers are “interns” from technical schools and paid less than standard wages. Honda management announced in May 2010 that it would increase production in China by approximately one third—heaping on work hours.

Shortly after Honda announced its increased production goals, Foshan workers demanded a wage increase and wage equality across groups of workers. They also demanded the right to select their factory-level representatives, seeking a voice to speak directly for them. They circulated their positions internationally, including a disclaimer of any desire to dislodge the official union but with a firm demand for the opportunity to elect their own plant representatives.[10] Honda dismissed these demands, and the workers struck.

They selected strike leaders from among their ranks to speak for them to management.[11] Honda production across China went down, as no transmissions emerged from Foshan to feed the assembly plant. The international and auto press started to cover the strike, pelting Honda with questions about when production would resume. Honda, now under the lens, resorted to firing those it suspected of being strike activists, and made a desultory wage offer. The strikers, undeterred, rejected the low-ball wage offer and kept the transmission plant down. Honda then mounted a widely filmed effort to muscle the strikers back to work, and threatened to replace the strikers. Yet the Foshan plant, and with it all Honda, stayed down.

As the strike stretched on, management began to understand that the Foshan strike required some industrial relations innovation. Over the past decade, China has reformed some of its labor laws with widespread publicity and discussion. Worker centers, groups in the official union, legal aid centers, and other worker rights advocates launched initiatives all over China’s new industrial zones to educate workers about their rights under Chinese law. As a result, China’s young workers are increasingly conscious of their rights and prepared to assert them. To resolve this new era of strikes, Honda finally reached out to the grass-roots strike representatives at Foshan and directly negotiated a wage deal that permitted the resumption of production.[12]

We do not know the exact extent of the 2010 auto strike wave and its ripples in Chinese industry.[13] However, it appears that workers all over pushed their employers to engage in genuine collective bargaining and often attained real improvements in wages, hours, and working conditions.[14] Although these strikes were clearly initiated by the workers on their own, the government did not react punitively. Indeed, there were high-level calls for increasing the purchasing power of Chinese workers, and for some forms of rudimentary collective negotiation.[15] The strikes had the wind of public opinion behind their sails as they forced genuine bargaining in the private economy.

The Collective Bargaining Environment

“Western” laws authorizing industrial relations roughly reflected actual institutional arrangements already fashioned by employers and worker organizations to address work stoppages and other labor disputes. China’s private industrial sector does not yet have such institutions in place. Thus, Chinese labor laws and regulations too often “clone” other systems, and lack a real world referent. [16] Yet, a canvass of these labor statutes and resulting regulations establishes a legal and policy trend favoring bargaining and “democratic management” which is increasingly animated by grass roots pressure.

Article 4 of the 2008 Employee Contract Law (“ECL”) requires that the employer’s work “…rule, regulation or decision be improved by making amendments after consultations…’ if workers object. Defining consultation as “on the basis of equality” and requiring improvements to perceived deficiencies in the employer’s approach, i.e., movement by the employer, surely looks like collective bargaining under the National Labor Relations Act (“NLRA”) 29 USC 151 et seq. [17]

Indeed, Chinese labor law may constrain employer discretion far more than the NLRA. The employer’s obligation to deal with the union or worker representative does not hinge on proving representative status. A small number of workers (25) can install a union, and a workers’ congress must and can be easily established. In short, unionization of a facility is a relatively automatic process, and the union has de jure standing to represent enterprise workers as well as labor in general before employers, mediators and arbitrators, government and the courts. Throughout the laws and regulations one finds the requirement that workers have a voice, that “equal” discussions take place between labor and management and that disputes be harmoniously resolved.[18] This primal social pressure to induce harmony will be felt most acutely by “foreign” employers and renders insistence that the duty to “consult” is not “a duty to bargain in good faith” beside the point.

The two sides—managers and workers—are not yet clearly demarcated, with employers often choosing the nominal union head.[19] The union and other nominal workers’ representatives cannot credibly speak for or to workers with industrial grievances. “Bargains” struck with the employer at such a remove from the rank-and-file may simply have no weight—as was the case initially in Foshan—and be rejected by the workforce. And that is the state of affairs where the union does attempt to intervene in a strike. The more common occurrence is that the union is entirely absent, and there is no workers’ congress. There are also weak employer organizations.
Given these weaknesses, many private employers can act unilaterally in labor relations. Yet, industrial workers are beginning to use legal frameworks for bargaining as “weapons” to pressure private employers for wage and other improvements. In response, the official union is launching its own campaign to compel employers to execute barebones collective agreements. In a private sector as vast as China’s, these trends are profound. The inevitable improvements obtained as a result of this push for higher wages and improvements will generate yet more grass roots and institutional pressure for further improvements. Here are some of the durable elements of this trend:

More Assertive Grass Roots Worker Leaders: The law as it stands suggests that trade union chairs and committees at the grass roots be elected by workers’ assemblies.[20] The All China Federation of Trade Unions (ACFTU) has issued specific Measures for the Election of the Trade Union Chairman of an Enterprise (July 25, 2008) on a trial basis, contemplating that the enterprise union chair will be democratically elected “…in secret ballot…”[21] Under the Measures, the party and the upper level union body have control of the entire process, including the nomination of candidates.[22] Whatever these limitations, though, the measures will surely be applied to more employers and create space for more assertive grass roots leaders. The real issues are two. Will the official union bring in grass roots leaders and deploy them to spread unionization and collective bargaining? Will employers seek to exclude classes of workers, such as interns, so that front line trade union representation in the end will not include the very workers sparking the strikes that local union leadership is tasked with averting?

Shanghai ERCs: The ACFTU and the government at all levels are seeking to bring the workers’ congresses to life in the private sector. In December 2010, the Peoples’ Congress for the Municipality of Shanghai (on par with a province) issued regulations requiring establishment of Employee Representative Congresses (ERCs) in places of work with 100 or more employees. The ERC is to function as a vehicle for employee participation in “democratic management of the enterprise”, and to protect the interests of the employees.[23] Its “jurisdiction” is therefore broad, including the employer’s operations and management, company internal policies, and matters directly affecting employees such as collective bargaining regarding wages, hours, rest and leave, benefits, the protection of female employees, occupational health and safety, as well as employer efforts to implement ERC decisions and recommendations and the employer’s adherence to collective agreements.[24]

The regulations also set forth how ERC membership is to be selected. Individual representatives are to be elected by majority vote of all employees for 3-5 year terms, with a majority of the ERC representatives coming from the ranks of grass roots workers. No more than 20 percent of the ERC may be middle or senior managers and the male to female ratio in the ERC must reflect that of the overall enterprise. Thus, the ERC must have proportional female representation.[25]

In line with the Trade Union Law, the “operating organ” of the ERC is the trade union, and the union is mandated to organize elections to the ERC, train employee representatives, nominate employee candidates for the ERC “presidium”, the enterprise board of directors and the supervisory board[26]. The regulations mirror here the Company Law, which sanctions election of employee representatives to boards of directors and the supervisory boards.[27]

Stalemate in Guangdong: Guangdong is in the process of formulating regulations similar to those in Shanghai. This initiative has been stalled thus far by employer opposition, including from Hong Kong employers.[28] The latest draft of the regulations contemplates that “more than one-third of the employees” in an enterprise may invoke the collective bargaining process, even if the union has not done so or there is no union.[29] The trade union, where present, is the vehicle for employee voice in collective bargaining. Otherwise, democratically elected representatives may speak for the employees.[30] The regulations favor sectoral or regional bargaining where appropriate.[31] The 4th Draft omits the co-determination features of an earlier draft that followed and may have modestly expanded provisions in the Trade Union and Company Laws contemplating employee representation of the boards of directors and supervisory boards of enterprises. This evoked heated opposition from Hong Kong employers.[32]

Unfair Labor Practice Strikes: While strikes are neither affirmatively authorized not expressly forbidden under Chinese law (caveat security laws), the Guangdong proposal would expressly protect employees who cease work in response to an employer’s failure to bargain.[33] Lest alarms be sounded, the remainder of the draft forbids strikes where the process set forth for initiating bargaining and mediation has not been exhausted—a possible express proscription against strikes outside the channels for collective bargaining and mediation.[34]


The ACFTU website set forth a vision of extensive bargaining in enterprises over wages, hours and conditions, and extensive equal consultation.[35] This vision has now come to the private sector. Workers at the grass roots are also using the law as “a weapon” in a parallel fashion and will often push employers into direct bargaining. Thus, the government is negotiating official space for grass roots representation parallel to the union. Will competent organizational forms for employers to bargain with the official union and rank-and-file worker representatives emerge to meet this challenge?

Earl V. Brown Jr. is Labor & Employment Counsel for the American Center for International Labor Solidarity.

[1] The rising power of the Chinese worker, The Economist, July 29, 2010; The next China, id.
[2] Earl V. Brown, Chinese Workers Flex Muscles, Progressive Policy Institute Special Report, July 15 2010,
[3] See, Mapping Labor Unrest across China, China Strikes, (2011), (Showing the extent of industrial unrest 2009-date).
[4] Labor strikes do not herald revolution, Global Times, May 3, 2011,
[5] See, Guthrie, China and Globalization, 223-235, (Routledge, 2006). See also, Mary Elizabeth Gallagher, Contagious Capitalism: Globalization and the Politics of Labor in China, (Princeton University Press, 2005), (a beautifully written review of China’s march to a more private industrial economy.) See also, Luigi Tomba, Remaking China’s Working Class: gongren and nongminggongren in Shelton et al., China’s Changing Workplace, London: Routledge, Chapter 8 (2011), for a wrenching description of this process viewed from the ground in the “rust-belt” industrial town of Shenyang.
[6] Gallagher, supra n. 4, at 121-132.
[7] Ronald C. Brown, Understanding Labor and Employment Law in China, 8-11 (Cambridge University Press, 2009) (describing the colossal amount of unpaid wages due migrants and legal responses to this festering problem.) It is important to remember, however, that while workers were protesting arrearages and SOE restructuring, strikes for better wages and improvements were numerous as well. Chang Hee Lee, Industrial Relations and Collective Bargaining in China, Working paper No. 7, ILO, Geneva, 3-4 (October 2009); Zheng Qinghong, Regulate the right to economic strikes, build harmonious labor relations, proposal submitted to the Fourth Session of the Eleventh National People's Congress and the Fourth Session of the Eleventh National Committee of Chinese People's Political Consultative Conference (CPPCC) in March 2011, available at Although China does not collect statistics on strike, Chang Hee Lee, above at 3, sets out a marked rise in collective protests (quntixing shijian) over labor and other issues, often outside legal procedures. In 2003, 60,000 such protests were logged, in contrast to only 10,000 in 1993. 46.9 percent of the 2003 collective protests were described as labor related. Id.
[8] See supra n. 1.
[9] Honda triples profit forecast on Japan, China sales, Gasgoo, Automotive News, October 27, 2009,
[10] Wildcat Strikes In China, China Study Group, June 17, 2010,
[11] In response to my questions about how the Foshan workers selected their representatives an expert in touch with the plant responded: underground elections are not transparent to the outside!
[12] Strike at Honda in China ends with a 24% wage rise, International Metalworkers Federation, June, 2010,; Honda Offers Strikers in China 24% Pay Boost, Wall Street Journal, June 1 2010, (describing June 3rd settlement at Foshan). The Foshan strike was closely observed internationally and in China, and a definitive account remains to be completed by researchers and historians with more distance. Two websites are an excellent source on grass roots developments inside China—China Labor News Translations, found at, and China Study Group, found at
[13] Supra n. 4.
[14] See as one of the many articles describing auto and other strikes in the summer of 2010, Another Honda parts plant in Foshan on strike,, June 9, 2010,
[15] For example: China’s Government-Controlled Unions Call for Reform Following Labor Unrest, BNA Daily Labor Report, August 9, 2010; Tom Mellen, China Drives to Boost Union Role, Morning Star, September 1, 2010.
[16] Chang Hee Lee, Industrial Relations and Collective Bargaining in China, ILO Working Paper No. 7, 9 (2009) (China has been engaged in “institutional cloning” of other industrial relations models, largely tripartite ILO models).
[17] Law of the People’s Republic of China on Employment Contracts, promulgated June 29, 2007 and effective Jan. 1 2008, Article 4, translation by Baker and McKenzie, http;// (translation by law firm principally representing corporations).
[18] Here is how the ECL puts it: the parties in their contractual relations shall abide by “…the principles of lawfulness, fairness, equality, free will, negotiated consensus and good faith.” ECL, Art. 3.
[19] See, Trade Union Law of the People's Republic of China (1992), as amended, 2001, Art. 9, (stipulating only that “…close relatives…” of the principals in an enterprise may not be elected as members of the grass-roots trade union committee). An unofficial English translation is available at
[20] Articles 9-10, 16-17, 35 of the Trade Union Law of the People’s Republic of China, adopted April 3, 1992, and amended October 27, 2001. The force of these provisions are not entirely clear.
[21] Id, Article 14.
[22] Id., Articles 3-4, 7-10. Reading the Measures, one is left to wonder if their real intent may be to reiterate party and higher-level union control over the grass roots election.
[23] Shanghai Regulations on the Employee Representative Congress, effective May 1, 2011, Arts. 3-4, 8-9.
[24] Id., Articles 8-9.
[25] Id., Articles 15, 21.
[26] Id., Article 34. In this and other respects, the Shanghai ERC scheme follows the script of the Trade Union Law, Articles 9-10; 16; 35-36; 38-39. That model, in turn, owes much to the initial framework for co-determination adumbrated in the German Constitution of 1919, Article 165. Weimar Const. Art. 165.
[27] Articles 18-19; 45; 52; 68; 109; 118 of the Company Law of the People’s Republic of China, promulgated 1992, amended through 2005. It is not clear whether such “co-determination” is compelled by the Company Law in the private sector.
[28] New Chinese law to turn “lose-lose” labor disputes into “win-win” negotiation, Xinhua, (July 23, 2010); Andreas Lauff and Jonathan Isaacs, ACFTU Pushes Forward Collective Bargaining and Democratic Management at Enterprises, Baker and McKenzie,; Anita Chan, A threat on paper, South China Morning Post, (October 9, 2011) (Chan derides the hyperbolic rhetoric about the Guangdong proposals).
[29] Guangdong Province Democratic Management of Enterprises Ordinance, Art. 26, (4th Draft).
[30] Id., Article 29.
[31] Id., Article 34.
[32] Chan, supra, n. 28.:
“Our agitated businesspeople are concerned that the proposed regulation goes further. Under the draft rules, workers can elect representatives to sit in an annual staff and workers' representative congress. They are also entitled to at least a third of the representatives on the board of directors and the supervisory board. Yet the businesspeople have not read closely the wording about these "worker board members and worker supervisors. Article 31 states that such an arrangement "should" be established in state enterprises and in joint ventures with state enterprises as shareholders. The implication is: first, it is not mandatory; second, other than the specified ownership types, factories are not required to have them at all. Hence, Hong Kong-invested firms do not fall under Article 31.”
[33] Guangdong Province Democratic Management of Enterprises Ordinance, Art. 54, (4th Draft).
[34] Id., Articles 34, 40, 42, 51. 53.
[35] Chinese Trade Unions Vigorously Advance the Democratic Management among Enterprises and Institutions with the Workers' Congress System as the Basic Form, ACFTU (Nov 16, 2007),

France: Recent Developments

By Roselyn Sands and Giani Michalon

Restructuring a French Company May Have Unexpected Financial Consequences for Other Entities of the Group

In a well published decision, in January 2011, the French Supreme Court recognized the liability of a French parent company as co-employer of the employees of one of its French subsidiaries.

In that case, the activities of French subsidiary A were transferred to French subsidiary B. Those employees refusing the transfer from A to B were terminated.

Some of these employees challenged their redundancy and claimed damages from both Company A, their employer, and also, Company C, the French parent company.

Based on the “intermingling of interests, activity and management” between Company A and C, which was key in the decision, the French Supreme Court held that both companies were co-employers of the employees and therefore co-liable for any financial consequences. Such intermingling of interests, activity and management were notably shown by:

- the fact that the subsidiary was economically dependent on the parent company which owned the majority of the share capital;
- the joint management of the staff of both companies and also of another subsidiary;
- the fact that the parent company was taking, from a practical standpoint, all strategic decisions for its subsidiary and notably the decision to transfer the activity of the subsidiary which led to the redundancies of employees;
- the fact that the subsidiary was not autonomous, the parent company being the one which had the operational management.

Several earlier decisions of French labor court suggested co-liability of companies belonging to the same group when these companies could be considered as co-employers under the “intermingling of interests, activity and management” test.

The French Supreme Court thus confirmed the tendency of the lower Courts to extend the liability relating to financial consequences of redundancies to other companies of the same group in the context of a restructuring.

Moreover, the French Supreme Court considered that, when an employee is co-employed by entities of the same group, the suspension of activity of one of these entities can only justify redundancies if a valid business justification exists not only at the level of the company but at the level of the group activities.

This decision is in line with long-standing case law in France considering that, in order to assess whether a company has valid grounds to proceed with redundancies, such grounds must be examine not only with reference to the company concerned but with respect to the group in a all.

A Slice of Flexibility for the Employer Regarding the Modification of the Variable Part of an Employee’s Remuneration

It has been established for a long time, in France, that the modification of an employee’s remuneration requires his/her prior consent, even if the change is considered as more favorable to the employee!

Many considered that, given that the modification of an employee’s objectives would impact his/her remuneration, the employer would thus need the employee prior consent for such modification.

In March 2011, the French Supreme Court adopted a solution much more favorable to the employer considering that, under certain conditions, an employer may unilaterally modify the objectives determining an employee’s variable remuneration.

In that case, an amendment to the employee’s employment contract provided that the determination of the goals relating to his variable remuneration was a prerogative of the employer which had the possibility to modify them unilaterally.

The employee challenged the possibility for the employer to modify unilaterally his goals considering that such modification should require his prior approval.

However, the French Supreme Court held that, when the objectives are unilaterally determined by the employer, it can unilaterally modify such objectives under certain limits.

An employer may therefore modify unilaterally the goals to be reached by an employee in order to obtain his variable remuneration unless the employment contract provides otherwise.

The French Supreme Court recalled that the new goals must be achievable and that the employee must have full knowledge of them at the beginning of the year.

Employer should therefore review the existing employee documentation and consider gaining flexibility on these matters of goal setting and variable remuneration.

Due to changes in the Social Security Tax laws, the cost of termination of an employee in 2011 has significantly increased

As a consequence of the global economic crisis, the government has decided to limit the potential exemption of social security contributions related to termination indemnities.

Indeed, the Finance Act on Social Security for 2011 lowers the ceiling of the social security exemption applicable to any termination indemnities, severance and/or settlement indemnities relating to the termination of an employment contract.

As from 2012, any payments related to termination of employment above EUR 106,000 will be subject to full social security contributions both for the employer and the employee.

This will also concerns social plan payments, which have been tax free.

This new reform also includes the damages granted by a judge for wrongful dismissal.

Before the Finance Act of 2011, amounts granted as damages by a court were fully exempted from social security contributions no matters the amount; now, these payments are treated as any other type of remuneration and, thus, will also be subject to social security contributions when total termination indemnities granted to an employees are above the EUR 106,000 ceiling.

Given the high level of social security contributions paid by the employer (40% - 45%), this new reform will significantly impact termination costs and should be taken into account when estimating termination and litigation risk.

The Reinforced Role of the Health and Safety Committee in France

It is well-known that in France, the Works Council is a key player when implementing any project in a company. The information and consultation process of the Works Council may significantly impact the timing of a restructuring, reorganization project, and, of course, the cost.

The role of the Health and Safety committee was, for a long time limited to hygiene, working conditions and security. However, more and more, this committee participates not only for the protection of the physical security of the employees but, also, for the protection of their mental health.

In this respect, recent case law shows that employers should also engage the Health and Safety committee given the increasing attention with respect to mental conditions/ stress of employees.
Even if there is no decision of higher courts yet, several lower courts show a tendency for a reinforced role of the Health and Safety committee.

In two recent decisions of February and April 2011, the reorganization of a sales department or the restructuring of an HR department and the creation of a shared-service center were suspended by the courts because the employer had not consulted the Health and Safety committee.

The tendency of an increased role of the Health and Safety committee in any project impacting employees should be anticipated by employers.

By Roselyn Sands and Giani Michalon, Ernst & Young, EMEIA & France Human Resources, Labor and Employment Law

Ireland: The Employment Challenges Potentiall Arising From the Banking Reform

By Deidre Lynch

1. Overview

The third President of the United States, Thomas Jefferson, remarked that “Banking institutions are more dangerous to our liberties than standing armies.” Whilst you may not concur entirely with this view, the global financial crisis has provided a dramatic reminder that mismanagement of credit institutions may indeed be extremely dangerous. In Ireland, a number of significant pieces of legislation have been introduced which will undoubtedly present new challenges from an employment law perspective. The Central Bank of Ireland (“CBI”) has also conducted a range of reviews of the practices of financial institutions, including in particular a review of the link between remuneration practices and risk taking, and it is in the process of introducing a number of measures which will lead to increased scrutiny and supervision of credit institutions operating in Ireland. In this article, I will examine some of the employment law issues potentially arising from a number of these initiatives.

2. Special orders and bonus payments where financial assistance has been provided by the state

The Credit Institutions (Stabilisation) Act 2010 was signed into law on 21 December 2010. It provides the legislative framework for the restructuring of the Irish banking system, as agreed in the EU/IMF Programme for Ireland. The Act applies to, amongst others, those financial institutions which have received funding support from the Irish state. The majority of the Act’s provisions will cease to have effect from 31 December 2012. However, it does contain a number of novel and interesting provisions which potentially raise employment law issues.

Special Management Orders

The Act empowers the Minister for Finance to make a “special management order” enabling him to appoint an appropriately qualified person as a “special manager” to a relevant financial institution for a period of six months. Such individual would be required to carry on the institution’s business as a going concern with the object of preserving and restoring its financial position. The Act gives a special manager extremely wide-ranging powers, including sole authority over and direction of officers and employees of the institution and statutory authority to remove any person who is a director, employee or consultant, without the necessity to give notice to such person.

Where an employee is dismissed in Ireland and has one year’s continuous service with his or her employer, he or she may bring a claim of unfair dismissal. If such claim is successful, then the employee may be awarded compensation of up to two years’ gross remuneration or an order may be made that he or she be reinstated or re-engaged. In the normal course, it may also be open to an employee to bring an application for an injunction or a claim of wrongful dismissal at common law, where he or she has not received the requisite contractual notice of termination of employment. Whilst the Act preserves an individual’s right to claim damages or compensation from the relevant institution for loss of office or employment, it expressly disentitles an employee to be reinstated or re-engaged and also curtails potential injunction applications. It is clear that these provisions may have a profound impact on the employment rights of individuals employed by a relevant institution in the event of the appointment of a special manager.


The Act empowers the Minister to impose terms and conditions when providing financial support to relevant institutions which any other provider of financial support would be entitled to impose. This provision, which not unsurprisingly has attracted much attention, can be used to prevent the making of bonus payments by relevant institutions to employees or officers where the Minister stipulates that a condition of further financial support is that such bonus payments are not made. Its purpose is to provide a relevant institution with a defence to a claim by an employee that he or she was entitled as a matter of contract or statute to be paid a bonus. This provision has not yet been examined by the Irish courts and it will be interesting to see how its precise parameters are interpreted where an employee claims to have earned a bonus and it remains unpaid.

3. Corporate Governance Code for Credit Institutions

On 8 November 2010, the CBI issued its Corporate Governance Code for Credit Institutions and Insurance Undertakings (the “Code”), which applies to such institutions’ existing boards and directors from 1 January 2011. Institutions have until 30 June 2011 to introduce changes to their systems and structures and where changes to board membership are necessitated by the Code, the period is extended to 31 December 2011. The Code imposes specific obligations on banks and insurance companies in relation to their corporate governance structures.

The Code seeks to ensure that by putting in place robust corporate governance arrangements, the boards of these institutions are in a position to manage risk and thereby minimise the prospect of future financial crises. On the introduction of the Code the Head of Financial Regulation, Mr Matthew Elderfield, commented that its provisions “are more demanding than those in place in other jurisdictions as we have decided that in the area of corporate governance we do not want to simply match best practice internationally but wish to set a higher standard.”

The Code includes provisions relating to matters such as board membership and the role and responsibilities of the chairman and other directors. From an employment law perspective, there are several interesting requirements set out in the Code. By way of example, the Code obliges a relevant institution to review the renewal of the Chief Executive Officer’s contract at least every five years. Where, as is generally the case, an individual is employed as Chief Executive Officer pursuant to a permanent contract of employment the above requirement will undoubtedly raise interesting issues lead to litigation where, for example, the conclusion of the review is that the individual should not continue in the position.

4. The fit and proper regime

Under the Central Bank Reform Act 2010 (the “2010 Act”), the CBI has been granted very significant statutory powers, which may have an impact on the employment relationship. In this respect, it now has power to regulate the appointment of individuals to influential positions in regulated financial services providers and to apply a rigorous fitness and probity regime to individuals occupying certain positions in such institutions. The ambit of the new regime is much broader than that which was previously in place in that it brings within its scope persons who perform “controlled functions” and not simply those in senior managerial positions.
In summary, the CBI is now empowered to: -

· designate certain positions as “pre-approval controlled functions” (PCF’s) or “controlled functions” (CF’s);
· compel the production of specified information/documentation from individuals or firms and compel persons to attend before the CBI for interview prior to any appointment being made to a PCF;
· impose statutory standards of fitness and probity which CF’s and PCF’s shall be obliged to meet. The CBI is empowered to issue a code which will prescribe such standards.

Consultation Paper

The CBI issued a consultation paper in March 2011 concerning two aspects of the new fit and proper regime, namely the designation of positions as either PCF’s or CF’s and the proposed standards of fitness and probity which must be met by such individuals. Interested parties were invited to make submissions by 20 May 2011.

CF’s and PCF’s

The 2010 Act contains an extremely broad definition of CF to include persons who carry out a function in relation to the provision of a financial service that is likely to enable them to exercise a significant influence on the conduct of the affairs of a regulated financial services provider. In addition, a CF is defined to include a function that is related to ensuring, controlling or monitoring compliance by a regulated financial service provider, the giving of advice to a customer, dealing with or having control over property of a customer or dealing with property on behalf of the financial service provider.

Where a person performs a CF role, the relevant institution must not permit that person to perform such function unless it is satisfied on reasonable grounds that the person complies with any fitness and probity standards set out in the forthcoming code to be finalised by the CBI and also that the person has agreed to abide by such standards.

From an employment law perspective, one significant provision of the 2010 Act is the extension of a power to the Head of Financial Regulation to investigate the fitness and probity of a person performing a controlled function. Such person may be suspended if the Head of Financial Regulation is of the opinion that there is sufficient reason to suspect that the person is not a fit and proper person. A suspension notice may endure for an initial ten day period and if confirmed it can apply for a further period of up to three months. The Head of Financial Regulation is also empowered to make an application to the High Court to extend the period of validity of the suspension notice.

The CBI may designate certain functions as PCF’s, where the function is one by which a person may exercise a significant influence on the conduct of the regulated financial institution’s affairs. Directors, secretaries and chief executive officers are deemed to be PCF’s by the 2010 Act.
One of the consequences of a position being designated as a PCF is that the relevant regulated financial institution is prohibited from offering to appoint a person to perform the function unless the CBI has approved the particular appointment in writing. In considering whether or not to approve a particular appointment, the CBI may request the production of documentation/information to it and it may also require the candidate or another person to attend before it for interview. Clearly, these powers are extremely significant and ensure that the CBI will play an active role in ensuring the fitness and probity of individuals appointed to senior and influential positions within regulated financial institutions.

Proposed Standards of Fitness and Probity

The draft standards of fitness and probity proposed by the CBI in its consultation paper raise a number of very interesting issues from an employment law perspective. An analysis of each of these issues would obviously be beyond the scope of this article. However, I have highlighted a number of matters below in order to give readers a flavour of the employment challenges which may arise.

One matter which is unclear is the level of due diligence which relevant institutions will be obliged to undertake to ensure that the standards prescribed are met. In this regard, for example, the draft standards require that a person must be able to demonstrate that his or her role in a CF or PCF is not adversely affected to a material degree by financial matters or credit or bankruptcy issues. The lengths to which an institution must go to satisfy the above are not entirely clear and this is likely to raise issues given the level of personal debt of many individuals in Ireland.

Some practical difficulties may also arise in recruiting external candidates to key roles in view of some of the requirements of the current draft code. One of the criteria that needs to be satisfied by a PCF candidate is obtaining a reference from his or her current employer. Many candidates will be reluctant to disclose to their current employer that they have applied for a new job prior to having a binding contractual commitment from the new employer to employ them and the 2010 Act prohibits any contractual commitments being entered into with PCF’s without CBI approval of the candidate. Further, in Ireland many employers do not issue references to former employees. Instead, employers tend to issue a statement of employment which would not address the ability of the individual and would be limited to basic factual information such as the position held by the individual, dates of employment and the nature of his or her duties.


It is clear from the various initiatives outlined above that the Irish legislature has introduced very significant stabilising and reforming measures in the financial services sector. The precise implications of many of these measures for the employment relationship between a financial institution and its employees will be likely to be the subject of litigation over the coming years.

Clients operating in the financial services sector, who may be affected by these measures, would be well advised to take a pro-active approach to these initiatives. Whilst the Irish legislature has certainly drawn legal battle lines, it will undoubtedly fall to Irish courts and tribunals to demarcate several of those lines in particular situations. Absent a pro-active approach to the new regime, the words of an old adage may ring true for many financial institutions and it may indeed prove too late for such institutions to sharpen their defence sword when the drum beats for legal battle!

Deidre Lynch is a Senior Associate Solicitor at Matheson Ormsby Prentice, Dublin, Ireland

Mexico: Legal Framework for Expatriate Employees

By Juan Najera


Workforce mobility is not a new trend akin to today’s “globalization”. It dates back to ancient times, as in the Greek and Roman ages, continued during the expansion of the Ottoman empire, and throughout the 3 subsequent periods of globalization explained by Friedman
[1]: Globalization 1 -of countries- (1492–1800), Globalization 2 -of companies- (1800–2000), and Globalization 3 -of individuals- (2000–present).

Globalization is not only an economic phenomenon. It is also a social and legal phenomenon. In today’s increasingly competitive economies, a two-way exchange of “mind workers” and “production workers” occurs
[2]. The scope of this work is only to describe in general terms the various legal implications of skilled professional employees sent by their employers to their Mexican subsidiaries or business partners or when employers located anywhere in the world, not finding the skill in the Mexican market could effectively turn to recruitment on a global scale, such as a UK based company that may hire a Costa Rican executive to head its new Mexican subsidiary (“corporate expats”), and not other types of expatriates, as “pensioner expats” or “migrant workers”[3].

There are several advantages and disadvantages of using expatriate employees to staff international company’s subsidiaries. Advantages include permitting closer control and coordination of international subsidiaries and providing a broader global perspective. Disadvantages include high transfer costs, the possibility of encountering government restrictions in the country of destination, and possibly creating a problem of adaptability to foreign environments

Overseeing, managing, or supporting domestic and international employee transfer presents the employer with great challenges for which an international company should have experienced staff or adequate consultants and follow proper procedures to mitigate the cost, the associated risks and to secure compliance in all involved jurisdictions (origin and destination, and even third countries).

There are two main types of “expats”, i) those on time limited “secondment agreements”, “expat contracts” or “assignments”, usually living in housing provided by the employer, with most other expenses such as children's education also paid by the employer while they are still maintaining a home in their country of origin. At the expiration of their assignment these expats either move on to another assignment, or are given a local contract without expat subsidies; and ii) those on "local" contracts who are treated and paid like other locals (but that may still receive some of the benefits described below to compensate them for the costs arising from relocation or local cost-of-living).

Overview of the Mexican legal system

The Mexican Legal System is inspired by the Greek and Roman traditions and by the French civil law system. Its main foundations are the Federal Constitution and the Civil Codes system which regulate, among others, human and civil rights, legal capacity of natural persons, domicile, marriage/divorce, minors and incapacitated persons (custody, guardianship, adoptions, etc.), estates, and others, as well as civil contracts such as rental/lease agreements, purchase agreements, donations, abandoned property, etc. The Mexican legal system is more comparable with other legal systems throughout Latin America and continental Europe than with the U.S. legal system. It is important to mention that Mexican law (with some exceptions for international or tax laws) is based on a “short arm” statute, which renders it valid and enforceable only within the Mexican territory.

Non-Mexican nationals are entitled to all rights and privileges under the Mexican legal system, except for directly owning real estate properties located within a strip of 100 kilometers (62.50 miles) from the international border lines (U.S. in the North and Guatemala and Belize in the South) and 50 kilometers (31.25 miles) from coast lines (Pacific, Sea of Cortez, Gulf of Mexico and the Caribbean), which cannot be directly owned by foreign nationals, except through a real estate trust, or owning majority business interests in regulated activities (oil, transportation, telecommunications, etc.) or engaging in political activities. As a separate note, we strongly advise against use empty Mexican corporations, figureheads or “trusted friends” to acquire real estate.

Personal status (i.e. minor, married, single, divorced, under guardianship or custody, etc.) acquired in a foreign jurisdiction is normally recognized in Mexico, unless it is against Mexican law. Commonly the most beneficial status is recognized for any person within the Mexican territory.

Labor matters such as individual employment contracts or collective bargaining, labor outsourcing, termination, salary and benefits, profit sharing, accident compensation, labor unions or strikes, are regulated at federal level by the “Ley Federal del Trabajo” (Federal Labor Law or “LFT”). The competent authorities are the federal Ministry of Work (Secretaría del Trabajo y Previsión Social or “STPS”), through its various agencies, such as the Federal Work Inspection, the Federal Labor Board (Junta Federal de Conciliación y Arbitraje or “JFCA”, a labor tribunal competent to adjudicate disputes between employees and employers which business activities are regulated at federal level, such as transportation, banking, oil, etc.). There are also Local Labor Boards (Juntas Locales de Conciliación y Arbitraje or “JLCA”, which are labor tribunals in each state jurisdiction competent to adjudicate disputes between employees and employers which business activities are not regulated at federal level).

Social security, housing, and retirement savings are all regulated by federal law and enforced by federal authorities. It is important to mention that recently enacted amendments to the Social Security law impose strict reporting requirements (and penalties) upon labor outsourcing companies and their clients, which make it easier for the authorities to monitor compliance by primary and secondary employers. There are also Social Security or Pension Transfer Treaties signed by Mexico with other countries, which are promoted by the International Labour Organization
[5], an agency of the United Nations.

Visas, resident aliens and immigration matters are regulated at federal level by the brand new Migration Law
[6] (Ley de Migración). The competent authorities are the National Migration Institute (Instituto Nacional de Migración or “INM”) and the Mexican Consulates in more than 130 countries.

Mexico is a “global income” jurisdiction for Income Tax purposes, so when a foreign national becomes a resident of Mexico (through an authorization granted by the INM), he or she must get a Mexican Tax Id number (”RFC” or Registro Federal de Contribuyentes) to declare and pay Income Tax in Mexico over his/her total worldwide income. Double taxation effects can be then mitigated or offset by claiming benefits under current Double Taxation Treaties -DTTs-
[7] between Mexico and the country of tax residency or citizenship of the expat. The tax system is administered by the Internal Revenue Service of Mexico (Servicio de Administración Tributaria, or “SAT”[8]) and structured around a Federal Tax Code (Código Fiscal de la Federación or “CFF”). Income Tax is regulated only at federal level through the Ley del Impuesto Sobre la Renta or “LISR”. There is no local (state) income taxation. There is, however, a local payroll tax imposed in the majority of state jurisdictions (Impuesto Sobre Nóminas or “ISN” of between 1.5 and 3.5% over the payroll amount). The Income Tax rates are very competitive and currently capped at 30% over the taxable income. One important advantage is that gifts among family members (vertical) are not taxed at all. Inheritances are not taxed at all either, as there is no Estate Tax anywhere in Mexico.

Please keep in mind that Mexico has a Value Added Tax (“IVA”) imposed on virtually all sales at a rate of 16%.

Particular legal issues regarding Expatriates

Key labor issues

The LFT is a public interest law, which is very protective of workers or employees irrespective of their national origin or residency status in Mexico and applies even if there are any contradictory provisions in the secondment, relocation or assignment agreement between the Company and the expat employee.

Under the LFT system, a labor contract is deemed to exist whenever a person renders his or her personal services to any other person
[9], business or employer (including foreign embassies, consulates or offices of international organizations), even if an intermediary is used under an “independent contractor” or “labor outsourcing” agreement and regardless of whether the employee goes to work regularly or not.

Absent a written agreement, or if the current written agreement does not include a specific provision required by law, or its provisions are against the law, then the labor relation is governed by the LFT.

Total salary in Mexico must include payments for the following: i) 1 or 2 resting days per week; ii) Christmas bonus of 15 days each year (or fraction thereof); iii) annual vacations + a 25% vacation premium; iv) employee profit sharing. Salary of internationally assigned personnel customarily consists of standard salary and monetary benefits such as cost of living and/or hardship allowances supported by non-monetary incentives i.e. cost of living allowance, tax equalization, mobility premium, hardship allowance, housing, education and other benefits.

Employment may be terminated for cause, provided that the employer has sufficient proof to support the cause of termination. Wrongful dismissals can be costly, as the wrongfully dismissed employee may be adjudicated with a mandatory severance payment of 3 months + 20 days of salary per each year of service, plus accrued unpaid salary while the lawsuit proceeds
[10], among others.

It is important to mention that, regardless of what the “secondment agreements”, “expat contracts” or “assignment agreements” might establish, a labour relation is created between the expat employee and the Mexican employer and give said employee various rights.

Key immigration issues

It is important to mention that any foreigner who enters Mexican territory must follow a procedure to obtain the adequate visa or migration status to be able to be employed and to perform the duties for which he or she was engaged. Failure to comply with Migration Law could result in fines, expiration of rights, administrative sanctions or even prison or deportation.

The employer is made liable by the Mexican government for all the repatriation expenses of the expat.

In many cases the expat is entitled to import duty free a full set of used furniture and household goods

Key tax issues

As soon as the expat becomes a resident of Mexico or establishes his or her residence in Mexico (animus residendi), he/she is deemed to be a resident of Mexico. Any and all earned income is then taxed under Title IV of the Income Tax Law and on global basis.

If a foreign employee is assigned to work in Mexico for a time period of less than 180 days or does not become a permanent resident, a tax withholding must be made on all sources of local income. These tax withholdings may not entitle the foreign employee to claim benefits under a DTT.

Because residence is defined so broadly, most treaties recognize that a person could meet the definition of residence in more than one jurisdiction (i.e., "dual residence") and provide a “tie breaker” clause
[12]. Such clauses typically have a hierarchy of three to five tests for resolving multiple residencies, typically including permanent abode as a major factor. Tax residency rarely impacts citizenship or permanent resident status, though certain residency statuses under a country's immigration law may influence tax residency[13].

It is important to mention that when there is a flux of money between two or more related companies, most tax systems, including Mexico’s consider these as related party transactions which give rise to “Transfer Pricing” issues. Also, when key employees are assigned to foreign subsidiary or affiliate company, especially to start new facilities, some tax authorities may consider it as a transfer of intangibles, for the experience and knowledge of the expatriate. In this case, it is deemed that the company receiving the employee should pay a royalty fee, at fair market price.

Key social security issues

Affiliation of employers and enrollment of all permanent or temporary employees is not optional. Lack of compliance may carry stiff fines and penalties.

There are useful ways to eliminate or minimize double taxation on Social Security or Pensions by requesting the issuance of coverage or transfer certificates under a current bilateral Social Security or Pension Transfer Treaty.

Please keep in mind that Mexican law expressly prohibits the procurement of insurance coverage from foreign insurance companies not licensed in Mexico and punishes this as a federal crime. Life or medical insurance may be procured locally to supplement social security coverage.

Recommendations upon the arrival of the expat employee

· Execute a well-written labour agreement.
· Get the person to enroll with the RFC and get his or her electronic signature (“FIEL”).
· Enroll the employee and his or her family members with the SAR, IMSS and INFONAVIT (and keep the records current).
· Make sure that the proper documents are filed in the country of origin to reflect the change or termination of tax residency.

Recommendations prior to the departure of the expat employee

· Execute a well-written labour termination and release agreement.
· File a change of taxpayer’s status notice (“suspension de actividades”) with the SAT.
· Get a “certification of tax residency” of the expat.
· File the termination notices (“baja”) of the employee and his or her family members with the SAR, IMSS and INFONAVIT and get any benefit certificates as needed.
· Get a notarized power of attorney to address tax issues that may arise after the expat’s departure.

A final word

By knowing what is required for good management of expat employees, you will make sure that your company is able to better serve its expat staff through various important issues such as international taxation, immigration, labor and social security. In addition, accounting planning will let you legally make tax deductible all benefits paid or spent on behalf of the employee, as these allowances could easily double the annual employee costs and may also cause in unplanned or unexpected costs, such as double or even triple taxation at income tax, social security or pension levels, as well as to prevent any complications for your company and your expat employees, including having to pay late interest or fines, while maintaining current all social security and pension benefits current in the country of origin and securing international compliance of all related obligations.

Juan Najera, Najera Danieli & Asocs, Mexico

[1] Thomas L Friedman, "It's a Flat World, After All", New York Times Magazine; Apr. 3, 2005.
[2] Reich, Robert. The Work of the Nations, Preparing Ourselves for 21st Century Capitalism. Alfred A. Knopf, Toronto, 1992
[3] "Expatriate Movements and Trends" in
[4] Gomez-Mejia, Luis; Balkin, David B.; Cardy, Robert L. MANAGEMENT OF HUMAN RESOURCES, Pearson Prentice Hall, 2008.
[5] See:
[6] Enacted into law as of May 25, 2011. However, many provissions of the old “Ley General de Población” will still be applicable during a period of 180 days, while the new executive regulations manual (Reglamento) is enacted.
[7] As of May, 2011, there were 48 DTTs in force, whith more than 20 under negotiation.
[8] See:
[9] In this vein, it is important to mention that domestic personnel is considered as a worker under the LFT and the Social Security Law.
[10] However, this is not automatic, so we recommend against yielding to pressure to pay any such amount just by the mere threat of being sued.
[11] Known in Spanish as “menaje de casa”
[12] See article 4 of the US-Mexico DTT
[13] See: