Wednesday, December 14, 2011

International Employment Committee Newsletter - Winters 2011

Dear All

Welcome to the Winter 2011 edition of the International Employment Committee Newsletter. In this edition, we have articles from numerous jurisdictions including India, Germany and Denmark. It is fantastic that we continue to have support from all over the globe, and our thanks to all those who have helped us in this regard by submitting articles for this edition.

Wishing you all a happy holiday, and best wishes for 2012 and a bumper year for the Committee.

Denmark: Danish Data Protection Agency issues guidelines on access to emails of former employees

Anders Etgen Reitz and Julie Lindberg, IUNO

Danish Data Protection Agency issues guidelines on access to e-mails of former employees The Danish Data Protection Agency has recently published guidelines on how long an employer may keep the e-mail account of a former employee open, on who should have access to the account and for what purposes the account may be used.

As a result of several cases brought before the Danish Data Protection Agency concerning the employer's handling of the e-mail account of a former employee, the Agency has drawn up some guidelines on the subject. The guidelines apply where there is no specific agreement between the employer and the employee and provide among other things that:

1) The e-mail account of a former employee may only be kept open for as short a period as possible, and this period may not exceed twelve months. The twelve-month period begins to run from the time when the employee ceases to work regardless of whether the company pays salary to the employee for a period after the end of employment.

2) As soon as the employee has left the workplace and no longer has access to his or her e-mail account, the employer is required to set up an auto-reply stating that the employee no longer works for the employer.

3) The e-mail account may be used only to receive e-mails. Any personal e-mails sent to the e-mail account may, however, be forwarded to the employee's personal e-mail account.

4) Only one or very few trusted employees should have access to the e-mail account of the former employee.

5) Information on the employee's e-mail address must as soon as possible be deleted from the company's website and other information sites open to the general public.

6) In cases where the company keeps the e-mail account of a former employee open, it must comply with the rules of the Danish Data Protection Act, including the rules governing the duty of disclosure, access, etc. As to the duty of disclosure, it may be incorporated in the company's IT policy, and the Data Protection Agency also recommends that the company draws up guidelines on the handling of the e-mail accounts of former employees.

It should be emphasized that the Danish Data Protection Agency does not provide any directions as to whether the employer may read the former employee's personal e-mails as this issue is governed by the Danish Criminal Code. However, the general rule is clearly that the employer is not allowed to do so.

Germany: Head count reductions in Germany - mandatory age discrimination?

Bernd Weller, Partner, Heuking Kuhn Luer Wojtek, Frankfurt am Main

It is well known that the laws of the European Union provide for several directives and principles aiming at the prevention of discrimination, in particular age discrimination. In Germany, the European anti-discrimination directives were implemented in 2006 by the Equal Treatment Act (“Allgemeines Gleichbehandlungsgesetz”). The Equal Treatment Act forbids the discrimination of employees based on their gender, age, disability, race and origin as well as religion and belief. At the same time, “discriminatory” behaviour was and still is an integral part of German culture and society. Whenever an employer implements headcount reductions for operational reasons, the German Protection against Dismissal Act (“Kündigungsschutzgesetz”) requires employers to base the selection of the employees, i.e. the dismissal decision, on the employees’ age, seniority, alimony duties and severe disability. Other criteria like performance shall not be considered.

At first glance, the demands of the German Protection against Dismissal Act seem to be discriminatory and contrary to European law. As a consequence, many expected the Federal German Labour Court (“Bundesarbeitsgericht, BAG”) to declare the German Protection against Dismissal Act at least partially void insofar as it demands that employee age be considered.

When it comes to mass dismissals, many questions trigger age-discrimination. Does the length of the notice period length depend on employee age? Are older employees per se protected against dismissal? Are younger employees always the ones to be dismissed? Must the employer pay higher severance to older employees or less?

Notice periods

According to statutory German law, Sec. 622 of the German Civil Code (“Bürgerliches Gesetzbuch”), the length of notice period depends on the years of service of the employee concerned. The longer an employee is with the company, the longer the notice period becomes. The law, however, says that years with the company are only relevant if the employee is older than 25. In other words, the notice period of a 28 year old employee who joined a company at the age of 16 is only one month. A 30 year old employee’s notice period, who joined at the age of 25, is 2 months. It took some time, but in the end both German courts and the European Court of Justice (C‑555/07) declared this stipulation to be discriminatory and void. Hence, the age-relation in Sec. 622 of the German Civil Code does not exist any more. At the same time it has become common sense that similar provisions – whether in statutes or contracts – are therefore also invalid.

Special protection against dismissal because of age

Many collective bargaining agreements (“Tarifverträge”) still provide for clauses according to which employees enjoy special protection as soon as they reach a specified age and seniority. Most of them require an age beyond 50 or 55 and a seniority of more than 15 or 20 years. Because of the link to seniority, many believe that such clauses are valid. There are, however, particular provisions that cause serious concerns. Pursuant to a collective bargaining agreement of the metal industry sector in Baden-Württemberg, employees with a seniority of more than 3 years cannot be dismissed if they are more than 53 years old. Given the relative unimportance of the seniority-related criterion in this agreement, the protection against dismissal in effect depends on age only. So far, no court has held that particular agreement invalid. It can be expected, however, that the European Court of Justice will have a different view on this issue. And that is a common situation in German employment law at the moment. After only five years of the Equal Treatment Act’s implementation, many questions have already been raised and answered. Many more questions are as yet unanswered.

For an employer, this situation results in significant legal and financial risks. Should he treat an employee in line with the (quite likely void) collective bargaining agreement and dismiss others? In that case the dismissed employee might escalate the dispute to the European Court of Justice just to find out after years of litigation that the dismissal was void and the employer must pay and employ the dismissed employee. In the other case, the employer risks losing all German court proceedings just to be approved by the European Court of Justice years later. In the end, no employer will litigate for years; the result instead will be more expensive redundancy packages.

Selection of employees to be dismissed

When it comes down to selection between comparable employees, German law requires consideration of employee age. German courts so far believe that this requirement under the German Protection against Dismissal Act does not infringe the Equal Treatment Act and the European anti-discrimination rules. They always argue that “it is well known” that older employees are unemployed for longer and have more difficulties finding new jobs than younger employees. Based on that “fact”, German labour courts believe that article 6 of the EC-directive 2000/78 permits protection of older employees rather than younger ones. Statistics, however, show in most European countries that the group of unemployed young people is far bigger than the group of older employees. Hence, it can be doubted that the “facts”, upon which the German labour courts base their decisions and arguments, are true. As a consequence, a dismissal decision that is in line with the current legal opinion of German labour courts runs the risk of being proved wrong by the European Court of Justice. So what can an employer do to avoid such risks?

The employer may establish so-called age-groups (“Altersgruppe”). Then the employer may implement the headcount reduction in each of these groups in proportion to the entire headcount. As a consequence of the age-grouping, the dismissal decision becomes far less dependent on employee age than it would have under German law.

Alternatively, the employer may establish a scheme, according to which a different number of points is accredited to each employee for his age, seniority, alimony duties and potential severe disability (e.g. 1 point for each year of life – combined with a cap of 50, 2 points for each year of service, 5 points for each alimony duty (i.e. per child) and 10 points for a disability). Ideally, the scheme results in the age of the affected employee becoming less important than it historically has in Germany.

The challenge in both alternatives lies in co-determination. Both alternatives require the consent of the works council. Works council members, however, are often the older employees and, thus, tend to protect their peers rather than protecting the young. In negotiations with the works council, the establishment of schemes and age-groups often becomes an expensive task. A task, however, that avoids legal risks related to the claims of employees against their respective dismissal.

Social plan packages

Under German law, an employer must negotiate a social plan with the works council when major redundancies are envisaged. The social plan usually provides for severance payments. There again, the age of the affected employee may play a role. In Germany, two formulas are commonly used in order to calculate the employee’s severance.

According to the first formula, the severance is equal to a factor multiplied by the years of service and multiplied by the monthly gross salary. According to the alternative formula, the severance is age multiplied by years of service multiplied by monthly gross salary and divided by a divisor.

It is obvious that both formulas directly or indirectly refer to the employees’ age. German courts so far hold that the link between age and severance amount is legitimate and valid. Here again, the German courts base their decision on the “fact” that older employees per se have worse job perspectives than younger employees. And similar to the social selection, there is the significant risk that the European Court of Justice will decide differently. In deed, the European Court of Justice has already decided upon a similar question. In a Danish redundancy scenario, severances were paid to the employees. Those employees who were close to retirement age were granted a smaller or no severance at all. The European Court of Justice (C 499/08) has held that to be an unjustified age-discrimination. According to its decision, the affected employee was granted the full severance entitlement. In Germany, it is common to cap the severances for employees close to their retirement. Here again, there are significant risks for the employer – given the decisions of the European Court of Justice.

If an employer wants to limit his legal and financial risks, he should choose the first formula as it makes no direct reference to the age of the employee. In addition, the employer should provide for a general cap for the severance. Such caps have been accepted as valid by the German courts in the past. As the cap does not necessarily affect only older employees, it can be seen only – if anything – as indirect age-discrimination. Such indirect discrimination can be easier to justify, e.g. by the need to distribute a limited budget to many employees. If necessary, an additional (lower) cap for employees close to their retirement may be implemented. In this way, the employer has several lines of defence vis-à-vis the employee.


The German labour courts so far tend to continue their decisions irrespective of the Equal Treatment Act and the European anti-discrimination rules. That may be seen as a reassurance for employers – which it is not. In fact, it is to be expected that the European Court of Justice – in a few years time – will have overruled the current German judicature. That leaves employers in a situation where they must find ways to comply with both the current judicature and the (likely) future one. The best way to do that is to avoid any direct link to the employees’ age and to refer to other criteria such as the seniority and alimony duties.

India - Recent developments in employment law

Sajai Singh, Partner, J. Sagar Associates, Bangalore, India

India has continued with the development of its employment law jurisprudence this year as well. There is some level of clarity on issues that legal practioners like me were debating upon, and there are some ways forward where things looked bleak. Let’s take a look at a few recent highlights.

To be a Workman, or Not to be …

Lets start with a favorite discussion topic, of who is a ‘workman’ as defined
[1] under the of Industrial Disputes Act, 1947 (‘IDA’). And the usual question that is asked by multinationals doing business in India - what is the wage level / designation level that takes a person out of the category of ‘workman’? Can an employee be re-designated to get him out of the protective coverage available to a ‘workman’?

In such situations we recommend that clients apply two tests:

1) Check whether the employee is employed for hire or reward; and
2) Check if the employee has been employed to do manual, unskilled, skilled, operational, technical or clerical work.

On satisfaction of the above two tests of employment in the affirmative, the employee would invariably fall within the definition of ‘workman’.

Our further response that the quantum of wages / salary, the designation, the method of recruitment, the terms and conditions of employment, and the mode of payment are not relevant for deciding whether or not a person is a workman has been given a shot in the arm by the Supreme Court of India recently[2].

The observation that merits a mention is that the definition of ‘workman’ does not make any distinction between full-time and part-time employees or a person appointed on contract basis. Therefore, it cannot be said that only a person employed on regular basis or a person employed for doing full-time job may be categorized as a ‘workman’ and those employed on a temporary basis, casual, part-time or contract basis on fixed wages are not ‘workmen’.

In another judgment[3], the Supreme Court considered a matter of an employee who was transferred but did not join the work place where he was transferred. The employer company terminated his services. This led to the employee challenging the transfer order before the High Court of Allahabad. While disposing of the writ petition, the High Court gave liberty to the employee to move a representation before the Labour Commissioner. The employee filed a representation before the Labour Commissioner which was challenged by the employer company submitting that the employee was not a ‘workman’. While the Labour Commissioner held that the question whether the employee was ‘workman’ under the UP Industrial Disputes Act, 1947 could not be decided; the Supreme Court held that the issue of whether or not a person is a ‘workman’ within the meaning of U.P. Industrial Disputes Act, 1947 is a matter to be decided by a competent court, after allowing the parties to lead evidence. The enquiry before the Labour Commissioner was of a summary nature and while exercising powers of summary nature, the Labour Commissioner cannot decide and examine factual matters relating to an issue as to whether or not the person concerned is a ‘workman’.

Misconduct and its Determination

Following the brief discussion on workmen, a related issue is the protection that a ‘workman’ has vis-à-vis his job. This security of employment comes from relatively few avenues available for employers to terminate a ‘workman’. Indeed, for misconduct or a discipline related issue, a ‘workman’ may be terminated. However, misconduct has to be established pursuant to a duly conducted domestic enquiry. A domestic enquiry should be conducted in an unbiased manner, following the principles of natural justice. While the burden of proof in domestic enquiries is not as stringent as in a criminal trial, it nevertheless weighs the employer down. Some recent jurisprudence is related hereinafter.

Principles of Natural Justice - The Supreme Court had a chance to adjudicate
[4] on an ex-parte order passed in a domestic enquiry. The ex-parte order was passed since the workman was absent on various dates of hearing. The Supreme Court, on the question of whether the principles of natural justice were violated in the present enquiry, held that these principles should not be stretched to a point where they render in-house proceedings unworkable. The workman remained absent and adopted dilatory tactics. Further, the workman had tendered two admissions of guilt before the management witness and there was hardly anything that could be said on his behalf to repel the charges. Hence, it was held that the proceedings had been conducted in a fair and reasonable manner, and there had been no violation of the principles of natural justice.

A Case of Bias – As stated above, in addition to following the principles of natural justice, the domestic enquiry needs to be conducted in a fair and reasonable manner. There should be no bias in the conduct of such an enquiry. Bias formed the basis of a recent decision
[5] of the Supreme Court wherein, bias was considered to be included within the attributes and broader purview of the word ‘malice’ which in common parlance, means and implies ‘spite’ or ill will. It was held that mere negative statements are not sufficient to indicate ill-will. Cogent evidence should be led, to prove whether in fact, bias or mala fide motive existed, resulting in miscarriage of justice. As per the judgment, presumption lies in favour of bona fides of an order, unless contradicted by acceptable material, and the burden of proving mala fide lies on the person who alleges it.

Trivial Pursuits - The Allahabad High Court held[6] that a domestic enquiry cannot be held unfair on trivial points. To hold a domestic enquiry as being unfair, there should be substantial denial of opportunity to the workman and the workman should be able to demonstrate that such denial has resulted in prejudice.

The Ability to Transfer Employee – The Delhi High Court considered[7] this unique case of a suspended bank employee. On revocation of suspension the employee was asked to report to another branch of the Bank. The employee did not report to work. The Bank, thereafter, sent a notice to his last known address, but failed to get any response. The Bank then conducted a disciplinary enquiry and found that the employee had voluntarily abandoned his employment. On challenge, the Court held that transferability of the job was an incidence of service. Therefore, the employee’s failure to comply with the transfer justified the action taken and findings of the management, that he had voluntarily abandoned his job.

Crime & Punishment - Recently, the Delhi High Court
[8] considered the issue of a domestic enquiry in the context of a criminal trial and held that in normal circumstances a criminal case as well as a domestic enquiry may proceed simultaneously. The Court held that if the employer finds himself in a position where he needs to protect the discipline, sanctity, stability and propriety of his establishment he may initiate disciplinary proceedings and, if necessary, launch criminal proceedings simultaneously.

Loss of Productivity - In another interesting case on termination, a workman was terminated on grounds of not meeting productivity standards, as per the revised work norms. Such termination was held to be justified by the Madras High Court
[9] as long as the management conducted a proper domestic enquiry and found the workman guilty.

Director’s Liability - It has been clarified,
[10] by the Supreme Court of India, that Directors are not liable for crimes of the Company. Here, the offence complained of, was cheating and misappropriation of property, against the Company. The Court held that though civil law recognizes the principle of ‘vicarious liability’ of Directors of companies, the concept is not acknowledged in criminal law. Further, the Supreme Court held that there was no specific allegation against the members of the Board of Directors and that they had been named as they constituted the management of the Company. The Court also held that concepts of the Negotiable Instruments Act, 1881 (‘NI Act’) and the IDA cannot be imported into offences under the Indian Penal Code, 1860 (‘IPC’).

Past Director’s Liability – Under the NI Act, a Director may be held liable for dishonour of a cheque issued by the Company. The case
[11] before the Supreme Court was a curious case of a Past Director and her liability. The Supreme Court acquitted the Director as she had resigned before the alleged dishonour of cheque took place. The Court held that in case of a Director, the complaint should clearly specify in what manner the Director was in charge of or was responsible to the accused Company for conduct of its business before liability may be established.

Social Security Dues in Liquidation Situations

Putting social security dues of a Company above all other debts, the Supreme Court of India has reiterated
[12] its efforts to try and create an equitable work environment. The statute in question here was the Employees Provident Fund and Miscellaneous Provisions Act, 1956 (PF Act), and the Supreme Court of India held that if any amount is due from an employer under the PF Act, the amount so due is to be paid in priority to all other debts due.

Reference was made to Section 11 of the PF Act, in terms of which the workmen’s dues, and debts due to secured creditors, are required to be paid in priority to all other debts.

The employer Company in this case was under liquidation and the Official Liquidator was appointed to look after its properties and clear debts.

The Supreme Court considered the two aspects of sub-section (2) of Section 11 of the PF Act:

1) Amounts due from the employer towards contribution under the PF Act are deemed to be a first charge on the assets of the establishment.
2) Notwithstanding anything contained in any other law for the time being in force, such debt is to be paid in priority to all other debts.

On considering the above, the Supreme Court held that these provisions bring out the intention of Parliament to ensure the social benefit. There are other provisions in the PF Act rendering the Provident Fund amounts payable, immune from attachment of Civil Court’s decree. Therefore, only after the payment of such dues and debts in full, may the Official Liquidator distribute the remaining money as per Section 530 of the Companies Act.

The Dilemma of how much Exit Notice to Provide For

Is a month’s notice period fine for exiting/discontinuing an employment relationship? While the statutes may say so, employers in the IT / ITES space think differently. This is an industry that needs to counter a very high attrition rate
[13], while keeping the quality of its service and work product world class. So the solution is a three-month notice regime being implemented by industry[14].

While the Shops & Commercial Establishment’s Act one-month notice regime is very convenient when the markets are down and lay off’s are big, during boom times abrupt exits hurt ongoing projects and delivery schedules of global operators. Another advantage of a 3 month exit is to make it dearer for corporate raiders to acquire talent. A poacher’s ‘buy-out’ option thus becomes more expensive. Not to mention the 3 month time being enough time from a HR perspective to encourage the employee to stay on with the present employer.

[1] Section 2 (s).
[2] Devinder Singh v. Municipal Council, Sanaur AIR 2011 SC 2532

[3]Triveni Engineering and Industries Ltd. v. Jaswant Singh and Anr. AIR 2010 SC 2939..
[4] State Bank of India v. Hemanth Kumar, Civil Appeal No. 2957 of 2011, decided on April 6, 2011
[5]Chairman-cum-MD, Coal India Ltd. v. Ananta Saha & Ors. 2011(4)SCALE398..
[6] State Bank of Patiala v. Union of India and others., 2011(129)FLR594.
[7] U P Singh v.Punjab National Bank, 2011IIIAD(Delhi)373.
[8] of National Insurance Company v. Sunil Kumar and others, 178(2011)DLT439.
[9] Management of Lakshmi Crad Clothing Manufacturing Co Ltd, v. M Ramu and others, MANU/TN/1383/2008
[10] M/sThermax Ltd. & Ors. Vs. K.M. Johny & Others, 2011(11)SCALE128.
[11] Mrs. Anita Malhotra v. Apparel Export Promotion Council & ANR 2011(6)UJ3765(SC).
[12] Employees’ Provident Fund Commissioner v. O.L. of Esskay Pharmaceuticals Limited, MANU/SC/1327/2011.

[13] For top end IT / ITES companies the attrition levels are between 14% and 17%, while for small and medium sized companies are now in the range of 25-30%.
[14] IBM India, Capgemini India, Accenture, Cognizant. iGate Patni and Infotech Enterprises follow the 3 month notice policy for exits, for all or at least some levels of employees.

Netherlands - Amendment of Dutch holiday legislation per 1 January 2012

Els de Wind and Cara Pronk, Van Doorne NV, Amsterdam, The Netherlands

As per 1 January 2012 the Dutch legislation on holidays was amended. In this short article we will first provide some general information on the Dutch holiday legislation and then focus on the recent amendments.

Dutch holiday legislation

Under Dutch law employees working full-time (mostly 40 hours a week) are entitled to at least 20 holidays each year. These holidays are usually called statutory holidays. Most employers, however, grant their employees more holidays than the statutory minimum, for example 24 or 25 days per year (in the case of a 40-hour working week). The “extra” days above the statutory minimum are called non-statutory holidays. Employees are entitled to such non-statutory holidays pursuant to a sector wide or company collective labor agreement or an individual labor agreement. Generally the employee can determine when holidays are taken after acquiring the consent of the employer in this respect. Statutory and non-statutory holidays which have not been taken by an employee, will be compensated at termination of the employment, unless these have lapsed by law. Under the present legislation, holidays lapse automatically after 5 years after the end of the calendar year in which these were built up.

Background of amendments: European Court of Justice ruling

The amendments to the Dutch holiday legislation followed from a judgment rendered by the European Court of Justice (ECJ) in a German case on the interpretation of EU Directive 2003/88/EU on working hours. The ECJ ruled that it follows from the Directive that employees on sick leave build up holidays in the same way as regular employees. The Dutch Act implementing the Directive stipulated that employees on sick leave only build up holidays over the last 6 months of sickness. The Dutch Act therefore was in violation of the ECJ judgment. This was later confirmed by some local Dutch courts. As a result of this, the Dutch government amended the existing legislation on holidays to bring it in line with the Directive.

Amendments to holidays legislation

Under the amended holidays legislation, employees who are sick will (per 1 January 2011) build up the same number of holidays as employees who are not sick. For employers this means that they will have to grant sick employees holidays over the entire period of sickness. This will lead to additional expenses for employers employing employees who are (long term) sick which comes on top of the existing obligation to pay sick employees at least 70% of the salary (up to a certain statutory maximum amount) during the first 2 years of sickness. In order to compensate the employers for this amendment in the holiday legislation, the Dutch government implemented another amendment.

As a result of the amendments as per 1 January 2012, holidays will lapse 6 months after the end of the calendar year in which they were built up. Holidays built up in 2012 will therefore expire on 1 July 2013. The employee will then not be entitled any more to these holidays nor be able to be compensated for them. The expiry period of 6 months applies to statutory holidays built up by employees who are sick as well as by those who are not sick. The expiry period of 6 months does not apply (i) for holidays built up prior to 1 January 2012; (ii) for non- statutory holidays; and (iii) in cases where the employee “was not reasonably able to take holidays”. In these 3 situations holidays will lapse after 5 years. Whether an employee was not reasonably able to take holidays should be assessed on the basis of the circumstances of the case. This can for instance be due to a high workload. It is not clear yet how this will all work out in practice. It may well be that the employee will ask the employer for a written statement confirming that he was not able to use a certain number of holidays. The employer and the employee may make arrangements deviating from this rule to the employee’s benefit in the labor contract, for instance by agreeing a longer expiry period.

The amendments are warmly welcomed. Under the present holiday legislation, building up holidays over a period of 5 years could become a huge financial burden for employers. Under the new legislation, employees will not be able to build up such a large number of holidays as they used to be able to. This amendment will therefore also lead to less holidays being compensated at termination of employment. Furthermore, it is expected that as a result of the amendments, employers will have to more closely monitor the balance of the statutory and non-statutory holidays: statutory holidays will lapse after 6 months after the end of the year in which these were built up (unless employer and employee have agreed to a longer expiry period) whereas non-statutory holidays will still lapse after 5 years after the end of the year in which they were built up. Many payroll companies have already developed IT systems to facilitate this new administrative burden. Finally, employers with employees employed under Dutch law should review their individual and collective labor contracts and employee handbooks to make sure that they are adjusted to be in line with the new legislation.

USA - Expatriates and US tax withholding

Donald C. Dowling, Jr., Partner, White & Case LLP, New York

Employer income tax withholding mandates usually amount to a straightforward issue of the local law at the place of employment. An employee working in Italy is subject to Italian tax withholding mandates. Someone based in Chile is subject to corresponding Chilean rules. Staff in Korea is subject to Korea’s requirements.

This means that an inbound expatriate whose place of employment shifts to a new host country generally gets caught under host-country tax withholding requirements. This is certainly how it works stateside: A foreign entity—one not organized under U.S. law—that employs an alien who immigrates to the U.S. and works a job in, say, Seattle or St. Louis is almost always subject to U.S. tax withholding requirements. Cf. IRS Rev.Rul. 92-106 (12/7/92). The U.S. does not want foreign employers to use their offshore payrolls to pay employees who are not legal U.S. residents but who work on U.S. soil and who benefit from U.S. government services in a way that avoids American tax withholding. Not surprisingly, it tends to work the same way abroad. When a U.S. employer sends an American to work as an expatriate at some overseas place of employment, local host-country tax withholding requirements usually apply. (Even if a “social security totalization agreement” comes into play, it does not affect tax withholding.).

A big complication is that the U.S. tax withholding mandates do not switch off just because an American sets out to work abroad. These U.S. obligation can be “sticky,” following certain Americans overseas. The U.S. is one of very few countries in the world that taxes its “tax subjects” on their worldwide (including foreign-sourced) income (subject to some exclusions, such as a credit for foreign taxes paid). This, though, does not necessarily mean that all employers must make withholdings to the U.S. IRS on all foreign-sourced income that U.S. taxpayers earn abroad. When, if ever, must an employer withhold income tax to the U.S. IRS for an American taxpayer working overseas? To answer that, we first clarify three concepts:

1) A “U.S. taxpayer” includes both U.S. citizens and U.S. “tax residents” (for example, U.S. “permanent residents”/green card holders), even if working abroad.
2) “Working abroad” means having a principal place of employment outside the U.S., regardless of whether the employee works overseas as a company-designated expatriate, as someone living abroad for personal reasons, or as a “trailing spouse.”
3) A “U.S. employer” is an employer who is a U.S. “person.” This includes an employer entity incorporated in a U.S. state even if it is registered overseas as a branch or representative office. But this excludes American companies’ wholly- or majority-owned foreign-incorporated subsidiaries and affiliates not transacting business stateside.

U.S. citizen. Under U.S. Treasury regulations and IRS rulings (chiefly Treasury Reg. 31.3401(a)(8)(A-1b), (d-1) and IRS Rev.Rul. 92-106 (12/7/92)), employers must withhold and remit to the U.S. IRS income tax of U.S. citizens working abroad. But this mandate is subject to two vital exclusions: (1) the employer need withhold against a U.S. employee working abroad only on income above the “foreign earned income exclusion,” which in 2011 was $92,900, and (2) the employer need withhold on income earned outside the U.S. only if that income is not subject to withholdings under local withholding mandates imposed by the host country. That is, the employer need not withhold on income that the employee is required, under local law, to have withheld locally. So an employer need to impose U.S. withholding tax payments made to a U.S. citizen working abroad only on income remaining after excluding both the foreign earned income exclusion and income subject to actual host-country-mandated income tax withholdings.

Non-U.S.-citizen U.S. taxpayer. This same U.S. withholding mandate also reaches U.S. “tax subjects” working abroad who are not U.S. citizens—but in that case, the two exceptions do not apply. That can mean double withholding: A non-U.S.-citizen U.S. taxpayer working abroad can easily be simultaneously subject to both local and U.S. tax withholding. That said, though, employers can reduce U.S. withholdings of non-citizen U.S. taxpayers working abroad by the anticipated foreign tax credit they will be entitled to take on U.S. tax returns.

Non-U.S. employer. Surprisingly, the U.S. IRS takes the position that this same analysis applies not only to U.S. employers, but also even to non-U.S. employers. See IRS Rev.Rul. 92-106 (12/7/92). That means a non-U.S. employer of a U.S. taxpayer working abroad is actually supposed to make U.S. tax withholdings to the U.S. IRS―even if the non-U.S. employer transacts no business stateside. This is an aggressive position that raises problems. Few non-U.S. employers operating outside the U.S. have U.S. taxpayer identification numbers with which they can make U.S. IRS withholdings. And non-U.S. employers operating abroad may not be in a position to know which of their employees may happen to be U.S. taxpayers. For most non-U.S. employers, compliance with this IRS withholding mandate may prove all but impossible. Indeed, IRS enforcement against non-U.S. employers that transact no business in the U.S. may be all but impossible, as well.

USA - Conducting privileged whistleblower investigations in the US

Philip M. Berkowitz, Partner, Littler Mendelson PC, New York

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) creates new remedies for whistleblowers in the United States. It provides rewards (or bounties) for whistleblowers, and strengthens existing penalties against employers under the Sarbanes-Oxley Act for retaliating against whistleblowers.

These laws have greatly heightened employers’ already strong interest in identifying potentially unethical conduct. Employers make significant efforts to encourage potential whistleblowers to come forward and raise complaints, so that they can address and eliminate wrongdoing before the claims become a cause célèbre.

In the United States, companies investigating claims of wrongdoing must be concerned about the possibility that the results of the investigation – wherever in the world they may be conducted – are subject to discovery in a lawsuit or arbitration brought by the whistleblower, or by the government, or even in related claims brought by others.

The United States has the most onerous discovery rules in the world. As a general matter, in US civil litigation, parties may obtain discovery regarding any non-privileged matter that is relevant to any party's claim or defense. This includes the existence, description, nature, custody, condition, and location of any documents or other tangible things, and the identity and location of persons who know of any discoverable matter. To be discoverable, information need not even be admissible at the trial, so long as the discovery appears “reasonably calculated to lead to the discovery of admissible evidence.”[1]

However, discovery normally may not be had of information which is protected by the attorney-client privilege. This privilege attaches when legal advice of any kind is sought from a professional legal advisor acting in his capacity as such, where the communications relating to that purpose are made in confidence by the client. In that case, the information may not be sought either from the client or the lawyer, unless the privilege is waived.[2]

US courts recognize as privileged both the communications by the client to the attorney, and legal advice rendered by the attorney to the client, to the extent that the advice reflects confidential communications between the two.[3] However, the privilege only protects disclosure of communications; it does not protect disclosure of the underlying facts by those who communicated with the attorney.[4]

An investigation into the allegations of alleged wrongdoing is, of course, normally essential to the successful defense of a claim. But the results of an investigation may reveal damaging evidence of wrongdoing on the part of the company or an employee, or shortcomings in the company’s internal compliance procedures. There is also danger in how an investigation is carried out, and what is done with its results. For example, the employee who is the subject of the investigation may claim that the report, or that accusations made during the investigation, constitute defamation.

Thus, employers must give considerable thought and care to how they can best conduct internal investigations that promote compliance, and avoid creating damaging (and discoverable) investigative materials. Employers must also be vigilant to assure that an investigation, if privileged, does not lose the protection of the privilege via waiver, unless the waiver is intentional.
While structuring the investigation as privileged, employers should nevertheless plan for the possibility that it may eventually see the light of day. Of course, there is an inherent conflict between preparing a candid, privileged report while expecting that it may be disclosed – and this is an issue that is not readily resolved.

Application of the Privilege

The leading case on the privileged nature of internal investigations is Upjohn Co. v. United States.[5] There, after the company’s independent auditor found apparent violations of the Foreign Corrupt Practices Act (“FCPA”), the Chairman authorized the general counsel to conduct an internal investigation. A questionnaire was sent to all foreign managers, over the Chairman’s signature, noting the general counsel’s authority to conduct an investigation to determine potential legal violations, and instructing the managers to treat the investigation as highly confidential, and respond only to the general counsel. Both the general counsel and outside counsel conducted the interviews.

The Company submitted a report based on its investigation to the SEC and the IRS; and the IRS then demanded the investigation documents and interview notes.

In considering whether the results of the investigation were privileged, the Supreme Court held that the corporation’s attorney-client privilege extended to investigative interviews with both management and non-management employees, so long as the investigation is undertaken at the direction of management and for the purpose of providing legal advice.

The Court also held that the attorneys’ notes were protected attorney “work product,” because they would “tend[ ] to reveal the attorney’s mental processes ... what he saw fit to write down regarding witnesses’ remarks.” Under US law, “work product” may be disclosed only if there is “substantial need ... and [the information] cannot, without undue hardship,” be obtained.[6]

Akzo Nobel

Nevertheless, application of the privilege is not a foregone conclusion. In Europe, in-house counsel’s advice and activities may not be protected by the privilege. In Akzo Nobel,[7] at issue were internal records of the company which were seized by UK prosecutors in dawn raids carried out in an antitrust investigation. Included were records reflecting communications with counsel. The European Court of Justice held, in September 2010, that, at least in this context, communications with in-house counsel are not privileged. The court held, in short, that in-house counsel are not independent enough to warrant extending legal professional privilege.

Thus, the status of in-house counsel in Europe as a professional legal advisor, for the purposes of US privilege law, is questionable. Companies simply may not be able to rely on the results of investigations carried out by in-house counsel overseas as privileged, sufficient to overcome US discovery rules.

Recent US cases

In a recent New York case, HSBC Guyerzeller Bank AG v. Chascona N.V.[8], the court held that the attorney-client privilege did not protect documents created by an attorney, who was employed by creditors as “Senior Vice President, Special Projects,” during an investigation he conducted of the debtors. The court held that the attorney’s work was investigative rather than legal and “an investigative report does not become privileged merely because it was conducted by an attorney.”
The court found that the attorney served in a non-legal role, and noted that his job description made no mention of his performing legal services. The court also dismissed as “conclusory” the attorney’s affidavit describing his work as “predominately, if not exclusively legal….”

More recently, in a July 2011 federal court decision in New York, Gruss v. Zwirn,[10] the court considered whether the corporate defendants had waived the attorney-client privilege regarding its counsel’s internal investigation of alleged wrongdoing by the plaintiff, a former executive. There, counsel had created a memorandum detailing their findings; a set of talking points to be used by the company in discussions with investors explaining the plaintiff’s departure; and PowerPoint presentations (which included summaries of witness statements). The defendants explicitly relied on, and disclosed to shareholders and the SEC, these findings, which blamed the plaintiff for the alleged financial irregularities.

The defendants’ communications, the plaintiff said, were false and defamatory, and he sought counsel’s underlying interview notes and other investigatory documents. The plaintiff argued that in the defendants waived the privilege as to those notes and documents by revealing counsel’s findings.

In a comprehensive opinion, the court rejected every one of plaintiff’s numerous waiver arguments. The court also rejected the executive’s claim that the report was prepared primarily for business rather than legal purposes, and therefore was not protected either by the privilege or the work product doctrine. While counsel’s reports were prepared, in part, for the business purpose of how to communicate to investors and other business parties, there was no doubt that counsel were engaged to investigate accounting irregularities and to plan for the possibility, among other things, of employment litigation.[11]

The court made clear that in camera inspection (a confidential inspection of the materials by the judge, which does not constitute a waiver the privilege) may be necessary in order to determine whether the report was prepared for a business or a legal purpose; as the court put it, to do so, it is necessary “to examine whether the attorney’s notes reveal some focus on litigation strategy ….”
The executive argued that the defendants waived the privilege as to the underlying notes because it intended to rely on counsel’s report in defending the employee’s defamation claim (and its own counterclaims of breach of fiduciary duty and breach of contract). But the court accepted their express disavowal of any intent to rely on the privileged notes and summaries in proving their claim. The defendants asserted that they would rely on other evidence (via the executive’s testimony and other evidence) of his underlying conduct.

The executive also argued that the defendants waived the privilege by “selectively disclosing” the result of the investigation to the SEC. In the court’s view, critical to the defendants’ successful defense of this claim was their having entered into a written confidentiality agreement with the SEC. [12]

Finally, the court held that the interview notes constituted opinion work product and could not be produced. The plaintiff asserted that the notes would have been created in essentially similar form irrespective of the litigation, and hence were for a business as opposed to a legal purpose.

Government Investigations

Even if investigative materials are privileged, a company may find it has little choice but to waive that privilege during a US government investigation.

In August 2008, the United States Department of Justice (“DOJ”) released its Principles of Federal Prosecution of Business Organizations, commonly referred to as the “Filip Memorandum.” The Filip Memorandum makes clear that the DOJ cannot compel a corporation to waive its “core” attorney-client privilege and that a corporation need not do so to receive cooperation credit.

Prior to the implementation of these new guidelines, corporations were often pressured to waive their attorney-client privilege and received more favorable treatment in exchange for doing so. Still, the Filip Memo also explains that, to receive cooperation credit for the purpose of receiving a lesser sentence, the corporation must disclose the “relevant facts of which it has knowledge.”

Government pressure on companies to waive their attorney-client privilege has abated somewhat in recent years. Nevertheless, the DOJ and SEC continue to expect and reward disclosure of all “relevant facts.” The distinction between privileged communication and relevant fact is a slippery one, particularly with regard to an attorney’s conclusions and findings during an internal investigation.

Thus, despite the government’s recent efforts to limit the pressure to waive attorney-client privilege, the emphasis on full disclosure of facts gleaned during an investigation may still prompt the production of privileged information.


Employers investigating possible claims of wrongdoing, including international claims, should expect that the investigations will be the subject of disclosure, and must take steps in advance to assure their privileged nature.

The issue of who should carry out the investigation is of principal importance. Should it be carried out by in-house counsel, or outside counsel? The degree to which in-house counsel should be involved, or the two may work together, is particularly important if the matter involves in-house counsel based in Europe, or in other jurisdictions where the privilege is not as well established as in the United States.

Preferably, of course, any waiver of privilege should be voluntary and not compelled.

Counsel preparing reports must be cautious about intermingling business advice with legal advice. While the presence of business advice will not necessarily preclude application of the privilege, for the privilege to survive, the predominant purpose of the report must be legal advice.

To have the greatest likelihood of successfully limiting disclosure to the investigating government entity, a company should enter into a well-crafted confidentiality agreement with the government and avoid disclosures to adversarial parties other than the government.

Companies may consider an oral disclosure during a meeting with government representatives, rather than generating and disclosing a report that may later be deemed discoverable.

Of course, when US-based litigation is a risk, it is also important during the initial investigation to take particular care in issuing “Upjohn” warnings to company employees. An appropriate Upjohn warning must make clear that the investigating attorney represents the company and not the interviewee, the interview is covered by the company’s attorney-client privilege only and the company may elect to disclose privileged information as part of a government investigation.

[1] See Fed. R. Civ. P. 26(b)(1)
[2] See In re Grand Jury Subpoena, 731 F. 2d 1032 (2d Cir. 1984)
[3] In re Six Grand Jury Witnesses, 979 F. 2d 939 (2d Cir. 1992)
[4] Upjohn Co. v. United States, 449 U.S. 393, 396 (1981); In re Six Grand Jury Witnesses, 979 F. 2d at 944
[5] Upjohn Co. v. United States, 449 U.S. 393 (1981).
[6] Fed. R. Civ. P. 26 (b)(3)(A)(ii)
[7] Akzo Nobel Chemicals Ltd and Akcros Chemicals Ltd v European Commission, Case 155/79, A M & S Europe Limited v Commission, [1982] ECR 1575.
[8] Index No. 114705/2003 (Sup. Ct., NY County, June 23, 2010).
[9] Cf. Spectrum Services International v. Chemical Bank, 78 N.Y.2d 371 (1991)(court upheld as privileged a report carried out by an external law firm retained for the specific purpose of investigating possible internal fraud by employees and vendors, where affidavits of the firm’s lawyers made clear that Chemical had retained them specifically to perform an investigation and render legal advice regarding this possible fraud, and to counsel Chemical with regard to possible litigation).
[10] Gruss v. Zwirn, 2011 U.S. Dist. LEXIS 79298 (S.D.N.Y. July 14, 2011).
[11] Significantly, though, the court acknowledged (and the defendants conceded) that they had waived the privilege vis-à-vis counsel’s findings themselves, which (acknowledging the waiver) the defendants had produced to the executive in discovery.
[12] Accord In re Steinhardt Partners, L.P., 9 F.3d 230, 236 (2d Cir. 1993).