Welcome to the winter edition of our committee newsletter. This edition we have articles from the US, Canada, France, UK and Ukraine, as well as a checklist on International M&A issues. Many thanks as always to our contributors. Please let me know if you would like to contribute an article to a future edition.
Wishing you all a Happy Holidays and best wishes for 2015!
Helen Colquhoun
Withers LLP
Registered Foreign Lawyer (Hong Kong), Dual qualified in New York and England & Wales
Tuesday, December 16, 2014
Canada - Foreign Workers Denied Medical Coverage After Status Expires
By Sergio R. Karas, B.A., J.D., principal of Karas Immigration Law Professional Corporation.
A recent decision of a three judge Ontario Divisional Court panel concerning the entitlement of foreign workers to medical coverage under the Ontario Health Insurance Plan has potential far-reaching consequences and may result in the denial of medical benefits for thousands of foreign workers and students in Canada whose status has expired or changed.
In Ontario (General Manager, Ontario Health Insurance Plan) v. Clarke , two foreign workers from Jamaica, Denville Clarke and Kenroy Williams, arrived in Ontario as participants in the Seasonal Agricultural Worker Program (SAWP), operated by the Federal government. The workers held Work Permits valid until December 15, 2012. They were employed by a company in Ontario. As part of that program, the workers signed an employment agreement with the employer, who was required to obtain insurance that will provide compensation for the worker for personal injuries received or diseases contracted as a result of the employment unless prevailing law provided for such compensation. In addition, the employer was required to ensure that the workers obtain health coverage according to provincial regulations. The foreign workers were covered by insurance from the Worker’s Safety and Insurance Board (WSIB) and health coverage by the Ontario Health Insurance Plan (OHIP).
A few days after their arrival, the two foreign workers were injured in a serious motor vehicle accident while being transported to work in their employer’s van with other coworkers. The accident resulted in fatalities to other passengers. The foreign workers received compensation benefits and medical care for their work related injuries funded by the WSIB. Their medical treatment had to be extended beyond the date of expiry of their Work Permits. Faced with the prospect of being in Canada without status after the expiry of their Work Permits under the SAWP, the foreign workers applied for and were granted visitor status by Citizenship and Immigration Canada until February 2014. They also applied for an extension of their OHIP coverage but it was denied. They appealed that denial of coverage to the Health Services Appeal and Review Board, which determined that the foreign workers were residents of Ontario and eligible for health insurance coverage, and were entitled to continue to receive medical services. However, the province of Ontario appealed that decision to the Divisional Court.
The issue on appeal was whether the foreign workers continued to qualify for OHIP coverage after the expiry of their Work Permits. The case turned on the interpretation of Section 1.3 (2) of Regulation 522 under the Health Insurance Act . That Regulation prescribes that people who are present in Ontario because they have a Work Permit issued under the SAWP are residents of the province, even if they do not meet any other qualifying requirements set out in the regulations. The intent is to cover workers with valid Work Permits issued under the SAWP, so the question was whether the workers whose SAWP permits had expired, continued to be covered by that section.
The Divisional Court discussed the appropriate standard of review and held that it was agreed between the parties that such standard was one of reasonableness, as the Board was interpreting a statute that is directly related to its core function. Further, the court relied on previous caselaw and held that where there is no real dispute on the facts and the tribunal need only determine whether an individual breached a provision of its constituent statute, the range of reasonable outcomes is much narrower.
The province argued that the foreign workers did not qualify as residents of Ontario after the expiry of their Work Permits and that the issue was not properly addressed by the Board. Instead, the Board had decided that, because the agreements signed by the foreign workers under the SAWP contemplated that, in certain circumstance, persons in Canada under the program might not leave the country by the date stipulated in their Work Permits, they continued to be residents of Ontario. The Board relied on the language in the contract that directed the foreign workers to return to their country of origin at the expiry of their Work Permits with the exception of extraordinary circumstances, including medical emergencies. The Board hastily concluded that the foreign workers continued to be residents of Ontario and were entitled to continuing medical coverage.
In a unanimous ruling, the Divisional Court disagreed. The court held that the Board’s conclusion was not reasonable in light of the plain wording in Regulation 522. The plain and ordinary meanings of the words used in Section 1.3(2) accords the status of residents to the foreign workers “because they have a Work Permit” under the SAWP. There was no dispute that the foreign workers’ Work Permits expired of December 15, 2012 and therefore they no longer had Work Permits. The court also rejected the foreign workers’ contention that the Work Permits did not need to be valid in order to qualify as residents of Ontario. The court held that such conclusion was neither reasonable nor sensible, based on two main reasons:
First, as a matter of basic statutory interpretation, there was nothing in the plain and ordinary meaning of the words used in that section of the Regulation that contemplated its application beyond the situation where a worker is present in Ontario under the terms of the SAWP. The court held that it was clear that such plain and ordinary meaning of the words meant that coverage was provided for people who were present in Ontario because they have a Work Permit under the program. The Regulation expressly uses the present tense, not the past tense. The court held that the simple fact was that there was no other plausible meaning that could be given to the Regulation.
Second, the court ruled that the triggering event for residency under the Regulation was the possession of a Work Permit, and therefore it was implicit that such Work Permit had to be a valid one. The suggestion that the province would have passed a regulation that contemplated its application based on an invalid Work Permit was “irrational” .
The court also rejected the foreign workers’ contention that OHIP coverage only ceases when there is no longer a causal connection between their physical presence in Ontario and the SAWP. The court held that when a Work Permit issued pursuant to the SAWP expired, it can no longer be reasonably said that there remains a causal connection between the person’s physical presence in Ontario and the SAWP, and the person’s employment is legally at an end. If the person continues to remain in Ontario, it is not an outcome connected to the SAWP. The court held that, if the foreign workers’ contention was correct, any person whose seasonal worker permit had expired could continue to be entitled to OHIP coverage essentially in perpetuity . That was an outcome that the legislature could never have intended.
The court held that the Board erred because it did not consider the plain wording of the Regulation and whether there was any ambiguity. The Board did not engage in any analysis of the scheme of the Act or of the Regulation, did not identify any policy considerations that directed the adoption of any particular interpretation of the Regulation, but instead, the Board considered only the SAWP agreement between the foreign workers and the employer and used one provision of that agreement to base its conclusion that Section 1.3(2) of the Regulation covered the foreign workers’ situation. The Board also failed to note that the province was not a party to the SAWP agreement and that it cannot have its interests affected by an agreement to which it is not a party, nor should its legislative or regulatory enactments be interpreted based on such an agreement, especially ones that can create fiscal responsibilities and liabilities.
In the court’s view, the plain working of the Regulation allowed for no other conclusion than the foreign workers ceased to be eligible for OHIP once their Work Permits expired on December 15, 2012. The Board's conclusion to the contrary was not a decision that "falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law" .
Further, the court held that, if there is a gap in the parameters of the SAWP that does not ensure health care coverage for seasonal workers who are required to remain in Ontario for legitimate medical reasons after the expiration of their Work Permits, then that gap should be filled either by requiring the employers to obtain supplemental health insurance, or through an agreement negotiated between the Federal and Provincial governments. However, it cannot be filled by a contrived interpretation of an existing regulation.
This decision has potential negative consequences for all foreign workers and students whose permits have expired. Further to the court’s decision, all foreign workers and Study Permit holders who are normally entitled to OHIP, can have their coverage terminated if their permits are not extended. The expiry of those permits would mean that they would cease to be residents in the province for health insurance purposes as they would no longer be entitled to remain in the province legally. It is noteworthy that, despite the fact that the foreign workers in this case obtained visitor status, that was not sufficient to maintain their OHIP coverage, as visitors are not entitled to receive it. Employers should also be concerned by the suggestion that the gap in coverage should be filled by private health insurance provided by employers, as the province should not assume those liabilities.
A recent decision of a three judge Ontario Divisional Court panel concerning the entitlement of foreign workers to medical coverage under the Ontario Health Insurance Plan has potential far-reaching consequences and may result in the denial of medical benefits for thousands of foreign workers and students in Canada whose status has expired or changed.
In Ontario (General Manager, Ontario Health Insurance Plan) v. Clarke , two foreign workers from Jamaica, Denville Clarke and Kenroy Williams, arrived in Ontario as participants in the Seasonal Agricultural Worker Program (SAWP), operated by the Federal government. The workers held Work Permits valid until December 15, 2012. They were employed by a company in Ontario. As part of that program, the workers signed an employment agreement with the employer, who was required to obtain insurance that will provide compensation for the worker for personal injuries received or diseases contracted as a result of the employment unless prevailing law provided for such compensation. In addition, the employer was required to ensure that the workers obtain health coverage according to provincial regulations. The foreign workers were covered by insurance from the Worker’s Safety and Insurance Board (WSIB) and health coverage by the Ontario Health Insurance Plan (OHIP).
A few days after their arrival, the two foreign workers were injured in a serious motor vehicle accident while being transported to work in their employer’s van with other coworkers. The accident resulted in fatalities to other passengers. The foreign workers received compensation benefits and medical care for their work related injuries funded by the WSIB. Their medical treatment had to be extended beyond the date of expiry of their Work Permits. Faced with the prospect of being in Canada without status after the expiry of their Work Permits under the SAWP, the foreign workers applied for and were granted visitor status by Citizenship and Immigration Canada until February 2014. They also applied for an extension of their OHIP coverage but it was denied. They appealed that denial of coverage to the Health Services Appeal and Review Board, which determined that the foreign workers were residents of Ontario and eligible for health insurance coverage, and were entitled to continue to receive medical services. However, the province of Ontario appealed that decision to the Divisional Court.
The issue on appeal was whether the foreign workers continued to qualify for OHIP coverage after the expiry of their Work Permits. The case turned on the interpretation of Section 1.3 (2) of Regulation 522 under the Health Insurance Act . That Regulation prescribes that people who are present in Ontario because they have a Work Permit issued under the SAWP are residents of the province, even if they do not meet any other qualifying requirements set out in the regulations. The intent is to cover workers with valid Work Permits issued under the SAWP, so the question was whether the workers whose SAWP permits had expired, continued to be covered by that section.
The Divisional Court discussed the appropriate standard of review and held that it was agreed between the parties that such standard was one of reasonableness, as the Board was interpreting a statute that is directly related to its core function. Further, the court relied on previous caselaw and held that where there is no real dispute on the facts and the tribunal need only determine whether an individual breached a provision of its constituent statute, the range of reasonable outcomes is much narrower.
The province argued that the foreign workers did not qualify as residents of Ontario after the expiry of their Work Permits and that the issue was not properly addressed by the Board. Instead, the Board had decided that, because the agreements signed by the foreign workers under the SAWP contemplated that, in certain circumstance, persons in Canada under the program might not leave the country by the date stipulated in their Work Permits, they continued to be residents of Ontario. The Board relied on the language in the contract that directed the foreign workers to return to their country of origin at the expiry of their Work Permits with the exception of extraordinary circumstances, including medical emergencies. The Board hastily concluded that the foreign workers continued to be residents of Ontario and were entitled to continuing medical coverage.
In a unanimous ruling, the Divisional Court disagreed. The court held that the Board’s conclusion was not reasonable in light of the plain wording in Regulation 522. The plain and ordinary meanings of the words used in Section 1.3(2) accords the status of residents to the foreign workers “because they have a Work Permit” under the SAWP. There was no dispute that the foreign workers’ Work Permits expired of December 15, 2012 and therefore they no longer had Work Permits. The court also rejected the foreign workers’ contention that the Work Permits did not need to be valid in order to qualify as residents of Ontario. The court held that such conclusion was neither reasonable nor sensible, based on two main reasons:
First, as a matter of basic statutory interpretation, there was nothing in the plain and ordinary meaning of the words used in that section of the Regulation that contemplated its application beyond the situation where a worker is present in Ontario under the terms of the SAWP. The court held that it was clear that such plain and ordinary meaning of the words meant that coverage was provided for people who were present in Ontario because they have a Work Permit under the program. The Regulation expressly uses the present tense, not the past tense. The court held that the simple fact was that there was no other plausible meaning that could be given to the Regulation.
Second, the court ruled that the triggering event for residency under the Regulation was the possession of a Work Permit, and therefore it was implicit that such Work Permit had to be a valid one. The suggestion that the province would have passed a regulation that contemplated its application based on an invalid Work Permit was “irrational” .
The court also rejected the foreign workers’ contention that OHIP coverage only ceases when there is no longer a causal connection between their physical presence in Ontario and the SAWP. The court held that when a Work Permit issued pursuant to the SAWP expired, it can no longer be reasonably said that there remains a causal connection between the person’s physical presence in Ontario and the SAWP, and the person’s employment is legally at an end. If the person continues to remain in Ontario, it is not an outcome connected to the SAWP. The court held that, if the foreign workers’ contention was correct, any person whose seasonal worker permit had expired could continue to be entitled to OHIP coverage essentially in perpetuity . That was an outcome that the legislature could never have intended.
The court held that the Board erred because it did not consider the plain wording of the Regulation and whether there was any ambiguity. The Board did not engage in any analysis of the scheme of the Act or of the Regulation, did not identify any policy considerations that directed the adoption of any particular interpretation of the Regulation, but instead, the Board considered only the SAWP agreement between the foreign workers and the employer and used one provision of that agreement to base its conclusion that Section 1.3(2) of the Regulation covered the foreign workers’ situation. The Board also failed to note that the province was not a party to the SAWP agreement and that it cannot have its interests affected by an agreement to which it is not a party, nor should its legislative or regulatory enactments be interpreted based on such an agreement, especially ones that can create fiscal responsibilities and liabilities.
In the court’s view, the plain working of the Regulation allowed for no other conclusion than the foreign workers ceased to be eligible for OHIP once their Work Permits expired on December 15, 2012. The Board's conclusion to the contrary was not a decision that "falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law" .
Further, the court held that, if there is a gap in the parameters of the SAWP that does not ensure health care coverage for seasonal workers who are required to remain in Ontario for legitimate medical reasons after the expiration of their Work Permits, then that gap should be filled either by requiring the employers to obtain supplemental health insurance, or through an agreement negotiated between the Federal and Provincial governments. However, it cannot be filled by a contrived interpretation of an existing regulation.
This decision has potential negative consequences for all foreign workers and students whose permits have expired. Further to the court’s decision, all foreign workers and Study Permit holders who are normally entitled to OHIP, can have their coverage terminated if their permits are not extended. The expiry of those permits would mean that they would cease to be residents in the province for health insurance purposes as they would no longer be entitled to remain in the province legally. It is noteworthy that, despite the fact that the foreign workers in this case obtained visitor status, that was not sufficient to maintain their OHIP coverage, as visitors are not entitled to receive it. Employers should also be concerned by the suggestion that the gap in coverage should be filled by private health insurance provided by employers, as the province should not assume those liabilities.
Ukraine - Dismissal of Executive Officers
By Pavlo Khodakovsky and Alesya Pavlynska, Arzinger, Ukraine
The status of executive officers is as a rule regulated by special legislative norms in various jurisdictions, since it undoubtedly differs from the status of ordinary employees in terms of appointment and termination procedures, scope of duties and level of liability.
But the Ukrainian legislation, though granting such categories additional (corporate) authorities and envisaging special (higher) level of liability for executive officers, generally refers to them as to ordinary employees in terms of employment rights, benefits and guarantees.
Unfortunately Ukrainian Labor Code is still de facto a Soviet inheritance which limits the owners’ right to dismiss executive officers under their own initiative while granting far-reaching powers to trade unions (e.g. to demand dismissal of the CEO under certain circumstances).
It must be emphasized that the Labor Code contains an exhaustive list of reasons for dismissal of employees, most of which are dismissals for misconduct and require sufficient substantiation.
As for executive officers, whose status is similar to the status of ordinary employees under Ukrainian labor legislation, the following grounds for dismissal are used most frequently in practice:
- agreement between employer and employee;
- termination upon the initiative of the employee;
- termination of the fixed-term labor contract;
- grounds envisaged by the labor contract;
- gross violation of labor obligations by the CEO, his/her deputies or chief accountant;
- guilty actions of the CEO entailing untimely payment of salaries or payment in amounts lower than the minimum salary established by law.
Other grounds (e.g. systematic violation of duties, truancy, appearance at work under the influence of alcohol, drugs or any other toxic substances, violation of some requirements of anticorruption legislation etc.) are also possible, but are seldom applied to executive officers.
Each ground, applied on the initiative of the owner, requires substantiation as well as adherence to procedures and terms.
Therefore, in view of the legislation in force, until recently it was not possible to dismiss an executive officer anytime without any reason at the employer's initiative, unless there the labor contract contained such special ground for dismissal, and provided such special ground was not recognized by court as one which is less favorable to the employee than the labor legislation in force.
Under Ukrainian labor legislation a labor contract is a special form of a labor agreement which may be concluded with special categories of employees, including members of the management body (board of directors) in joint-stock companies, and CEOs in other companies.
Ukrainian courts are not in unity regarding the regulation that applies to such labor contracts, since pursuant to the general rule (Article 9 of the Labor Code), terms of labor agreements that worsen the state of the employee compared to the labor legislation in force are null and void. A dispute therefore often arises as to whether the labor contract can be considered separately, thereby allowing deviations from the legislative requirements.
However, recently in line with the policy of Ukraine on improvement of the investment climate some revolutionary changes were introduced. On June 1, 2014, Law 1255-VII amending Part 1 of Article 41 of the Labor Code came into effect. In particular, an additional ground for dismissal has been added (Para 5 Part 1 Article 41 of the Labor Code): revocation of authorities of executive officers.
Compared to other dismissal procedures, the amended labor legislation does not require separate notice or justification for dismissal on this ground. Thus, dismissal may be "same-day" without any grounds specified.
As a kind of compensation, Article 44 of the Labor Code prescribes the severance pay in the amount of at least six months’ average earnings.
Unfortunately, provisions of the Labor Code contain no definition of an “officer”, so there is still a problem identifying the categories of employees which may be subject to such dismissal.
In its clarification "The Class "Officer" in Labor Legislation" dated July 24, 2014, the State Labor Inspectorate of Ukraine attempts to find such a definition in the legislation relating to state officials, in criminal and corporate laws as well as in the relevant court resolutions.
In particular, the State Labor Inspectorate states that the note to Article 364 of the Criminal Code of Ukraine defines executive officers as persons who act as representatives of state authorities or local self-governments permanently, temporarily or under special authority as well as permanently or temporarily hold positions associated with organizational and management or administrative and business functions at state authorities, local self-governments, public or municipal enterprises, institutions or organizations or perform such functions under special authority, which are granted to a person by a competent state authority, local self-government, central state executive authority enjoying a special status, competent authority or authorized person of an enterprise, institution or organization.
An executive officer is endowed with a certain scope of authority, and within the same, has the right to take actions that generate, modify or suspend specific legal relations (e.g. the right to appoint or dismiss employees, to apply disciplinary or administrative penalties etc).
According to the Resolution of the Plenum of the Supreme Court of Ukraine , the organizational and management responsibilities (which are indispensable for the concept "executive officer") are responsibilities of managing an industry, staff members, task area or production activities of certain employees at enterprises, institutions or organizations regardless of ownership. Such functions are performed, in particular, by heads of ministries, other central executive authorities, state, collective or private enterprises, institutions and organizations, their deputies, heads of structural subdivisions (workshop managers, heads of departments, laboratories or chairs), their deputies, and persons managing task areas (masters, supervisors, foremen, etc).
However, in our opinion, application of the concept of criminal law to labor relations is controversial and such a broad definition is unlikely to be supported by the courts.
In our view, "revocation of authority" is basically a corporate law term, which assumes officers are elected, appointed and empowered by the higher authority (general meeting of owners, supervisory board).
Given the above and the fact that the Law 1255-VII also amended the Civil Code , the Commercial Code and the Law on JSC (i.e. the corporate legislation proper), we suggest considering the term under corporate law to define "officers" in this case.
According to Para 2 of Article 89 of the Commercial Code officers of a company are:
- Chairman and members of the Management Board,
- Chairman of the Audit Committee,
- in companies where a Supervisory Board is established – Chairman and members of the company’s Supervisory Board.
The Law on JSC (Para 15 Part 1 Article 2) additionally includes members of the Audit Committee, Head and members of another body of a joint stock company, if that body is provided for under the articles of association, as officers.
Thus, the corporate legislation defines only those persons as executive officers who are elected by the vote of the higher management bodies (general meeting of shareholders or supervisory boards) and are in corporate relations with the company, whereas mid- and low-level managers (heads of departments) are just appointed by the management board or CEOs without any corporate authorities and are therefore excluded from the list.
At the same time, such dismissal is included in Article 41 of the Labor Code (bearing the title "Additional grounds for termination of labor agreement on the initiative of the owner or its authorized body with separate categories of employees under certain conditions") and is thus a dismissal on the employer’s initiative. Therefore, all of the relevant safeguards apply to employees dismissed due to revocation of authorities, including, for instance, the following:
• Prohibition against dismissing pregnant women and women having children under three years of age (under six years of age in some cases provided for by Part 6 of Article 179 of the Labor Code) – Article 184 of the Labor Code;
• Prohibition against dismissing single mothers having a child under fourteen years of age or a disabled child – Article 184 of the Labor Code;
• This prohibition also extends to fathers raising their children without a mother (in particular, in case of the mother’s long-term treatment at a healthcare institution) as well as to guardians (trustees) and foster parents – Article 186 of the Labor Code;
• Employees under eighteen years of age may be dismissed only with the consent of the district (city) services for children’s affairs (Article 198 of the Labor Code);
• Employees may not be dismissed during a period of temporary disability or during their vacation (Part 3 Article 40 of the Labor Code).
To summarize, in our opinion the new ground for dismissal introduced into the Labor Code and dealing with dismissal of executive officers is undoubtedly a progressive regulation, protecting the rights of employers, foreign investors among them. The new regulation also smoothes out discrepancies between the corporate and labor legislation: whereas it was obvious that the owner may revoke the authorities of the executive any time, due to the rigid labor law prescriptions the labor relations didn't terminate simultaneously with such revocation. Therefore formally the officer was still in employment though due to revocation of his/her authorities he/she was not able to work.
At the same time the new legislation also provides the officer to be dismissed under this ground with the minimum guarantee (severance pay) in the amount of at least 6 average monthly salaries - the price the employee has to pay for its corporate decision. Previously the sum of compensation was regulated between the parties (with the dismissal formalized as mutual agreement) and in practice varying from zero to any sum, as agreed under the circumstances.
In our opinion, to define the term "officer" for dismissal purposes under Para 5 Part 1 Article 41 of the Labor Code, it is more correct to use the definitions under corporate law. Also in our view dismissals of CEOs and members of management boards will be the most frequent ones performed under this ground.
We believe that controversies in the interpretation of the term "officers" by employees and employers as well as by courts are likely to arise in practice, unless additional definitions appear in the legislation or official position of state bodies and courts.
The status of executive officers is as a rule regulated by special legislative norms in various jurisdictions, since it undoubtedly differs from the status of ordinary employees in terms of appointment and termination procedures, scope of duties and level of liability.
But the Ukrainian legislation, though granting such categories additional (corporate) authorities and envisaging special (higher) level of liability for executive officers, generally refers to them as to ordinary employees in terms of employment rights, benefits and guarantees.
Unfortunately Ukrainian Labor Code is still de facto a Soviet inheritance which limits the owners’ right to dismiss executive officers under their own initiative while granting far-reaching powers to trade unions (e.g. to demand dismissal of the CEO under certain circumstances).
It must be emphasized that the Labor Code contains an exhaustive list of reasons for dismissal of employees, most of which are dismissals for misconduct and require sufficient substantiation.
As for executive officers, whose status is similar to the status of ordinary employees under Ukrainian labor legislation, the following grounds for dismissal are used most frequently in practice:
- agreement between employer and employee;
- termination upon the initiative of the employee;
- termination of the fixed-term labor contract;
- grounds envisaged by the labor contract;
- gross violation of labor obligations by the CEO, his/her deputies or chief accountant;
- guilty actions of the CEO entailing untimely payment of salaries or payment in amounts lower than the minimum salary established by law.
Other grounds (e.g. systematic violation of duties, truancy, appearance at work under the influence of alcohol, drugs or any other toxic substances, violation of some requirements of anticorruption legislation etc.) are also possible, but are seldom applied to executive officers.
Each ground, applied on the initiative of the owner, requires substantiation as well as adherence to procedures and terms.
Therefore, in view of the legislation in force, until recently it was not possible to dismiss an executive officer anytime without any reason at the employer's initiative, unless there the labor contract contained such special ground for dismissal, and provided such special ground was not recognized by court as one which is less favorable to the employee than the labor legislation in force.
Under Ukrainian labor legislation a labor contract is a special form of a labor agreement which may be concluded with special categories of employees, including members of the management body (board of directors) in joint-stock companies, and CEOs in other companies.
Ukrainian courts are not in unity regarding the regulation that applies to such labor contracts, since pursuant to the general rule (Article 9 of the Labor Code), terms of labor agreements that worsen the state of the employee compared to the labor legislation in force are null and void. A dispute therefore often arises as to whether the labor contract can be considered separately, thereby allowing deviations from the legislative requirements.
However, recently in line with the policy of Ukraine on improvement of the investment climate some revolutionary changes were introduced. On June 1, 2014, Law 1255-VII amending Part 1 of Article 41 of the Labor Code came into effect. In particular, an additional ground for dismissal has been added (Para 5 Part 1 Article 41 of the Labor Code): revocation of authorities of executive officers.
Compared to other dismissal procedures, the amended labor legislation does not require separate notice or justification for dismissal on this ground. Thus, dismissal may be "same-day" without any grounds specified.
As a kind of compensation, Article 44 of the Labor Code prescribes the severance pay in the amount of at least six months’ average earnings.
Unfortunately, provisions of the Labor Code contain no definition of an “officer”, so there is still a problem identifying the categories of employees which may be subject to such dismissal.
In its clarification "The Class "Officer" in Labor Legislation" dated July 24, 2014, the State Labor Inspectorate of Ukraine attempts to find such a definition in the legislation relating to state officials, in criminal and corporate laws as well as in the relevant court resolutions.
In particular, the State Labor Inspectorate states that the note to Article 364 of the Criminal Code of Ukraine defines executive officers as persons who act as representatives of state authorities or local self-governments permanently, temporarily or under special authority as well as permanently or temporarily hold positions associated with organizational and management or administrative and business functions at state authorities, local self-governments, public or municipal enterprises, institutions or organizations or perform such functions under special authority, which are granted to a person by a competent state authority, local self-government, central state executive authority enjoying a special status, competent authority or authorized person of an enterprise, institution or organization.
An executive officer is endowed with a certain scope of authority, and within the same, has the right to take actions that generate, modify or suspend specific legal relations (e.g. the right to appoint or dismiss employees, to apply disciplinary or administrative penalties etc).
According to the Resolution of the Plenum of the Supreme Court of Ukraine , the organizational and management responsibilities (which are indispensable for the concept "executive officer") are responsibilities of managing an industry, staff members, task area or production activities of certain employees at enterprises, institutions or organizations regardless of ownership. Such functions are performed, in particular, by heads of ministries, other central executive authorities, state, collective or private enterprises, institutions and organizations, their deputies, heads of structural subdivisions (workshop managers, heads of departments, laboratories or chairs), their deputies, and persons managing task areas (masters, supervisors, foremen, etc).
However, in our opinion, application of the concept of criminal law to labor relations is controversial and such a broad definition is unlikely to be supported by the courts.
In our view, "revocation of authority" is basically a corporate law term, which assumes officers are elected, appointed and empowered by the higher authority (general meeting of owners, supervisory board).
Given the above and the fact that the Law 1255-VII also amended the Civil Code , the Commercial Code and the Law on JSC (i.e. the corporate legislation proper), we suggest considering the term under corporate law to define "officers" in this case.
According to Para 2 of Article 89 of the Commercial Code officers of a company are:
- Chairman and members of the Management Board,
- Chairman of the Audit Committee,
- in companies where a Supervisory Board is established – Chairman and members of the company’s Supervisory Board.
The Law on JSC (Para 15 Part 1 Article 2) additionally includes members of the Audit Committee, Head and members of another body of a joint stock company, if that body is provided for under the articles of association, as officers.
Thus, the corporate legislation defines only those persons as executive officers who are elected by the vote of the higher management bodies (general meeting of shareholders or supervisory boards) and are in corporate relations with the company, whereas mid- and low-level managers (heads of departments) are just appointed by the management board or CEOs without any corporate authorities and are therefore excluded from the list.
At the same time, such dismissal is included in Article 41 of the Labor Code (bearing the title "Additional grounds for termination of labor agreement on the initiative of the owner or its authorized body with separate categories of employees under certain conditions") and is thus a dismissal on the employer’s initiative. Therefore, all of the relevant safeguards apply to employees dismissed due to revocation of authorities, including, for instance, the following:
• Prohibition against dismissing pregnant women and women having children under three years of age (under six years of age in some cases provided for by Part 6 of Article 179 of the Labor Code) – Article 184 of the Labor Code;
• Prohibition against dismissing single mothers having a child under fourteen years of age or a disabled child – Article 184 of the Labor Code;
• This prohibition also extends to fathers raising their children without a mother (in particular, in case of the mother’s long-term treatment at a healthcare institution) as well as to guardians (trustees) and foster parents – Article 186 of the Labor Code;
• Employees under eighteen years of age may be dismissed only with the consent of the district (city) services for children’s affairs (Article 198 of the Labor Code);
• Employees may not be dismissed during a period of temporary disability or during their vacation (Part 3 Article 40 of the Labor Code).
To summarize, in our opinion the new ground for dismissal introduced into the Labor Code and dealing with dismissal of executive officers is undoubtedly a progressive regulation, protecting the rights of employers, foreign investors among them. The new regulation also smoothes out discrepancies between the corporate and labor legislation: whereas it was obvious that the owner may revoke the authorities of the executive any time, due to the rigid labor law prescriptions the labor relations didn't terminate simultaneously with such revocation. Therefore formally the officer was still in employment though due to revocation of his/her authorities he/she was not able to work.
At the same time the new legislation also provides the officer to be dismissed under this ground with the minimum guarantee (severance pay) in the amount of at least 6 average monthly salaries - the price the employee has to pay for its corporate decision. Previously the sum of compensation was regulated between the parties (with the dismissal formalized as mutual agreement) and in practice varying from zero to any sum, as agreed under the circumstances.
In our opinion, to define the term "officer" for dismissal purposes under Para 5 Part 1 Article 41 of the Labor Code, it is more correct to use the definitions under corporate law. Also in our view dismissals of CEOs and members of management boards will be the most frequent ones performed under this ground.
We believe that controversies in the interpretation of the term "officers" by employees and employers as well as by courts are likely to arise in practice, unless additional definitions appear in the legislation or official position of state bodies and courts.
France - New Governmental Proposals to Jump-Start the French Economy
By Roselyn Sands,
EY Société d’Avocats, Paris, France
Over the past years, France’s economic system has often been criticized and accused of being unable to adapt to the new rules of a globalized economy. Indeed, the fact that unemployment is on a continuous rise since 2008 is often pointed out as proof that the French economy is under stress. The French labor market and the laws governing it are considered as being in part responsible for France’s current predicament.
In order to remedy this situation, the French government is taking bold measures in the hopes of jump-starting the economy. Since the beginning of François Hollande’s presidency, major changes have been implemented in areas of French labor law, such as the simplification of large scale redundancy process (while the process remains complex, at least the time is now much better secured).
Indeed, under pressure from the European Union as well as the high unemployment rate, the French government is being more enterprising in its reforms. A team of two French and German economists submitted a paper on the potential reforms both countries could implement to stimulate growth in both countries as well as Europe.
Based on this paper, the French Minister of the Economy has submitted a law which will be discussed before the French Parliament early 2015. This law includes a certain number of reforms which are aimed to create greater flexibility in the labor market and further simplify redundancies.
Measures which aim to increase flexibility
Regarding flexibility, the proposed law implements measures which expand the categories for fixed term employment.
The proposed law plans on preserving the possibility to enter into a fixed term contract for a “specific purpose”. This type of contract was highly sought by companies managing complex projects and that required specific competencies for long but fixed durations of time.
This contract, which had been authorized for an experimental duration between June 2008 and June 2014, allowed employers to hire “cadre” employees for a specific purpose or project, of a minimum duration of at least 18 months and a maximum duration of 36 months.
Measures to simplify redundancy process
The proposed law also aims to simplify additionally the regulations on redundancies in France.
- Selection criteria
Currently, French law requires that when a company considers undertaking the redundancy of more than 10 employees, a selection criterion be applied to all employees based on, notably, factors set forth in the French Labor code: age, number of dependents, years of service and disabilities.
However, this applies regardless of the geographical scope of the redundancy. Therefore, a company making employees redundant in one city had to compare the employees concerned with those located in another city.
The proposed law affords employers greater flexibility; indeed, through either a unilateral decision or through a collective bargaining agreement, the employer would be able to choose to limit the geographical scope of a selection criteria analysis.
- The “reclassement” obligation
In addition, one of the most difficult aspects of the redundancy rules in France is the extra-territorial “reclassement” obligation, requiring employers to search for other positions throughout the group of company even outside of France. The proposed law would limit the geographical scope of this obligation. Thus, if the law passes, employers will no longer have to search for job opportunities in subsidiaries established outside France.
- Labor inspector authorization
Finally, and more importantly, since July 2013 any redundancy plan must be approved by the French labor administration prior to being implemented. Currently, if a plan is approved by the administration and later overturned by the courts after its implementation by the employer, the termination are deemed null and void. This will no longer be the case if the proposed law is implemented as is.
Administrative and other simplifications
The French Parliament is also discussing a new law this month which would aim to simplify administrative procedures for employers and thus, cut through the red tape. The main simplifications are the following:
- Simplification of the part-time mechanisms,
- Harmonization of the timing rules of the French Labor Code,
- Simplification of the profit sharing schemes (merger of the mandatory and the optional profit sharing scheme).
Reducing unemployment is absolutely paramount for the French government. François Hollande had promised, in 2012, that his government would manage to reduce unemployment by the end of 2013.
The burdensome labor laws are viewed as an obstacle to attract investment and reduce unemployment. It is for this reason that labor law has been, and continues to be, at the heart of French politics and legislative reform.
In view of such a daunting political and economic task, the government is convinced that the benefits brought by increased flexibility, entrepreneurship and investments outweigh the potential costs of decreased security for employees.
EY Société d’Avocats, Paris, France
Over the past years, France’s economic system has often been criticized and accused of being unable to adapt to the new rules of a globalized economy. Indeed, the fact that unemployment is on a continuous rise since 2008 is often pointed out as proof that the French economy is under stress. The French labor market and the laws governing it are considered as being in part responsible for France’s current predicament.
In order to remedy this situation, the French government is taking bold measures in the hopes of jump-starting the economy. Since the beginning of François Hollande’s presidency, major changes have been implemented in areas of French labor law, such as the simplification of large scale redundancy process (while the process remains complex, at least the time is now much better secured).
Indeed, under pressure from the European Union as well as the high unemployment rate, the French government is being more enterprising in its reforms. A team of two French and German economists submitted a paper on the potential reforms both countries could implement to stimulate growth in both countries as well as Europe.
Based on this paper, the French Minister of the Economy has submitted a law which will be discussed before the French Parliament early 2015. This law includes a certain number of reforms which are aimed to create greater flexibility in the labor market and further simplify redundancies.
Measures which aim to increase flexibility
Regarding flexibility, the proposed law implements measures which expand the categories for fixed term employment.
The proposed law plans on preserving the possibility to enter into a fixed term contract for a “specific purpose”. This type of contract was highly sought by companies managing complex projects and that required specific competencies for long but fixed durations of time.
This contract, which had been authorized for an experimental duration between June 2008 and June 2014, allowed employers to hire “cadre” employees for a specific purpose or project, of a minimum duration of at least 18 months and a maximum duration of 36 months.
Measures to simplify redundancy process
The proposed law also aims to simplify additionally the regulations on redundancies in France.
- Selection criteria
Currently, French law requires that when a company considers undertaking the redundancy of more than 10 employees, a selection criterion be applied to all employees based on, notably, factors set forth in the French Labor code: age, number of dependents, years of service and disabilities.
However, this applies regardless of the geographical scope of the redundancy. Therefore, a company making employees redundant in one city had to compare the employees concerned with those located in another city.
The proposed law affords employers greater flexibility; indeed, through either a unilateral decision or through a collective bargaining agreement, the employer would be able to choose to limit the geographical scope of a selection criteria analysis.
- The “reclassement” obligation
In addition, one of the most difficult aspects of the redundancy rules in France is the extra-territorial “reclassement” obligation, requiring employers to search for other positions throughout the group of company even outside of France. The proposed law would limit the geographical scope of this obligation. Thus, if the law passes, employers will no longer have to search for job opportunities in subsidiaries established outside France.
- Labor inspector authorization
Finally, and more importantly, since July 2013 any redundancy plan must be approved by the French labor administration prior to being implemented. Currently, if a plan is approved by the administration and later overturned by the courts after its implementation by the employer, the termination are deemed null and void. This will no longer be the case if the proposed law is implemented as is.
Administrative and other simplifications
The French Parliament is also discussing a new law this month which would aim to simplify administrative procedures for employers and thus, cut through the red tape. The main simplifications are the following:
- Simplification of the part-time mechanisms,
- Harmonization of the timing rules of the French Labor Code,
- Simplification of the profit sharing schemes (merger of the mandatory and the optional profit sharing scheme).
Reducing unemployment is absolutely paramount for the French government. François Hollande had promised, in 2012, that his government would manage to reduce unemployment by the end of 2013.
The burdensome labor laws are viewed as an obstacle to attract investment and reduce unemployment. It is for this reason that labor law has been, and continues to be, at the heart of French politics and legislative reform.
In view of such a daunting political and economic task, the government is convinced that the benefits brought by increased flexibility, entrepreneurship and investments outweigh the potential costs of decreased security for employees.
USA and UK - Employment Insolvency Law Issues
By Gabrielle Culmer, overseas door tenant at 9 Stone Buildings, London.
In the United Kingdom, when a company goes into insolvency, it is usually when it is “unable to pay its debts as they fall due,” and is deemed to be so where it is proven to the satisfaction of the court. Also, where there is a shortfall of assets in relation to liabilities.
An official liquidator is appointed, and an application is made to the court to wind up the company by a petition presented whether by the company, or the directors, or by the creditors.
Employment Contracts in Administration and Receiverships
In an administrative receivership, the receiver acts as the agent of the company and acts as manager while being personally liable on any contract entered into by him/her in the carrying out of functions, but has an indemnity out of the assets of the company. In an administration, the administrator rescues the company as a going concern, and achieves a better result for the creditors than if it were wound up, or makes a distribution to one or more secured or preferential creditors.
Furthermore, the administrator has a duty to the general body of creditors and powers are given on behalf of the general body of creditors. The administrator is not generally liable for the contracts in which he enters or for the employment contracts adopted.
Liquidation
There is relief awarded to employees of companies in the U. K. In a liquidation, the pari passu principle is the order the creditors are to receive funds, and starts with secured creditors. Usually, the insolvency practitioner can keep the employee contracts where there is a viable company, however, if it is not feasible, can be liable for fraudulent trading if contracts are kept which cannot be covered financially.
Statutory Protection is provided as to the transfer of undertakings under the Insolvency Act 1986 where the company has been transferred. Also, a claim for arrears is preferential within the confines of the act. Under sections 257 and 258 of the Pensions Act 2004, eligibility is assessed and ensured, and the Pension Protection Fund provides compensation where the employers’ pension scheme is underfunded.
Preferential creditors have preferential debts to be paid in advance of other unsecured creditors. Schedule 6 of the Insolvency Act 1986 classifies these as PAYE , social security contributions, occupational pension scheme contributions, remuneration which includes, holiday pay, guarantee payments and any pay for the time off work if for trade union duties, ante natal care and medical supervision required by statute.
In addition, the insolvency practitioner may provide gratuitous payments to employees if they are bona fide payments to carry on the company’s business. However, a golden handshake or other terminal payments are harder to justify.
National Insurance Fund
Section 182 of the Employment Rights Act 1996 states that the Secretary of State needs to be satisfied that (a) the employer has become insolvent, (b) the employee’s employment has been terminated and (c) on the appropriate date, the employee was entitled to be paid the whole or part of any debt to which the part applies. Then subject to section 186, the Secretary of State will pay the employee out of the National Insurance Fund.
The Redundancy Payment Scheme
The insolvency provisions of the Employment Rights Act 1996 are brought into force when section 183 of the IA 1986 applies.
Under the Employment Rights Act 1996, the Redundancy Payment Scheme allows the employees who have some debts payable to them covered by the state.
The Redundancy Payment Office of the Department for Business Innovation and Skills (BIS) provides this in addition to the recourse of being able to recover some debts as creditors of the company.
In addition, employees dismissed by the administrators may look to them for claims arising during this period.
The Redundancy Payment Scheme Debts
These are to be applied for on form RP15 enclosing form RP16 and include:
1. Arrears of pay up to £464 per week (Effective since 14th April, 2014) for a maximum of eight weeks which includes commission overtime and guarantee payments.
2. Statutory payments for time off work, or suspension on medical and maternity grounds.
3. Any ‘protective award’ made by an employment tribunal if an employee has failed to inform or consult a worker’s representative about the collective redundancy.
4. Holiday pay, for unused holidays and for holidays which have been taken and not paid, up to a week’s limit of £464 for a maximum of 6 weeks. Holiday pay may include holiday carried over from the previous year if the contract permits.
5. A compensatory payment for failure to give proper statutory notice, up to a weekly limit of £464.
6. An unpaid basic award made by an employment tribunal of compensation for unfair dismissal.
7. Reasonable reimbursement of apprentices ‘or articled clerks’ fees or premiums. Unlike holiday pay and compensation, the full amounts can be recovered.
8. Statutory redundancy payments in the employee’s weekly pay (up to a current set limit of £464 per week) multiplied by a number of qualifying weeks equivalent to length of employment. 0.5week’s pay for each full year of service where the age during the year is less than 22 years. A week’s full pay for each full year of service where age during the year is 22 or above, but less than 41 years, 1.5 week’s pay for each full year of service where the age during the year is 41 years.
If such payments fail to be made, the procedure is then taken to the Employment Tribunal. The regular insolvency proceeding considers claims which are not covered by the scheme and which must be formally registered.
Recent Developments
In Gomes Viana Novo and Others v Fundode Garantia Salarial (ECJ) Case C-309/12, 372 (2014) ICR, it was held that under the second paragraph of Article 3 Directive 80/987, member states were free to determine the date from which the employees’ outstanding pay claims were to be taken over by a guarantee institution in the event of an employer’s insolvency. Under Article 4(1)(2), as amended, it is possible for the minimum guarantee period of 3 months to be after the reference date, with the member states also having the option of providing for a minimum guarantee limited to 8 weeks provided that 8 week period was within a longer reference period of at least 18 months. It was open to the member states to fix a date from which the reference period was to be calculated, as the date on which the proceedings for a declaration of the employers’ insolvency was commenced. Where a member state decided to exercise the option to limit the guarantee by setting a reference period, it could choose to limit that period to 6 months provided that it guaranteed pay for the last 3 months of the employment relationship.
U. S. A. Chapter 11 Restructuring and Employment Contracts
In the United States, the Chapter 11 bankruptcy allows for the reorganization and restructuring of the company. The Debtor in Possession can continue the contracts of employees under the code. Management is left mainly in place and the shareholders have a stake in the outcome. A cram down is imposed via a plan on the creditors.
Under Title 11 USC of the Bankruptcy Code § 1107, the debtor in possession is a fiduciary with the rights and powers of a trustee. The Automatic stay is placed on the business dealings of the company where the claims arising before the filing of the bankruptcy petition may not be pursued. The Code states that, “A stay of creditors’ actions against the Chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed.” (11 USC § 362(a)). However, it is noted that certain types of actions are exempt under 11 USC § 362 (b). Furthermore, secured creditors can obtain relief from the stay under specific circumstances.
Fees can be paid to professionals hired by the DIP or appointed by the court.
However, in the case of executory contracts the DIP may assume or reject any one. Should the DIP refuse an employment contract, the former employee can file an unsecured claim arising out of the date of the bankruptcy petition.
In Chapter 11 the debtor can renegotiate leases and contracts, and can repay debts and discharge them. Section 507 lists the types of priority claims against a debtor. In § 507 (a)(4), an employee claim for “unpaid wages, salary or commissions, including vacation, severance and sick pay leave, is entitled to fourth priority treatment.” The amount of the claim to be prioritized is $11,725 and earned by the employee within 180 days before the petition date and when the business ceased. If the claim goes above $11,725 or is earned prior to the 180 day window it becomes considered unsecured.
Priority is applied where the Code states that there should be priority, and the claim arose post petition. Also, where it can be applied as an administration expense under § 503(b) of the Code. The DIP usually prioritizes the employee claims that arise post petition while reducing unnecessary employee claims.
In the United Kingdom, when a company goes into insolvency, it is usually when it is “unable to pay its debts as they fall due,” and is deemed to be so where it is proven to the satisfaction of the court. Also, where there is a shortfall of assets in relation to liabilities.
An official liquidator is appointed, and an application is made to the court to wind up the company by a petition presented whether by the company, or the directors, or by the creditors.
Employment Contracts in Administration and Receiverships
In an administrative receivership, the receiver acts as the agent of the company and acts as manager while being personally liable on any contract entered into by him/her in the carrying out of functions, but has an indemnity out of the assets of the company. In an administration, the administrator rescues the company as a going concern, and achieves a better result for the creditors than if it were wound up, or makes a distribution to one or more secured or preferential creditors.
Furthermore, the administrator has a duty to the general body of creditors and powers are given on behalf of the general body of creditors. The administrator is not generally liable for the contracts in which he enters or for the employment contracts adopted.
Liquidation
There is relief awarded to employees of companies in the U. K. In a liquidation, the pari passu principle is the order the creditors are to receive funds, and starts with secured creditors. Usually, the insolvency practitioner can keep the employee contracts where there is a viable company, however, if it is not feasible, can be liable for fraudulent trading if contracts are kept which cannot be covered financially.
Statutory Protection is provided as to the transfer of undertakings under the Insolvency Act 1986 where the company has been transferred. Also, a claim for arrears is preferential within the confines of the act. Under sections 257 and 258 of the Pensions Act 2004, eligibility is assessed and ensured, and the Pension Protection Fund provides compensation where the employers’ pension scheme is underfunded.
Preferential creditors have preferential debts to be paid in advance of other unsecured creditors. Schedule 6 of the Insolvency Act 1986 classifies these as PAYE , social security contributions, occupational pension scheme contributions, remuneration which includes, holiday pay, guarantee payments and any pay for the time off work if for trade union duties, ante natal care and medical supervision required by statute.
In addition, the insolvency practitioner may provide gratuitous payments to employees if they are bona fide payments to carry on the company’s business. However, a golden handshake or other terminal payments are harder to justify.
National Insurance Fund
Section 182 of the Employment Rights Act 1996 states that the Secretary of State needs to be satisfied that (a) the employer has become insolvent, (b) the employee’s employment has been terminated and (c) on the appropriate date, the employee was entitled to be paid the whole or part of any debt to which the part applies. Then subject to section 186, the Secretary of State will pay the employee out of the National Insurance Fund.
The Redundancy Payment Scheme
The insolvency provisions of the Employment Rights Act 1996 are brought into force when section 183 of the IA 1986 applies.
Under the Employment Rights Act 1996, the Redundancy Payment Scheme allows the employees who have some debts payable to them covered by the state.
The Redundancy Payment Office of the Department for Business Innovation and Skills (BIS) provides this in addition to the recourse of being able to recover some debts as creditors of the company.
In addition, employees dismissed by the administrators may look to them for claims arising during this period.
The Redundancy Payment Scheme Debts
These are to be applied for on form RP15 enclosing form RP16 and include:
1. Arrears of pay up to £464 per week (Effective since 14th April, 2014) for a maximum of eight weeks which includes commission overtime and guarantee payments.
2. Statutory payments for time off work, or suspension on medical and maternity grounds.
3. Any ‘protective award’ made by an employment tribunal if an employee has failed to inform or consult a worker’s representative about the collective redundancy.
4. Holiday pay, for unused holidays and for holidays which have been taken and not paid, up to a week’s limit of £464 for a maximum of 6 weeks. Holiday pay may include holiday carried over from the previous year if the contract permits.
5. A compensatory payment for failure to give proper statutory notice, up to a weekly limit of £464.
6. An unpaid basic award made by an employment tribunal of compensation for unfair dismissal.
7. Reasonable reimbursement of apprentices ‘or articled clerks’ fees or premiums. Unlike holiday pay and compensation, the full amounts can be recovered.
8. Statutory redundancy payments in the employee’s weekly pay (up to a current set limit of £464 per week) multiplied by a number of qualifying weeks equivalent to length of employment. 0.5week’s pay for each full year of service where the age during the year is less than 22 years. A week’s full pay for each full year of service where age during the year is 22 or above, but less than 41 years, 1.5 week’s pay for each full year of service where the age during the year is 41 years.
If such payments fail to be made, the procedure is then taken to the Employment Tribunal. The regular insolvency proceeding considers claims which are not covered by the scheme and which must be formally registered.
Recent Developments
In Gomes Viana Novo and Others v Fundode Garantia Salarial (ECJ) Case C-309/12, 372 (2014) ICR, it was held that under the second paragraph of Article 3 Directive 80/987, member states were free to determine the date from which the employees’ outstanding pay claims were to be taken over by a guarantee institution in the event of an employer’s insolvency. Under Article 4(1)(2), as amended, it is possible for the minimum guarantee period of 3 months to be after the reference date, with the member states also having the option of providing for a minimum guarantee limited to 8 weeks provided that 8 week period was within a longer reference period of at least 18 months. It was open to the member states to fix a date from which the reference period was to be calculated, as the date on which the proceedings for a declaration of the employers’ insolvency was commenced. Where a member state decided to exercise the option to limit the guarantee by setting a reference period, it could choose to limit that period to 6 months provided that it guaranteed pay for the last 3 months of the employment relationship.
U. S. A. Chapter 11 Restructuring and Employment Contracts
In the United States, the Chapter 11 bankruptcy allows for the reorganization and restructuring of the company. The Debtor in Possession can continue the contracts of employees under the code. Management is left mainly in place and the shareholders have a stake in the outcome. A cram down is imposed via a plan on the creditors.
Under Title 11 USC of the Bankruptcy Code § 1107, the debtor in possession is a fiduciary with the rights and powers of a trustee. The Automatic stay is placed on the business dealings of the company where the claims arising before the filing of the bankruptcy petition may not be pursued. The Code states that, “A stay of creditors’ actions against the Chapter 11 debtor automatically goes into effect when the bankruptcy petition is filed.” (11 USC § 362(a)). However, it is noted that certain types of actions are exempt under 11 USC § 362 (b). Furthermore, secured creditors can obtain relief from the stay under specific circumstances.
Fees can be paid to professionals hired by the DIP or appointed by the court.
However, in the case of executory contracts the DIP may assume or reject any one. Should the DIP refuse an employment contract, the former employee can file an unsecured claim arising out of the date of the bankruptcy petition.
In Chapter 11 the debtor can renegotiate leases and contracts, and can repay debts and discharge them. Section 507 lists the types of priority claims against a debtor. In § 507 (a)(4), an employee claim for “unpaid wages, salary or commissions, including vacation, severance and sick pay leave, is entitled to fourth priority treatment.” The amount of the claim to be prioritized is $11,725 and earned by the employee within 180 days before the petition date and when the business ceased. If the claim goes above $11,725 or is earned prior to the 180 day window it becomes considered unsecured.
Priority is applied where the Code states that there should be priority, and the claim arose post petition. Also, where it can be applied as an administration expense under § 503(b) of the Code. The DIP usually prioritizes the employee claims that arise post petition while reducing unnecessary employee claims.
International M&A Employment Due Diligence Checklist
By Donald C. Dowling, Jr., White & Case, New York
Thorough due diligence involves a wide range of business and legal issues including antitrust analysis, accounting principles, intellectual property rights, environmental compliance, tax status, and an analysis of pending and potential lawsuits against the seller. One part of any thorough due diligence process is the staffing piece—workplace due diligence into the seller’s labor practices, its employment law compliance and its employee benefits offerings. Due diligence into workforce issues internationally, outside the US is particularly vital, because business acquirers away from employment-at-will in effect inherit the seller’s human resources status quo—whether by vested rights in a stock purchase, by acquired rights in an asset purchase or else by some contractual commitment amounting to some sort of employer substitution. Also, because law in many places shifts pre-closing employment liabilities to the buyer after closing, any prospective buyer of a business needs to study the seller’s global personnel operations and get familiar with the to-be-acquired worldwide workforce.
Using a thorough due diligence checklist helps a prospective business buyer figure out what data to scrutinize and also helps a prospective business seller anticipate what data prospective buyers will expect to see. But conducting due diligence into human resources across borders is tricky, because employment is inherently local, rooted in issues indigenous to each affected country. For example, Hong Kong imposes unique social security and pension compliance requirements, Mexico imposes strict profit-sharing mandates, Brazil imposes an unusual employer-financed unemployment compensation regime, Saudi Arabia imposes unique workforce gender-segregation rules, and South Africa imposes unique diversity plan obligations. An employment due diligence checklist can account for these inherently local workplace and employment law issues only if it gets tailored for all the jurisdictions in play in the present deal.
This international human resources due diligence checklist focuses on staffing issues that tend to arise across various jurisdictions. So this checklist is merely an outline that needs tailoring for each local jurisdiction where a seller in a given deal employs staff:
• Data laws in due diligence. The due diligence process exists to root out noncompliant problems, so the due diligence process itself should never cause its own compliance breach. Many jurisdictions, including the European Union as well as most of the rest of Europe plus Argentina, Canada, Israel, Japan, Korea, Philippines, South Africa, Uruguay and a growing number of others, impose broad data privacy (“data protection”) laws that inevitably have unexpected consequences in the due diligence context. Electronic due diligence data rooms raise exposure under these laws if they offer up to bidders personal information about identifiable seller employees. Bidders cannot shrug this off as the seller’s problem, because liability for breach of data laws can transfer to a buyer at closing, particularly in a stock deal. Compliance steps may require “anonymizing” data room information, entering into “onward transfer agreements” with bidders, entering into cross-border “model contractual clauses” agreements, collecting signed employee consents and taking other steps. Jurisdictions including Argentina, Hong Kong, Japan, Korea and the United Kingdom have issued legal guidance specific to the M&A due diligence context. Follow it.
• Materiality threshold. Prospective business buyers do not care about immaterial aspects of the seller’s staffing operations. International HR due diligence in any merger or acquisition therefore needs to be subject to some materiality threshold. Find out what the threshold is, and then focus HR due diligence only on issues that could exceed it.
• Claims, liabilities and exposure. Is the seller subject to any pending, threatened or potential employment-related grievances, claims, lawsuits, appeals, disciplinary proceedings, workplace inspections or audits, government complaints or investigations, administrative charges, unfair labor practice charges, criminal proceedings or unpaid employee judgments? What about claims disposed of over the last few years, be they settlements or judgments? What is the exposure for the seller’s noncompliance with labor/employment, payroll, safety, and HR data privacy laws? What are the seller’s cash reserves for these claims?
• Corporate employer issues. In each country, identify the seller’s local affiliated corporate entities that employ staff. Learn the relationships among the seller’s operating entities and any “services companies” that employ people.
• Census and organization chart of employees plus contingent staff. Get a census of seller employees (and directors) worldwide, including part-time and contracted-out employees. Include both employees who service the target entity and target-entity employees “seconded” out to service other organizations. Ideally this census should include dates of hire, compensation and job category. Separately, get an organization chart and verify that only the employees who actually serve the target unit—regardless of title or designation—will transfer as part of the deal. Conversely, verify that all essential staff who should transfer will come over as part of the deal. Identify any “shared services” employees who work for both the target unit and non-acquired units. Next, identify the seller’s contingent staff (independent contractors, consultants, agents, secondees, sales representatives, “business partner” staff dedicated to this business and employees working from home or remotely, even overseas).
• Expatriates and immigrants. Collect information on the seller’s expatriate and immigrant populations and programs. Who are the overseas secondees and other posted expatriates? Which corporate entity employs each expatriate? Identify “stealth expatriates” outside the formal expatriate program who are nevertheless working outside their home countries. Check the visa status of non-local-citizen employees worldwide. How might this deal affect these visas?
• Compliance with policies and laws. Identify (and check compliance with) the seller’s own employment policies, written and unwritten. Look at employee handbooks, written work rules, health/safety guidelines. Separately, check whether the seller complies with legally mandated terms and conditions of employment. What special terms and conditions (beyond legal minimums and above market) does the seller extend to employees? The buyer will likely have to replicate these terms after closing.
• Code of conduct. Check compliance with the seller’s internal ethics code of conduct and social responsibility programs, including any commitment to an industry code, any corporate social responsibility program and any so-called “framework” (global union neutrality) agreement. Are these translated into local languages and compliant with overseas language laws? Do the seller’s HR practices comply? Will the seller’s current practices align with the buyer’s practices and comply with the buyer’s policies and codes? Check seller practices regarding government procurement, payment procedures to government officials, and compliance with anti-bribery laws and audit/ accounting rules. Verify that any seller whistleblower hotline complies with Europe’s tough data protection law mandates.
• Supply chain and human rights. Get the seller’s supplier code of conduct, if any, and collect compliance data like social/human rights audits. Collect data on labor practices in the supply chain, particularly as to components and products sourced from poor countries, including construction projects. Consider post-closing obligations on the buyer under California’s Transparency in Supply Chain Act 2010. (Cal. Civil Code §1714.43; Cal. Revenue and Taxation Code §19547.5) Consider post-closing exposure to workplace-context human rights claims. Consider whether the seller’s supply chain practices might, after closing, breach the buyer’s supplier code of conduct, if any. This said, keep human rights issues in perspective. Discount advice (from certain consultants and activists) that the United Nations Guiding Principles on Business and Human Rights and other aspirational declarations somehow impose binding legal obligations relevant to international mergers and acquisitions. For the most part, they do not.
• Compensation and benefits. Using a separate compensation/ benefits checklist, check the seller’s benefits and compensation offerings, including bonus plans. Are they above market? Do they comply with legal minimums? Look into the seller’s compensation philosophy, compensation/benefits “schemes” or plans, severance plans, retirement plans, bonus plans and perquisites (like meals, housing and expatriate benefits). Check sales compensation. Check individual pension promises, special agreements, grandfather clauses, death/disability benefits, cafeteria plans, service awards, profit-sharing and savings plans, tuition and adoption reimbursement plans, employee assistance programs, employee loans and guarantees—even unusual expense reimbursements. Understand the interplay between foreign pension plans and foreign social security in each affected country. Check compliance with local laws that mandate extra payments and benefits (like thirteenth-month pay and profit sharing in Latin America). Get an accounting of any transferring plans and study funding—unfunded, underfunded, and “book reserve” plans can raise huge problems and occasionally even kill deals.
• Equity. Look at seller stock options, stock grants, phantom stock and other equity plans, plus employee ownership programs, officer/director stock ownership, and employee ownership in affiliates and entities doing business with the seller. What will happen to these after closing? If the buyer will not or cannot replicate them, what will it need to do instead?
• Employee insurance coverage. Look at the employment-related insurance the seller provides, like employee life/health/accident insurance, hazardous duty/kidnap insurance, payments to state-mandated insurance funds (workers’ compensation and state social security insurance), expatriate coverage and “key man” policies naming the employer as beneficiary. Consider analogous insurance needs post-closing and, in an asset deal, consider the logistics of getting insurance in place by the closing date.
• Performance management. Study the seller’s performance management system. Focusing on key employees, collect data on job evaluations, performance appraisals and problem employees. Consider integration after closing.
• Labor organization relationships. What labor organizations represent the seller’s workers? Are these independent unions, in-house unions or so-called “white unions”? What about pending employee requests for union recognition or organization? Separately, collect organizational data on the seller’s in-house or company-sponsored labor organizations like local/national works councils, any European Works Council, health/safety committees, staff consultation committees, worker committees, workplace forums, labor/management committees and ombudsmen. How cooperative or contentious are these groups? Collect meeting minutes and records memorializing labor disturbances and days lost to strikes.
• Collective agreements. Look at applicable collective bargaining agreements, “industrial awards,” “social plans” and other agreements with employee representatives—not only union agreements, but also accords with works councils, worker committees, health and safety committees, ombudsmen and the like. Avoid the common mistake of asking only for “collective bargaining agreements”—a phrase usually interpreted as meaning only formal union agreements, excluding informal one off accords and arrangements with works councils. Get expired agreements with terms that still apply. Identify all industry (“sectoral”) collective agreements that bind the seller even as a non-signatory. Does the seller participate in any multiemployer bargaining associations?
• Individual employment agreements. Look at individual employment contracts with employees, including employment agreements labeled “offer letters,” “statement of particulars,” restrictive covenants, non-competes and confidentiality agreements, indemnification agreements, invention and intellectual property agreements, expatriate arrangements, resignation letters and releases. At least check these for key executives and look at form/template agreements for rank and file employees. Be sure to look at contracts with contingent workers—service providers like “temps,” independent contractors, consultants and agents).
• Employee consents. Check individual employee consent forms. Employee consents come in many flavors: In jurisdictions like the UK and Korea, employees may have consented in writing to work overtime. European employees may have consented to employer processing of sensitive personal data. Employees may have acknowledged a code of conduct or work rules in writing. If these consents are electronic, do signatures comply with electronic signature protocols?
• Change-in-control clauses. Check change-in-control, golden parachute, and other transfer-related clauses in employment and agency agreements, including M&A-ratification provisions in any labor union contracts and European Works Council agreements. Of course, dig out every change-in-control clause in every executive employment agreement and find all transferability clauses in independent contractor agreements. These are vital.
• External agreements. Do any external agreements (with third parties) limit staffing flexibility? For example, in a stock purchase, are there acquisition agreements from earlier deals that limit reductions-in-force? Has the seller signed onto any supplier codes of conduct of its customers? Is the seller a government contractor that has taken on staffing-related public procurement obligations? In the United States, for example, a buyer of a government contractor can take on big “affirmative action” obligations after closing, and analogous issues can arise abroad. Separately, look at outsourcing agreements with HR service providers like payroll providers, “temp” agencies, benefits providers and whistleblower hotline providers.
• Payroll and government filings. Check the seller’s payroll processing compliance as to deductions, withholdings, reporting, compliance with mandatory payments to unions and remittances to agencies including government tax, social, unemployment and housing funds. How is payroll issued? Are there any extra deductions (such as for charitable contributions or employee loan repayments)? Does the seller pay mandated benefits like premium-pay vacation, profit sharing and thirteenth-month pay? If the seller employs anyone in countries where it is not registered to do business, how does the seller comply with host-country payroll obligations? Be sure to check “permanent establishment” issues—are there “floating” employees doing business in countries where the seller is unregistered, not paying taxes, and flouting local payroll mandates? This scenario is common.
• Wage/hour compliance. Verify compliance with wage/hour laws, cap-on-hours laws, vacation and holiday mandates, overtime payments, payments during business travel, exempt-status designations, mandatory meal breaks, toilet breaks and rest periods.
• Health and safety; duty of care. Check compliance with health and safety laws, including recordkeeping mandates. Get information on duty of care/safety/evacuation and other protocols such as for hazardous-duty work and occupational health/safety law compliance, particularly for expatriates.
• Discrimination/harassment. Verify compliance with local discrimination/diversity/harassment laws including laws on pay equity, affirmative action, mandatory training and bullying. Verify compliance with the seller’s own discrimination/harassment policies. For example, does the seller impose mandatory retirement in violation of a no-age-discrimination provision in its own code of conduct? (That, unfortunately, is a common problem. Indeed, many international discrimination/harassment policies go well beyond local laws, and many employers violate their own policies.)
• Recent layoffs and divestitures. What layoffs or “collective redundancies” have occurred in the last few years? What divestitures of business units have occurred? Did these comply with applicable laws? What lingering obligations exist in old “social plans”? Any recall rights?
• HRIS. Look into the seller’s employee data-processing and human resources information systems (HRIS). Check how HRIS complies with data protection laws, especially as to cross border data exports. Has the seller made all required notices/communications to employees about HR data processing and collected necessary consents? What so-called “sensitive” staff data does the seller process? Beyond HRIS, verify compliance with data protection laws in the HR context, including as to routine HR data exports overseas, and as to global whistleblower hotlines.
• Powers of attorney. Find out what powers of attorney employees, officers and directors hold. These are particularly critical in Latin America, where there can be different levels of powers, some of which include the power to dispose of company assets. Consider how these powers will need to work after closing.
• Management oversight. What controls does the seller’s headquarters use to monitor local management’s compliance with laws and corporate policies?
Thorough due diligence involves a wide range of business and legal issues including antitrust analysis, accounting principles, intellectual property rights, environmental compliance, tax status, and an analysis of pending and potential lawsuits against the seller. One part of any thorough due diligence process is the staffing piece—workplace due diligence into the seller’s labor practices, its employment law compliance and its employee benefits offerings. Due diligence into workforce issues internationally, outside the US is particularly vital, because business acquirers away from employment-at-will in effect inherit the seller’s human resources status quo—whether by vested rights in a stock purchase, by acquired rights in an asset purchase or else by some contractual commitment amounting to some sort of employer substitution. Also, because law in many places shifts pre-closing employment liabilities to the buyer after closing, any prospective buyer of a business needs to study the seller’s global personnel operations and get familiar with the to-be-acquired worldwide workforce.
Using a thorough due diligence checklist helps a prospective business buyer figure out what data to scrutinize and also helps a prospective business seller anticipate what data prospective buyers will expect to see. But conducting due diligence into human resources across borders is tricky, because employment is inherently local, rooted in issues indigenous to each affected country. For example, Hong Kong imposes unique social security and pension compliance requirements, Mexico imposes strict profit-sharing mandates, Brazil imposes an unusual employer-financed unemployment compensation regime, Saudi Arabia imposes unique workforce gender-segregation rules, and South Africa imposes unique diversity plan obligations. An employment due diligence checklist can account for these inherently local workplace and employment law issues only if it gets tailored for all the jurisdictions in play in the present deal.
This international human resources due diligence checklist focuses on staffing issues that tend to arise across various jurisdictions. So this checklist is merely an outline that needs tailoring for each local jurisdiction where a seller in a given deal employs staff:
• Data laws in due diligence. The due diligence process exists to root out noncompliant problems, so the due diligence process itself should never cause its own compliance breach. Many jurisdictions, including the European Union as well as most of the rest of Europe plus Argentina, Canada, Israel, Japan, Korea, Philippines, South Africa, Uruguay and a growing number of others, impose broad data privacy (“data protection”) laws that inevitably have unexpected consequences in the due diligence context. Electronic due diligence data rooms raise exposure under these laws if they offer up to bidders personal information about identifiable seller employees. Bidders cannot shrug this off as the seller’s problem, because liability for breach of data laws can transfer to a buyer at closing, particularly in a stock deal. Compliance steps may require “anonymizing” data room information, entering into “onward transfer agreements” with bidders, entering into cross-border “model contractual clauses” agreements, collecting signed employee consents and taking other steps. Jurisdictions including Argentina, Hong Kong, Japan, Korea and the United Kingdom have issued legal guidance specific to the M&A due diligence context. Follow it.
• Materiality threshold. Prospective business buyers do not care about immaterial aspects of the seller’s staffing operations. International HR due diligence in any merger or acquisition therefore needs to be subject to some materiality threshold. Find out what the threshold is, and then focus HR due diligence only on issues that could exceed it.
• Claims, liabilities and exposure. Is the seller subject to any pending, threatened or potential employment-related grievances, claims, lawsuits, appeals, disciplinary proceedings, workplace inspections or audits, government complaints or investigations, administrative charges, unfair labor practice charges, criminal proceedings or unpaid employee judgments? What about claims disposed of over the last few years, be they settlements or judgments? What is the exposure for the seller’s noncompliance with labor/employment, payroll, safety, and HR data privacy laws? What are the seller’s cash reserves for these claims?
• Corporate employer issues. In each country, identify the seller’s local affiliated corporate entities that employ staff. Learn the relationships among the seller’s operating entities and any “services companies” that employ people.
• Census and organization chart of employees plus contingent staff. Get a census of seller employees (and directors) worldwide, including part-time and contracted-out employees. Include both employees who service the target entity and target-entity employees “seconded” out to service other organizations. Ideally this census should include dates of hire, compensation and job category. Separately, get an organization chart and verify that only the employees who actually serve the target unit—regardless of title or designation—will transfer as part of the deal. Conversely, verify that all essential staff who should transfer will come over as part of the deal. Identify any “shared services” employees who work for both the target unit and non-acquired units. Next, identify the seller’s contingent staff (independent contractors, consultants, agents, secondees, sales representatives, “business partner” staff dedicated to this business and employees working from home or remotely, even overseas).
• Expatriates and immigrants. Collect information on the seller’s expatriate and immigrant populations and programs. Who are the overseas secondees and other posted expatriates? Which corporate entity employs each expatriate? Identify “stealth expatriates” outside the formal expatriate program who are nevertheless working outside their home countries. Check the visa status of non-local-citizen employees worldwide. How might this deal affect these visas?
• Compliance with policies and laws. Identify (and check compliance with) the seller’s own employment policies, written and unwritten. Look at employee handbooks, written work rules, health/safety guidelines. Separately, check whether the seller complies with legally mandated terms and conditions of employment. What special terms and conditions (beyond legal minimums and above market) does the seller extend to employees? The buyer will likely have to replicate these terms after closing.
• Code of conduct. Check compliance with the seller’s internal ethics code of conduct and social responsibility programs, including any commitment to an industry code, any corporate social responsibility program and any so-called “framework” (global union neutrality) agreement. Are these translated into local languages and compliant with overseas language laws? Do the seller’s HR practices comply? Will the seller’s current practices align with the buyer’s practices and comply with the buyer’s policies and codes? Check seller practices regarding government procurement, payment procedures to government officials, and compliance with anti-bribery laws and audit/ accounting rules. Verify that any seller whistleblower hotline complies with Europe’s tough data protection law mandates.
• Supply chain and human rights. Get the seller’s supplier code of conduct, if any, and collect compliance data like social/human rights audits. Collect data on labor practices in the supply chain, particularly as to components and products sourced from poor countries, including construction projects. Consider post-closing obligations on the buyer under California’s Transparency in Supply Chain Act 2010. (Cal. Civil Code §1714.43; Cal. Revenue and Taxation Code §19547.5) Consider post-closing exposure to workplace-context human rights claims. Consider whether the seller’s supply chain practices might, after closing, breach the buyer’s supplier code of conduct, if any. This said, keep human rights issues in perspective. Discount advice (from certain consultants and activists) that the United Nations Guiding Principles on Business and Human Rights and other aspirational declarations somehow impose binding legal obligations relevant to international mergers and acquisitions. For the most part, they do not.
• Compensation and benefits. Using a separate compensation/ benefits checklist, check the seller’s benefits and compensation offerings, including bonus plans. Are they above market? Do they comply with legal minimums? Look into the seller’s compensation philosophy, compensation/benefits “schemes” or plans, severance plans, retirement plans, bonus plans and perquisites (like meals, housing and expatriate benefits). Check sales compensation. Check individual pension promises, special agreements, grandfather clauses, death/disability benefits, cafeteria plans, service awards, profit-sharing and savings plans, tuition and adoption reimbursement plans, employee assistance programs, employee loans and guarantees—even unusual expense reimbursements. Understand the interplay between foreign pension plans and foreign social security in each affected country. Check compliance with local laws that mandate extra payments and benefits (like thirteenth-month pay and profit sharing in Latin America). Get an accounting of any transferring plans and study funding—unfunded, underfunded, and “book reserve” plans can raise huge problems and occasionally even kill deals.
• Equity. Look at seller stock options, stock grants, phantom stock and other equity plans, plus employee ownership programs, officer/director stock ownership, and employee ownership in affiliates and entities doing business with the seller. What will happen to these after closing? If the buyer will not or cannot replicate them, what will it need to do instead?
• Employee insurance coverage. Look at the employment-related insurance the seller provides, like employee life/health/accident insurance, hazardous duty/kidnap insurance, payments to state-mandated insurance funds (workers’ compensation and state social security insurance), expatriate coverage and “key man” policies naming the employer as beneficiary. Consider analogous insurance needs post-closing and, in an asset deal, consider the logistics of getting insurance in place by the closing date.
• Performance management. Study the seller’s performance management system. Focusing on key employees, collect data on job evaluations, performance appraisals and problem employees. Consider integration after closing.
• Labor organization relationships. What labor organizations represent the seller’s workers? Are these independent unions, in-house unions or so-called “white unions”? What about pending employee requests for union recognition or organization? Separately, collect organizational data on the seller’s in-house or company-sponsored labor organizations like local/national works councils, any European Works Council, health/safety committees, staff consultation committees, worker committees, workplace forums, labor/management committees and ombudsmen. How cooperative or contentious are these groups? Collect meeting minutes and records memorializing labor disturbances and days lost to strikes.
• Collective agreements. Look at applicable collective bargaining agreements, “industrial awards,” “social plans” and other agreements with employee representatives—not only union agreements, but also accords with works councils, worker committees, health and safety committees, ombudsmen and the like. Avoid the common mistake of asking only for “collective bargaining agreements”—a phrase usually interpreted as meaning only formal union agreements, excluding informal one off accords and arrangements with works councils. Get expired agreements with terms that still apply. Identify all industry (“sectoral”) collective agreements that bind the seller even as a non-signatory. Does the seller participate in any multiemployer bargaining associations?
• Individual employment agreements. Look at individual employment contracts with employees, including employment agreements labeled “offer letters,” “statement of particulars,” restrictive covenants, non-competes and confidentiality agreements, indemnification agreements, invention and intellectual property agreements, expatriate arrangements, resignation letters and releases. At least check these for key executives and look at form/template agreements for rank and file employees. Be sure to look at contracts with contingent workers—service providers like “temps,” independent contractors, consultants and agents).
• Employee consents. Check individual employee consent forms. Employee consents come in many flavors: In jurisdictions like the UK and Korea, employees may have consented in writing to work overtime. European employees may have consented to employer processing of sensitive personal data. Employees may have acknowledged a code of conduct or work rules in writing. If these consents are electronic, do signatures comply with electronic signature protocols?
• Change-in-control clauses. Check change-in-control, golden parachute, and other transfer-related clauses in employment and agency agreements, including M&A-ratification provisions in any labor union contracts and European Works Council agreements. Of course, dig out every change-in-control clause in every executive employment agreement and find all transferability clauses in independent contractor agreements. These are vital.
• External agreements. Do any external agreements (with third parties) limit staffing flexibility? For example, in a stock purchase, are there acquisition agreements from earlier deals that limit reductions-in-force? Has the seller signed onto any supplier codes of conduct of its customers? Is the seller a government contractor that has taken on staffing-related public procurement obligations? In the United States, for example, a buyer of a government contractor can take on big “affirmative action” obligations after closing, and analogous issues can arise abroad. Separately, look at outsourcing agreements with HR service providers like payroll providers, “temp” agencies, benefits providers and whistleblower hotline providers.
• Payroll and government filings. Check the seller’s payroll processing compliance as to deductions, withholdings, reporting, compliance with mandatory payments to unions and remittances to agencies including government tax, social, unemployment and housing funds. How is payroll issued? Are there any extra deductions (such as for charitable contributions or employee loan repayments)? Does the seller pay mandated benefits like premium-pay vacation, profit sharing and thirteenth-month pay? If the seller employs anyone in countries where it is not registered to do business, how does the seller comply with host-country payroll obligations? Be sure to check “permanent establishment” issues—are there “floating” employees doing business in countries where the seller is unregistered, not paying taxes, and flouting local payroll mandates? This scenario is common.
• Wage/hour compliance. Verify compliance with wage/hour laws, cap-on-hours laws, vacation and holiday mandates, overtime payments, payments during business travel, exempt-status designations, mandatory meal breaks, toilet breaks and rest periods.
• Health and safety; duty of care. Check compliance with health and safety laws, including recordkeeping mandates. Get information on duty of care/safety/evacuation and other protocols such as for hazardous-duty work and occupational health/safety law compliance, particularly for expatriates.
• Discrimination/harassment. Verify compliance with local discrimination/diversity/harassment laws including laws on pay equity, affirmative action, mandatory training and bullying. Verify compliance with the seller’s own discrimination/harassment policies. For example, does the seller impose mandatory retirement in violation of a no-age-discrimination provision in its own code of conduct? (That, unfortunately, is a common problem. Indeed, many international discrimination/harassment policies go well beyond local laws, and many employers violate their own policies.)
• Recent layoffs and divestitures. What layoffs or “collective redundancies” have occurred in the last few years? What divestitures of business units have occurred? Did these comply with applicable laws? What lingering obligations exist in old “social plans”? Any recall rights?
• HRIS. Look into the seller’s employee data-processing and human resources information systems (HRIS). Check how HRIS complies with data protection laws, especially as to cross border data exports. Has the seller made all required notices/communications to employees about HR data processing and collected necessary consents? What so-called “sensitive” staff data does the seller process? Beyond HRIS, verify compliance with data protection laws in the HR context, including as to routine HR data exports overseas, and as to global whistleblower hotlines.
• Powers of attorney. Find out what powers of attorney employees, officers and directors hold. These are particularly critical in Latin America, where there can be different levels of powers, some of which include the power to dispose of company assets. Consider how these powers will need to work after closing.
• Management oversight. What controls does the seller’s headquarters use to monitor local management’s compliance with laws and corporate policies?
Monday, October 20, 2014
Welcome to the Fall edition of our committee newsletter. This edition we have articles from the US, UK, Germany, France and Mexico. Many thanks as always to our contributors and please let me know if you would like to contribute an article to a future edition.
Helen Colquhoun
Withers LLP
Dual qualified in New York and England & Wales
Helen Colquhoun
Withers LLP
Dual qualified in New York and England & Wales
France - Measures to Reinforce the Economy
By: Roselyn S. Sands / Nicolas Etcheparre
EY Société d’Avocats, France
Ever since French President, François Hollande, promised to reduce unemployment figures by the end of 2013, the issue of unemployment has been and continues to be at the heart of French politics, and therefore French legislation. Indeed, over the past year, the French government has passed several pieces of legislation aiming to reduce unemployment.
First, the government passed a series of laws which aim to encourage both employee mobility within France and training. Each employee is entitled to a certain number of hours of employee financed training per year. These hours are acquired pro rata of the number of days worked and are “potable.” Consequently, even if the employee changes employer, he will still be allowed to benefit from the acquired training hours. This mechanism replaces a more complex mechanism where employee rights were transferable to a new employer only under specific conditions and for a limited time only. The aim of the legislation is to ensure that all employees benefit from training throughout their career, even when they change jobs, in order to ensure adequacy between the job market’s needs, and the job pool’s qualifications.
Second, unemployment figures for youth and senior citizens are the highest of any category in France. The government has thus implemented a twofold plan in order to reduce unemployment in these specific populations. The first part of its plan is the “Contrat de génération”, or the “Generational contract”. Its aim is to encourage employers to hire youth and senior employees, thus ensuring a transfer of experience within the company. Therefore, in 2013 the government passed a law which gave a yearly 4.000€ tax incentive, for 3 years, to companies of less than 50 employees who hired a youth under the age of 26 and kept employed a senior citizen of more than 57 of age. However, this measure was not as effective as hoped for, therefore the government increased the tax incentive to 8.000€ in September 2014, to all companies of less than 300 employees.
Last, in order to encourage in-house investment, the government has implemented a tax incentive applicable to low salaries. This tax incentive, called the “Tax Credit for Competiveness and Employment”, offers a tax credit on social contributions paid on salaries which are approximately 20% above the legal minimum. Therefore, part of the social contributions paid on these salaries is reimbursed through a tax credit. Companies are free to use the tax credit as they wish, under the condition that it is reinvested within the company in order to favor competitiveness and employment. There is one catch: the works council must be kept apprised of the way in which the tax saving is spent on investment. The figures for fiscal year 2014 prove that the tax credit has been a success, even if the government hopes to increase awareness of the tax credit and encourage more companies to request it for financial year 2015.
In conclusion, the French government continues to implement targeted legislation and mechanisms which aim to reduce unemployment throughout the country. Given that the economy and unemployment are at the heart of the political debate in France, it is to be expected that the government will continue to work towards these goals.
EY Société d’Avocats, France
Ever since French President, François Hollande, promised to reduce unemployment figures by the end of 2013, the issue of unemployment has been and continues to be at the heart of French politics, and therefore French legislation. Indeed, over the past year, the French government has passed several pieces of legislation aiming to reduce unemployment.
First, the government passed a series of laws which aim to encourage both employee mobility within France and training. Each employee is entitled to a certain number of hours of employee financed training per year. These hours are acquired pro rata of the number of days worked and are “potable.” Consequently, even if the employee changes employer, he will still be allowed to benefit from the acquired training hours. This mechanism replaces a more complex mechanism where employee rights were transferable to a new employer only under specific conditions and for a limited time only. The aim of the legislation is to ensure that all employees benefit from training throughout their career, even when they change jobs, in order to ensure adequacy between the job market’s needs, and the job pool’s qualifications.
Second, unemployment figures for youth and senior citizens are the highest of any category in France. The government has thus implemented a twofold plan in order to reduce unemployment in these specific populations. The first part of its plan is the “Contrat de génération”, or the “Generational contract”. Its aim is to encourage employers to hire youth and senior employees, thus ensuring a transfer of experience within the company. Therefore, in 2013 the government passed a law which gave a yearly 4.000€ tax incentive, for 3 years, to companies of less than 50 employees who hired a youth under the age of 26 and kept employed a senior citizen of more than 57 of age. However, this measure was not as effective as hoped for, therefore the government increased the tax incentive to 8.000€ in September 2014, to all companies of less than 300 employees.
Last, in order to encourage in-house investment, the government has implemented a tax incentive applicable to low salaries. This tax incentive, called the “Tax Credit for Competiveness and Employment”, offers a tax credit on social contributions paid on salaries which are approximately 20% above the legal minimum. Therefore, part of the social contributions paid on these salaries is reimbursed through a tax credit. Companies are free to use the tax credit as they wish, under the condition that it is reinvested within the company in order to favor competitiveness and employment. There is one catch: the works council must be kept apprised of the way in which the tax saving is spent on investment. The figures for fiscal year 2014 prove that the tax credit has been a success, even if the government hopes to increase awareness of the tax credit and encourage more companies to request it for financial year 2015.
In conclusion, the French government continues to implement targeted legislation and mechanisms which aim to reduce unemployment throughout the country. Given that the economy and unemployment are at the heart of the political debate in France, it is to be expected that the government will continue to work towards these goals.
China - Bejing tightens rules for the hiring of foreigners
By Matthew Murphy and Yu Du, MMLC Group, Beijing, China
The Beijing authorities, including the Beijing Human Resources and Social Security Bureau (www.bjld.gov.cn), Beijing Municipal Government Foreign Affairs Office (www.bjfao.gov.cn), and Beijing Education Committee (www.bjedu.gov.cn), issued a notice on 15 September 2014, to further tighten the municipal policy on the employment of foreigners. The notice is entitled the Notice related to Further Strengthen the Employment of Foreigners in Beijing (关于进一步加强北京市外籍人员聘用工作的通知).
As per the Notice, to obtain employment in Beijing, a foreigner is required to have (in most cases) a bachelor degree or above and no less than two years of related work experience (we note that Shanghai already requires two years, but that Guangzhou requires five years). For foreign teachers (language teachers excluded) though, no less than 5 years related work experience will be required. From 31 October 2014, foreign teachers need to provide his or her teacher qualification certificate issued by their home country. Those language teachers who do not have a teacher certification are required to obtain language teaching qualification certifications that are internationally recognised.
The Notice also requires those senior skilled foreigners who do not have a bachelors degree to be employed only for those urgently needed jobs that can not be filled locally within a reasonable time. In such cases, the applicant will need to provide evidence of their trade experience and other special skills that have been acquired over time, instead of evidence of education.
As far as age limits are concerned, the rule is that foreigners can only be employed in China, if they are aged between the ages of 18 to 60 as per the relevant national regulations. This has been confirmed by the Notice, however it us understood that the age restrictions can be relaxed where a person has extraordinary abilities and his or her employment of China will be of benefit to China.
Further, the entities engaging in education, research, journalism, publishing, culture art, health and sports are required to obtain a special qualification for the hiring of foreign experts, before actually hiring any foreign experts, according to the Notice.
The the government departments that issued the Notice have confirmed that they will strengthen the supervision of foreigners employment and residence, realize information sharing, and set up both foreigners employer credit database and foreigners career credit database.
The Beijing authorities, including the Beijing Human Resources and Social Security Bureau (www.bjld.gov.cn), Beijing Municipal Government Foreign Affairs Office (www.bjfao.gov.cn), and Beijing Education Committee (www.bjedu.gov.cn), issued a notice on 15 September 2014, to further tighten the municipal policy on the employment of foreigners. The notice is entitled the Notice related to Further Strengthen the Employment of Foreigners in Beijing (关于进一步加强北京市外籍人员聘用工作的通知).
As per the Notice, to obtain employment in Beijing, a foreigner is required to have (in most cases) a bachelor degree or above and no less than two years of related work experience (we note that Shanghai already requires two years, but that Guangzhou requires five years). For foreign teachers (language teachers excluded) though, no less than 5 years related work experience will be required. From 31 October 2014, foreign teachers need to provide his or her teacher qualification certificate issued by their home country. Those language teachers who do not have a teacher certification are required to obtain language teaching qualification certifications that are internationally recognised.
The Notice also requires those senior skilled foreigners who do not have a bachelors degree to be employed only for those urgently needed jobs that can not be filled locally within a reasonable time. In such cases, the applicant will need to provide evidence of their trade experience and other special skills that have been acquired over time, instead of evidence of education.
As far as age limits are concerned, the rule is that foreigners can only be employed in China, if they are aged between the ages of 18 to 60 as per the relevant national regulations. This has been confirmed by the Notice, however it us understood that the age restrictions can be relaxed where a person has extraordinary abilities and his or her employment of China will be of benefit to China.
Further, the entities engaging in education, research, journalism, publishing, culture art, health and sports are required to obtain a special qualification for the hiring of foreign experts, before actually hiring any foreign experts, according to the Notice.
The the government departments that issued the Notice have confirmed that they will strengthen the supervision of foreigners employment and residence, realize information sharing, and set up both foreigners employer credit database and foreigners career credit database.
Germany - Foreign Managers, Matrix-Structure and Employment Law
By: Bernd Weller
Partner, Heuking Kühn Lüer Wojtek, Frankfurt am Main
In one of this newsletter’s past editions (http://intemploy.blogspot.de/2012/06/germany-works-councils-in-international.html), we have already highlighted that legal issues may arise when – in a matrix-structure within an international corporation – foreign managers are responsible for managing German employees. A recent decision of the Higher Regional Labor Court of Baden-Württemberg, decided on May 28, 2014, (4 TaBV 7/13) put a new twist on this issue.
The Higher Regional Labor Court of Baden-Württemberg had to decide whether or not the works council of a German operation had a right of consultation and objection with regard to the appointment of a manager who
• was an employee of a different group company,
• who never in person visited the German operation and who
• managed employees of the German operation via email and telephone.
The German works council claimed that he had to be consulted with before the person could be appointed as manager. The works council further claimed that it had a right to object to the appointment of the manager. Although the manager was never present in the operation of the works council’s competence, the Higher Regional Labor Court of Baden-Württemberg shared the works council’s opinion. According to the Higher Regional Labor Court of Baden-Württemberg, a manager becomes part of a (German) business-operation whenever he/she is entitled to instruct employees of that operation.
Under German employment law, the works council must be informed before hiring a new employee. Hiring means not only the conclusion of an employment agreement but as well the mere presence and inclusion of a person into the operation’s internal procedures. With that understanding, the appointment of a (external) supervisor for the operation’s employees is indeed “hired” in the meaning of Sec. 99 of the German Works Council Constitution Act (Betriebsverfassungsgesetz). In such cases, the works council has further a right to object to the envisaged hiring – based on certain specific reasons (for instance because of the fear that the appointment or hiring of a certain employee has detrimental effects on other employees).
In general, German works councils are not very supportive of foreign managers. This is because works councils often (with some justifications) fear that foreign managers do not care about the limits of German employment law whenever they manage German employees. It is to be expected that works councils will use the decision of the Higher Regional Labor Court of Baden-Württemberg very often in the (near) future in order to either prevent the appointment of foreign managers or at least delay or render it more expensive for the employer. In the end, the employer can always enforce the appointment; however, it requires a time-consuming and costly court proceeding.
Partner, Heuking Kühn Lüer Wojtek, Frankfurt am Main
In one of this newsletter’s past editions (http://intemploy.blogspot.de/2012/06/germany-works-councils-in-international.html), we have already highlighted that legal issues may arise when – in a matrix-structure within an international corporation – foreign managers are responsible for managing German employees. A recent decision of the Higher Regional Labor Court of Baden-Württemberg, decided on May 28, 2014, (4 TaBV 7/13) put a new twist on this issue.
The Higher Regional Labor Court of Baden-Württemberg had to decide whether or not the works council of a German operation had a right of consultation and objection with regard to the appointment of a manager who
• was an employee of a different group company,
• who never in person visited the German operation and who
• managed employees of the German operation via email and telephone.
The German works council claimed that he had to be consulted with before the person could be appointed as manager. The works council further claimed that it had a right to object to the appointment of the manager. Although the manager was never present in the operation of the works council’s competence, the Higher Regional Labor Court of Baden-Württemberg shared the works council’s opinion. According to the Higher Regional Labor Court of Baden-Württemberg, a manager becomes part of a (German) business-operation whenever he/she is entitled to instruct employees of that operation.
Under German employment law, the works council must be informed before hiring a new employee. Hiring means not only the conclusion of an employment agreement but as well the mere presence and inclusion of a person into the operation’s internal procedures. With that understanding, the appointment of a (external) supervisor for the operation’s employees is indeed “hired” in the meaning of Sec. 99 of the German Works Council Constitution Act (Betriebsverfassungsgesetz). In such cases, the works council has further a right to object to the envisaged hiring – based on certain specific reasons (for instance because of the fear that the appointment or hiring of a certain employee has detrimental effects on other employees).
In general, German works councils are not very supportive of foreign managers. This is because works councils often (with some justifications) fear that foreign managers do not care about the limits of German employment law whenever they manage German employees. It is to be expected that works councils will use the decision of the Higher Regional Labor Court of Baden-Württemberg very often in the (near) future in order to either prevent the appointment of foreign managers or at least delay or render it more expensive for the employer. In the end, the employer can always enforce the appointment; however, it requires a time-consuming and costly court proceeding.
Mexico - Sexual Harassment in the Workplace
By: Ernesto Velarde-Danache
Ernesto Velarde-Danache Inc., Brownsville, Texas
While dealing with day to day labor matters for several clients in Mexico I was asked on several occasions to intervene and render advice on terminating an employee due to sexual harassment at the workplace. It was surprising for the employers and their corporate counsel to learn that such conduct was not punished in Mexico, from a labor standpoint, even when the incidence of sexual harassment was extremely high in Mexico.
The extensive amendments to the Mexican Federal Labor Law passed on December 2012 now include and define the concept of “sexual harassment” and even consider it a cause for termination of the labor relationship without liability to the employer. We still have to undergo the cultural changes that this reform should bring since there are still many reasons that cause Mexican victims to passively accept and potentially live for years with sexual harassment, despite the psychological burden.
Some victims might fear that the claim will not be treated in a strictly confidential manner and co-workers would, as a result, end up knowing details that no victim would want divulged. A Mexican victim being harassed often is left with the following options: acquiesce, demand the offender stop or file a claim, which at the end of the day does not represent an economic benefit for him or her. Additionally, when the third option is contemplated, the victim would normally think about the potential repercussions of the claim: Is my story credible? What if the offender argues that I consented to his or her advances, or somehow encouraged them? Would my employer act upon my claim and investigate? Might there be retaliation if the offender is found guilty and punished?
The victim also might worry over what kind of reaction a boyfriend or girlfriend, a husband/wife, a father or brothers might have if they found out what has been happening in the workplace. For some, there can be a possibility of a violent reaction. As a result, some victims of sexual harassment would rather stay quiet and continue working, while others would rather quit the job without informing their employer of the cause that originated their decision to leave.
The Law’s Provisions
Yet despite the reluctance to file complaints by many, we are now starting to perceive a tendency to denounce sexual harassment in the workplace. When a complaint is filed with an employer, the employer has an obligation to immediately start an investigation of the allegations. The employer must use all diligence to determine if the allegations are true and act accordingly, always doing his or her best to keep all facts confidential.
As mentioned above, Article 47 of the Mexican Federal Labor Law establishes that employees engaging in sexual harassment actions will be terminated with cause and, as a consequence, not be entitled to severance. In addition, a criminal action may be initiated by the victim. As it concerns employers, not only is it prohibited for supervisors to sexually harass their employees, but also a supervisor would be penalized for permitting or tolerating this kind of behavior in the workplace. Article 994 establishes that substantial fines will be imposed on employers that tolerate sexual harassment.
As a result, employers should now be vigilant and thoroughly investigate any claims that are filed or any allegations by third parties that might suggest conduct that could be construed as sexual harassment. A serious, professional and comprehensive investigation, properly documented, needs to be immediately initiated once a claim has been filed. We strongly recommend to our clients that a notice on the scope of the new law as it pertains to sexual harassment be posted in a visible place, informing all employees that the employer does not tolerate this kind of behavior and encouraging employees to report any wrongdoings on this subject. Article 3-B, subparagraph (b), provides the definition of what constitutes sexual harassment and thus should be included in the posting. Additionally, employees should be made aware that it is very likely the State’s Criminal Code contemplates such conduct as a crime.
The procedure for filing a sexual harassment claim should be described on the notice, as well as the name and title of the official who will receive any complaints. We also recommend that those involved in the reception, handling and further investigation of the complaints be properly trained employees of the human resources department. These individuals must take every reasonable step to prevent a leak of information. They should keep all inherent information strictly confidential and make it available solely on an “as-needed basis.”
We also encourage employers to hold periodic seminars led by reputable specialists to better educate the labor force on the contents of the new legislation, and the rights and obligations of employers and employees. Moreover, ethics in the workplace needs to be a frequent topic discussed in seminars, with special emphasis on sexual harassment and its consequences. To be successful, all complaints of sexual harassment must be investigated, and all offenders terminated. There should be a zero tolerance rule with no exceptions.
Ernesto Velarde-Danache Inc., Brownsville, Texas
While dealing with day to day labor matters for several clients in Mexico I was asked on several occasions to intervene and render advice on terminating an employee due to sexual harassment at the workplace. It was surprising for the employers and their corporate counsel to learn that such conduct was not punished in Mexico, from a labor standpoint, even when the incidence of sexual harassment was extremely high in Mexico.
The extensive amendments to the Mexican Federal Labor Law passed on December 2012 now include and define the concept of “sexual harassment” and even consider it a cause for termination of the labor relationship without liability to the employer. We still have to undergo the cultural changes that this reform should bring since there are still many reasons that cause Mexican victims to passively accept and potentially live for years with sexual harassment, despite the psychological burden.
Some victims might fear that the claim will not be treated in a strictly confidential manner and co-workers would, as a result, end up knowing details that no victim would want divulged. A Mexican victim being harassed often is left with the following options: acquiesce, demand the offender stop or file a claim, which at the end of the day does not represent an economic benefit for him or her. Additionally, when the third option is contemplated, the victim would normally think about the potential repercussions of the claim: Is my story credible? What if the offender argues that I consented to his or her advances, or somehow encouraged them? Would my employer act upon my claim and investigate? Might there be retaliation if the offender is found guilty and punished?
The victim also might worry over what kind of reaction a boyfriend or girlfriend, a husband/wife, a father or brothers might have if they found out what has been happening in the workplace. For some, there can be a possibility of a violent reaction. As a result, some victims of sexual harassment would rather stay quiet and continue working, while others would rather quit the job without informing their employer of the cause that originated their decision to leave.
The Law’s Provisions
Yet despite the reluctance to file complaints by many, we are now starting to perceive a tendency to denounce sexual harassment in the workplace. When a complaint is filed with an employer, the employer has an obligation to immediately start an investigation of the allegations. The employer must use all diligence to determine if the allegations are true and act accordingly, always doing his or her best to keep all facts confidential.
As mentioned above, Article 47 of the Mexican Federal Labor Law establishes that employees engaging in sexual harassment actions will be terminated with cause and, as a consequence, not be entitled to severance. In addition, a criminal action may be initiated by the victim. As it concerns employers, not only is it prohibited for supervisors to sexually harass their employees, but also a supervisor would be penalized for permitting or tolerating this kind of behavior in the workplace. Article 994 establishes that substantial fines will be imposed on employers that tolerate sexual harassment.
As a result, employers should now be vigilant and thoroughly investigate any claims that are filed or any allegations by third parties that might suggest conduct that could be construed as sexual harassment. A serious, professional and comprehensive investigation, properly documented, needs to be immediately initiated once a claim has been filed. We strongly recommend to our clients that a notice on the scope of the new law as it pertains to sexual harassment be posted in a visible place, informing all employees that the employer does not tolerate this kind of behavior and encouraging employees to report any wrongdoings on this subject. Article 3-B, subparagraph (b), provides the definition of what constitutes sexual harassment and thus should be included in the posting. Additionally, employees should be made aware that it is very likely the State’s Criminal Code contemplates such conduct as a crime.
The procedure for filing a sexual harassment claim should be described on the notice, as well as the name and title of the official who will receive any complaints. We also recommend that those involved in the reception, handling and further investigation of the complaints be properly trained employees of the human resources department. These individuals must take every reasonable step to prevent a leak of information. They should keep all inherent information strictly confidential and make it available solely on an “as-needed basis.”
We also encourage employers to hold periodic seminars led by reputable specialists to better educate the labor force on the contents of the new legislation, and the rights and obligations of employers and employees. Moreover, ethics in the workplace needs to be a frequent topic discussed in seminars, with special emphasis on sexual harassment and its consequences. To be successful, all complaints of sexual harassment must be investigated, and all offenders terminated. There should be a zero tolerance rule with no exceptions.
UK - Expatriate Workers Denied UK Unfair Dismissal and Discrimination Protection
By: Tessa Cranfield and Georgina McAdam
Seyfarth Shaw (UK) LLP
In two recent decisions, the Employment Appeal Tribunal in the case of Fuller v United Healthcare Services Inc. and the Court of Appeal in CreditSights v Dhunna, employees with connections to the UK have been denied protection under UK employment law.
UK employment rights - a legal lacuna
Recent changes to the two key UK employment statutes mean they are both now silent as to their territorial scope. The Employment Rights Act 1996, which governs many employment rights including unfair dismissal and whistleblowing, previously excluded employees “ordinarily working outside Great Britain” from protection, while the discrimination legislation which preceded the Equality Act 2010 limited protection to employment “at an establishment in Great Britain”. In the absence of statutory guidance, it is now for the UK courts to assess whether there is a sufficient link to the UK, with appeal court decisions scrutinised by UK employment lawyers hoping to guide their clients.
Lawson v Serco principles
The most significant appeal court decision remains that of the UK’s top appellate court, the House of Lords, in the case of Lawson v Serco. In Lawson v Serco the House of Lords identified four types of case in which an employee will be entitled to protection from unfair dismissal under the Employment Rights Act:
1. Employees ordinarily working in Great Britain - An employee can usually bring a claim if they are working in Great Britain at the time of their dismissal.
2. Peripatetic employees - The employee’s base should be treated as their place of employment.
3. Expatriate employees - Expatriate employees working outside the UK need more than a British employer or nationality to bring a claim. Something more will be required, for example:
a. an employee working directly for the benefit of his UK employer (such as a foreign correspondent of a UK newspaper); or
b. an employee working for a UK employer in a “British enclave” (such as a British army base).
4. Equally strong connection with Great Britain - Employees who do not fit into categories 1 to 3 may still be covered if they have “equally strong” connections with Great Britain and British employment law. This final category has offered the most scope to overseas employees hoping to bring themselves within the ambit of UK protections.
Until the cases reported in this article, there was however no guidance as to whether the same principles applied to UK discrimination protection.
US employee assigned to the UK - Fuller v United Healthcare Services Inc.
The case concerned a US citizen who worked in a senior capacity for a US company, in the US. There was no governing law provision in his contract of employment. The employee agreed to responsibility for the UK and Middle Eastern business for a 2-year term, for which he was provided with accommodation in the UK. The assignment was ended and the employee was terminated after he returned to the US.
Both the Employment Tribunal and, on appeal, Employment Appeal Tribunal rejected his claims for unfair dismissal, whistleblower and sexual orientation discrimination protection on the basis there was an insufficiently strong connection with the UK.
The following factors were key:
• The UK assignment had ended and he had returned to the US at the time his employment terminated.
• There was no true break in his work connection with the US. The employee remained with the same US employer on the same contract and key benefits arrangements. Certain of his US work responsibilities also continued.
• The employee’s strongest personal connection remained with the US, where he maintained his home and his partner continued to live. He was paid in US Dollars and his partner was provided with paid flights from the US to the UK to visit him.
• His contractual documentation stated that he would be based in the US and would be required to spend time in other places including the UK and UAE and the practical arrangements were consistent with that.
Helpfully, the Employment Appeal Tribunal applied the same legal test to all of the employee’s claims. This means that claims under the unfair dismissal, whistleblowing and discrimination regimes all require the same strong connection with the UK.
UK national working outside the UK - CreditSights Ltd v Dhunna
In this case the employee worked as a salesperson and was initially based in London. He then relocated to the company’s Dubai operations, which were set up as a branch of the UK employer. There were later discussions as to his relocating to Singapore. Instead, the Dubai office was closed and his employment was terminated whilst in Dubai.
At first instance, the UK Employment Tribunal did not accept that the employee had sufficient connection with the UK to establish jurisdiction. The fact that he still had a UK employer, a UK employment contract and remained on the UK payroll and administration (but not UK benefits) was not sufficient to give him UK rights. The fact the employee received support with his work from the UK was also judged to be irrelevant, given the same support was also available to staff of the employer’s other overseas operations and he was not line-managed out of the UK. He had relocated to Dubai with no job to return to in the UK, and was working for the purposes of the Asian business, for an international company headquartered in New York.
On appeal by the employee, the Employment Appeal Tribunal overturned the Employment Tribunal’s decision, on the basis it should have compared the relative strengths of the employee’s connection with the UK and Dubai and the strength of employment law protection in each country. Appealed again by the employer, the Court of Appeal however, entirely disagreed: there should not be a comparison of connections between different countries, but simply consideration of whether the employee has a “much stronger connection” with the UK than another country. The Court also made clear that it is irrelevant that the employee may not be legally protected in the other countries where he or she has connections.
On this basis, the employee was not entitled to protection under UK law. He was not working in the UK at the time his employment terminated, and his working arrangements did not bring him into the exceptional category of expatriate workers who still maintain a sufficiently strong connection with the UK.
Fuller and CreditSights: Conclusions
The variety and complexity of these types of international working arrangements challenge the UK Courts. Employers and employees often embark on international arrangements without a clear picture of the legal rights conferred. Sophisticated employees with a choice of venues and law can be expected to choose the most favourable - which may be Europe rather than the USA.
For the UK, the principles of protection are however becoming clearer. Employees who are not working in the UK at the time of termination will now benefit from UK rights in exceptional cases.
Seyfarth Shaw (UK) LLP
In two recent decisions, the Employment Appeal Tribunal in the case of Fuller v United Healthcare Services Inc. and the Court of Appeal in CreditSights v Dhunna, employees with connections to the UK have been denied protection under UK employment law.
UK employment rights - a legal lacuna
Recent changes to the two key UK employment statutes mean they are both now silent as to their territorial scope. The Employment Rights Act 1996, which governs many employment rights including unfair dismissal and whistleblowing, previously excluded employees “ordinarily working outside Great Britain” from protection, while the discrimination legislation which preceded the Equality Act 2010 limited protection to employment “at an establishment in Great Britain”. In the absence of statutory guidance, it is now for the UK courts to assess whether there is a sufficient link to the UK, with appeal court decisions scrutinised by UK employment lawyers hoping to guide their clients.
Lawson v Serco principles
The most significant appeal court decision remains that of the UK’s top appellate court, the House of Lords, in the case of Lawson v Serco. In Lawson v Serco the House of Lords identified four types of case in which an employee will be entitled to protection from unfair dismissal under the Employment Rights Act:
1. Employees ordinarily working in Great Britain - An employee can usually bring a claim if they are working in Great Britain at the time of their dismissal.
2. Peripatetic employees - The employee’s base should be treated as their place of employment.
3. Expatriate employees - Expatriate employees working outside the UK need more than a British employer or nationality to bring a claim. Something more will be required, for example:
a. an employee working directly for the benefit of his UK employer (such as a foreign correspondent of a UK newspaper); or
b. an employee working for a UK employer in a “British enclave” (such as a British army base).
4. Equally strong connection with Great Britain - Employees who do not fit into categories 1 to 3 may still be covered if they have “equally strong” connections with Great Britain and British employment law. This final category has offered the most scope to overseas employees hoping to bring themselves within the ambit of UK protections.
Until the cases reported in this article, there was however no guidance as to whether the same principles applied to UK discrimination protection.
US employee assigned to the UK - Fuller v United Healthcare Services Inc.
The case concerned a US citizen who worked in a senior capacity for a US company, in the US. There was no governing law provision in his contract of employment. The employee agreed to responsibility for the UK and Middle Eastern business for a 2-year term, for which he was provided with accommodation in the UK. The assignment was ended and the employee was terminated after he returned to the US.
Both the Employment Tribunal and, on appeal, Employment Appeal Tribunal rejected his claims for unfair dismissal, whistleblower and sexual orientation discrimination protection on the basis there was an insufficiently strong connection with the UK.
The following factors were key:
• The UK assignment had ended and he had returned to the US at the time his employment terminated.
• There was no true break in his work connection with the US. The employee remained with the same US employer on the same contract and key benefits arrangements. Certain of his US work responsibilities also continued.
• The employee’s strongest personal connection remained with the US, where he maintained his home and his partner continued to live. He was paid in US Dollars and his partner was provided with paid flights from the US to the UK to visit him.
• His contractual documentation stated that he would be based in the US and would be required to spend time in other places including the UK and UAE and the practical arrangements were consistent with that.
Helpfully, the Employment Appeal Tribunal applied the same legal test to all of the employee’s claims. This means that claims under the unfair dismissal, whistleblowing and discrimination regimes all require the same strong connection with the UK.
UK national working outside the UK - CreditSights Ltd v Dhunna
In this case the employee worked as a salesperson and was initially based in London. He then relocated to the company’s Dubai operations, which were set up as a branch of the UK employer. There were later discussions as to his relocating to Singapore. Instead, the Dubai office was closed and his employment was terminated whilst in Dubai.
At first instance, the UK Employment Tribunal did not accept that the employee had sufficient connection with the UK to establish jurisdiction. The fact that he still had a UK employer, a UK employment contract and remained on the UK payroll and administration (but not UK benefits) was not sufficient to give him UK rights. The fact the employee received support with his work from the UK was also judged to be irrelevant, given the same support was also available to staff of the employer’s other overseas operations and he was not line-managed out of the UK. He had relocated to Dubai with no job to return to in the UK, and was working for the purposes of the Asian business, for an international company headquartered in New York.
On appeal by the employee, the Employment Appeal Tribunal overturned the Employment Tribunal’s decision, on the basis it should have compared the relative strengths of the employee’s connection with the UK and Dubai and the strength of employment law protection in each country. Appealed again by the employer, the Court of Appeal however, entirely disagreed: there should not be a comparison of connections between different countries, but simply consideration of whether the employee has a “much stronger connection” with the UK than another country. The Court also made clear that it is irrelevant that the employee may not be legally protected in the other countries where he or she has connections.
On this basis, the employee was not entitled to protection under UK law. He was not working in the UK at the time his employment terminated, and his working arrangements did not bring him into the exceptional category of expatriate workers who still maintain a sufficiently strong connection with the UK.
Fuller and CreditSights: Conclusions
The variety and complexity of these types of international working arrangements challenge the UK Courts. Employers and employees often embark on international arrangements without a clear picture of the legal rights conferred. Sophisticated employees with a choice of venues and law can be expected to choose the most favourable - which may be Europe rather than the USA.
For the UK, the principles of protection are however becoming clearer. Employees who are not working in the UK at the time of termination will now benefit from UK rights in exceptional cases.
USA - Out of BOunds: Second Circuit "Blows the Whistle" on Extraterritorial Application of Anti-Retaliation Provision of Dodd-Frank Act
By Robert B. Fitzpatrick
Principal of the law firm of Robert B. Fitzpatrick, PLLC in Washington, D.C.
In Liu v. Siemens, AG, No. 13-4385, 2014 U.S. App. LEXIS 15637, 2014 WL 3953672 (2d Cir. Aug. 14, 2014) the Second Circuit, with Judge Lynch writing for a unanimous panel, held that the whistleblower provisions of the Dodd-Frank Act, 15 U.S.C. § 78u-6(h)(1)(A), did not apply where the plaintiff, his employer, and the other entities involved were all “foreigners based abroad,” and where the whistleblowing, the purported activity which allegedly violated the Foreign Corrupt Practices Act, and the alleged retaliation occurred abroad, and where the plaintiff’s complaint stated “essentially no contact with the United States regarding either the wrongdoing or the protected activity.”
The Court also held that the plaintiff’s argument that Siemens’ voluntary election to publicly list a class of its securities with the New York Stock Exchange was the type of “fleeting connection” that the Supreme Court in Morrison v. Nat’l Australia Bank, Ltd., 130 S. Ct. 2869 (2010) held could not overcome the presumption against a statute’s extraterritoriality. See Celia Joseph, “Court Denies Extraterritorial Application of the Dodd-Frank Act’s Whistleblowing Provisions”, Cross Border Employer Blog, Fisher & Phillips, LLP (Sept. 8, 2014) (available at: http://www.crossborderemployer.com/post/2014/09/08/Court-Denies-Extraterritorial-Application-of-the-Dodd-Frank-Acts-Whistleblowing-Provisions.aspx); Rebekah Mintzer, A Low Note for Whistleblowers at the Second Circuit, American Lawyer Blog (Aug. 19, 2014) (available at: http://www.americanlawyer.com/id=1202667161707).
The Court explained that, to survive a motion to dismiss, a plaintiff must demonstrate:
[E]ither (1) that the facts alleged in his complaint state a domestic application of the antiretaliation provision of the Dodd-Frank Act, or (2) that the antiretaliation provision is intended to apply extraterritorially.
As an initial matter, the Court noted that, “this case is extraterritorial by any reasonable definition.” Having thus disposed of the first prong, Court devoted the bulk of its analysis to addressing the second prong of the test. Perhaps significantly, the plaintiff in Liu did not report the alleged conduct to the Securities Exchange Commission until after being terminated, thus forfeiting any argument that the termination was on account of a filing with the SEC. After, as explained above, determining that the “fleeting” contact of registering on a domestic exchange did not, under Morrison, bring Siemens within the application of the Dodd-Frank Act, the Court addressed whether the Dodd-Frank Act applied to extraterritorial conduct.
The Court framed its analysis on this point by noting that “there is absolutely nothing in the text of the provision…or in the legislative history of the Dodd-Frank Act, that suggests that Congress intended the [A]nti-[R]etaliation [P]rovision to regulate the relationships between foreign employers and their foreign employees working outside the United States.” Although conceding that the plaintiff “offers several arguments that the statutory language or context” of the Dodd-Frank Act was intended to have extraterritorial reach, the Court founds that the plaintiff failed to provide a “clear and affirmative indication” of legislative intent sufficient to overcome the presumption against extraterritoriality.
One of the plaintiff’s more interesting arguments was based on the SEC’s interpretation of the Dodd-Frank Act’s whistleblower bounty provision, 15 U.S.C. § 78u-6(b). The implementing regulations adopted by the agency provide that “you are not eligible [for an award] if:…You are…a member, officer, or employee of a foreign government, any political subdivision, department, agency, or instrumentality of a foreign government, or any other foreign financial regulatory authority.” 17 C.F.R. § 240.21F-8(c)(2). Elsewhere, the agency discusses the tax filing procedures for an award payment to a foreign national. See 76 Fed. Reg. 34300-01, 34348 n.370, 34320 (June 13, 2011). Liu argued that these regulations indicated that the SEC interpreted the Dodd-Frank Act to apply to conduct outside the United States.
Although noting that “Courts generally defer to reasonable agency interpretations of statutes that” they administer, the Court questioned whether “regulations should be accorded weight…with respect to [determining] the extraterritorial application of a statute.” Liu, 2014 U.S. App. LEXIS 15637 at *17. The Court went on to note that the presumption against extraterritoriality was a “canon of construction” which was capable of resolving Congressional intent without resort to agency regulations. Id. at *18. The Court also held that, in any event, extraterritorial application of the bounty program did not necessarily imply extraterritorial application of the Anti-Retaliation Provision. Id. at *18. Interestingly, the Second Circuit decision came after at least one lower court’s pre-Morrison decision that a similar provision of the Sarbanes-Oxley Act of 2002, Section 806, did have extraterritorial application. See O’Mahoney v. Accenture Ltd., 537 F. Supp. 2d 506 (S.D.N.Y. 2008). It is unclear whether the Second Circuit’s decision in Liu overruled this interpretation, or whether SOX will continue to receive extraterritorial application – at least in the Southern District of New York – while Dodd-Frank Act does not.
In light of the Second Circuit’s holding it is worth considering whether Liu similarly cuts off extraterritorial application of the whistleblower bounty provisions. See Liu, 2014 U.S. App. LEXIS 15637 at *18 (“even if we assume that the regulations clearly apply the bounty program to whistleblowers located abroad…”). Of course, there is some reason to believe that the two regimes would be treated differently – as the Second Circuit explained “[p]roviding rewards to persons, foreign or domestic, who supply information about lawbreaking is far less intrusive into other countries’ sovereignty than seeking to regulate the employment practices of foreign companies with respect to the foreign nationals they employe in foreign countries.” Id. at *19.
Indeed, the Securities and Exchange Commission has relied on this argument to distinguish Liu. In Whistleblower Award Proceeding, the SEC awarded Claimant, a foreign resident, a payment in excess of $30 million under 15 U.S.C. § 78u-6(b)(1) and 17 C.F.R. § 240.21F-3(a), the “bounty” provisions of the Dodd-Frank Act. File No. 2014-10, Release No. 73174 (Sept. 22, 2014) (available at: http://www.sec.gov/rules/other/2014/34-73174.pdf). In so doing, the SEC found that “an award payment is appropriate here notwithstanding the existence of certain extraterritorial aspects of Claimant’s application.” Id. at n.2. The SEC reasoned that “there is a sufficient U.S. territorial nexus whenever a claimant’s information leads to the successful enforcement of a covered action brought in the United States, concerning violations of the U.S. securities laws, by the Commission. Id. In such instances, the location of the claimant’s employment, citizenship, and the location where the fraud occurred is irrelevant. Id. The SEC distinguished Liu on the ground that “the whistleblower award provisions have a different Congressional focus than the [A]nti-[R]etaliation [P]rovisions[.]” Id. It is worth noting that nearly twelve percent of the whistleblower tips received by the SEC during FY 2013 came from employees working outside the United States. See U.S. Securities & Exchange Comm’n, 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program at p. 22 (available at: http://www.sec.gov/about/offices/owb/annual-report-2013.pdf).
The Second Circuit is not the first court to find that the Anti-Retaliation Provision of the Dodd-Frank Act did not apply to primarily extraterritorial events. In Asadi v. G.E. Energy (USA), LLC, Judge Nancy F. Atlas faced a similar set of facts. No. 4:12-345, 2012 U.S. Dist. LEXIS 89746, 2012 WL 2522599 (S.D. Te. June 28, 2012), aff’d on other grounds, Asadi v. G.E. Energy United States, L.L.C., 720 F.3d 620 (5th Cir. 2013). In Asadi, the plaintiff alleged that the defendant had terminated him in retaliation for reporting a violation of the anti-bribery provisions of the Foreign Corrupt Practices Act. Id. Judge Atlas first examined the language of the Anti-Retaliation Provision and, finding that it was “silent regarding whether it applies extraterritorially”, proceeded to “consider the Provision’s ‘context.’” Id. at *15-16; citing Morrison v. Nat’l Australia Bank, Ltd., 130 S. Ct. 2869 (2010). In considering the Anti-Retaliation Provision’s “context”, the Asadi Court gave substantial weight to the fact that the Dodd-Frank Act “explicitly addresses extraterritorial scope of the statute in a limited context” in Section 929P(b) . Asadi, 2012 U.S. Dist. LEXIS 89746 at *17. The Court recognized that Section 929P(b) contained explicit language regarding extraterritoriality, and that “when a statute provides for some extraterritorial application, the presumption against extraterritoriality operates to limit that provision to its terms.” Id.at *18 (internal quotations omitted). Quoting the Supreme Court’s holding in Morrison v. National Australia Bank, Ltd., the Court found that “when a statute provides for some extraterritorial application, the presumption against extraterritoriality operates to limit that provision to its terms” and that, accordingly, the language in Section 929P(b) “strengthens the conclusion that the Anti-Retaliation Provision does not apply extraterritorially.” Id. at *18 (quoting Morrison, 130 S. Ct. at 2883).
Similarly, while analyzing a similar provision of the Sarbanes-Oxley Act of 2002, the Administrative Review Board in Villaneuva v. Core Labs. NV, noted that the Anti-Retaliation Provision of the Dodd-Frank Act does not apply to wholly extraterritorial conduct. ARB Case No. 09-108, ALJ Case No. 2009-SOX-006, 2011 DOLSOX LEXIS 82, 2011 WL 6981989 (ARB Dec. 22, 2011) (en banc) (interpreting 18 U.S.C. § 1514A). In Villaneuva, the plaintiff, a non-U.S. citizen, complained of conduct by the defendant, a Columbian company which does not list securities under Section 12, or file reports under Section 15(d), of the Securities Exchange Act of 1934. Id. at *2-3. The ARB found that the Employee Protection Provisions of Section 806 of the Sarbanes-Oxley Act of 2002 did not apply to the concededly wholly-extraterritorial conduct of which the plaintiff complained. Id. at *3. In so holding, the ARB drew a parallel to the Dodd-Frank Act, in which it endorsed the same reasoning later used by Judge Atlas in Asadi: that because Section 929P of the Dodd-Frank Act expressly provides for extraterritorial application, that other portions of the Dodd-Frank Act should not be extended by judicial interpretation into extraterritorial application. Id. at *27-29; see also Carnero v. Boston Sci. Corp., 433 F.3d 1 (1st Cir. 2006) (In a pre-Morrison case, the First Circuit found that Section 806 of SOX does not apply to extraterritorial conduct); but see Penesso v. LCC Int’l, Inc., 2005 SOX 00016, 2005 DOLSOX LEXIS 95, 2005 WL 4889018 (U.S. Dept. of Labor March 4, 2005) (denying motion for summary judgment because Complainant was a U.S. Citizen, much of the protected activity occurred in the U.S. and at least one of the retaliatory acts occurred in the U.S.). Interestingly, although the ARB based its holding in Villaneuva entirely on Section 806’s lack of extraterritorial application, on appeal the Fifth Circuit again ducked this issue, instead finding against Villaneuva on the grounds that he had not engaged in protected activity. Villaneuva v. United States Dept. of Labor, 743 F.3d 103 (5th Cir. 2014).
Although they have yet to find purchase, it is worth taking a moment to unpack the sophisticated arguments deployed to argue that the Anti-Retaliation Provisions should have extraterritorial effect. On appeal to the Fifth Circuit, the plaintiff in Asadi attempted to distinguish Morrison on the basis that “the whistleblower protections under Dodd-Frank rely entirely on the securities laws incorporated by the statute to establish liability.” Brief of Plaintiff-Appellant at 27, Asadi v. G.E. Energy (USA), L.L.C., No. 12-20522 (5th Cir. Oct. 22, 2012). Plaintiff went on to note that the laws incorporated by 15 U.S.C. § 78u-6(h)(1)(A)(iii) include those with “explicit extraterritorial applicability”, such as the Foreign Corrupt Practices Act and Section 302 of the Sarbanes-Oxley Act of 2002. Id. at 27, 29; 15 U.S.C.S. § 7241(a)(4)-(5). Asadi argued that by incorporating those statutes, the Anti-Retaliation Provision explicitly provided for its extraterritorial application. The Fifth Circuit did not address these arguments, opting instead to affirm the lower court’s holding on the alternative rationale that Asadi was not a “whistleblower” within the meaning of the Anti-Retaliation Provision. See Asadi, 720 F.3d at 630.
Although both Liu and Asadi determined that the Anti-Retaliation Provision of the Dodd-Frank Act did not apply to extraterritorial conduct, in neither case did the facts have more than a “fleeting” connection to the United States. In Liu, the Second Circuit found that the plaintiff had “essentially no contact with the United States”, while in Asadi the plaintiff conceded that “the majority of events giving rise to the suit occurred in a foreign country” and the only alleged connection with the United States was that the plaintiff was a dual U.S. and Iraqi citizen and that the plaintiff’s termination was governed by U.S. law. In neither case did the plaintiff allege that any deceptive conduct had occurred within the United States. So, although “clearly” extraterritorial conduct is not within the reach of the Anti-Retaliation Provision, it remains to be seen what level of domestic connection is required to sustain a successful claim.
Principal of the law firm of Robert B. Fitzpatrick, PLLC in Washington, D.C.
In Liu v. Siemens, AG, No. 13-4385, 2014 U.S. App. LEXIS 15637, 2014 WL 3953672 (2d Cir. Aug. 14, 2014) the Second Circuit, with Judge Lynch writing for a unanimous panel, held that the whistleblower provisions of the Dodd-Frank Act, 15 U.S.C. § 78u-6(h)(1)(A), did not apply where the plaintiff, his employer, and the other entities involved were all “foreigners based abroad,” and where the whistleblowing, the purported activity which allegedly violated the Foreign Corrupt Practices Act, and the alleged retaliation occurred abroad, and where the plaintiff’s complaint stated “essentially no contact with the United States regarding either the wrongdoing or the protected activity.”
The Court also held that the plaintiff’s argument that Siemens’ voluntary election to publicly list a class of its securities with the New York Stock Exchange was the type of “fleeting connection” that the Supreme Court in Morrison v. Nat’l Australia Bank, Ltd., 130 S. Ct. 2869 (2010) held could not overcome the presumption against a statute’s extraterritoriality. See Celia Joseph, “Court Denies Extraterritorial Application of the Dodd-Frank Act’s Whistleblowing Provisions”, Cross Border Employer Blog, Fisher & Phillips, LLP (Sept. 8, 2014) (available at: http://www.crossborderemployer.com/post/2014/09/08/Court-Denies-Extraterritorial-Application-of-the-Dodd-Frank-Acts-Whistleblowing-Provisions.aspx); Rebekah Mintzer, A Low Note for Whistleblowers at the Second Circuit, American Lawyer Blog (Aug. 19, 2014) (available at: http://www.americanlawyer.com/id=1202667161707).
The Court explained that, to survive a motion to dismiss, a plaintiff must demonstrate:
[E]ither (1) that the facts alleged in his complaint state a domestic application of the antiretaliation provision of the Dodd-Frank Act, or (2) that the antiretaliation provision is intended to apply extraterritorially.
As an initial matter, the Court noted that, “this case is extraterritorial by any reasonable definition.” Having thus disposed of the first prong, Court devoted the bulk of its analysis to addressing the second prong of the test. Perhaps significantly, the plaintiff in Liu did not report the alleged conduct to the Securities Exchange Commission until after being terminated, thus forfeiting any argument that the termination was on account of a filing with the SEC. After, as explained above, determining that the “fleeting” contact of registering on a domestic exchange did not, under Morrison, bring Siemens within the application of the Dodd-Frank Act, the Court addressed whether the Dodd-Frank Act applied to extraterritorial conduct.
The Court framed its analysis on this point by noting that “there is absolutely nothing in the text of the provision…or in the legislative history of the Dodd-Frank Act, that suggests that Congress intended the [A]nti-[R]etaliation [P]rovision to regulate the relationships between foreign employers and their foreign employees working outside the United States.” Although conceding that the plaintiff “offers several arguments that the statutory language or context” of the Dodd-Frank Act was intended to have extraterritorial reach, the Court founds that the plaintiff failed to provide a “clear and affirmative indication” of legislative intent sufficient to overcome the presumption against extraterritoriality.
One of the plaintiff’s more interesting arguments was based on the SEC’s interpretation of the Dodd-Frank Act’s whistleblower bounty provision, 15 U.S.C. § 78u-6(b). The implementing regulations adopted by the agency provide that “you are not eligible [for an award] if:…You are…a member, officer, or employee of a foreign government, any political subdivision, department, agency, or instrumentality of a foreign government, or any other foreign financial regulatory authority.” 17 C.F.R. § 240.21F-8(c)(2). Elsewhere, the agency discusses the tax filing procedures for an award payment to a foreign national. See 76 Fed. Reg. 34300-01, 34348 n.370, 34320 (June 13, 2011). Liu argued that these regulations indicated that the SEC interpreted the Dodd-Frank Act to apply to conduct outside the United States.
Although noting that “Courts generally defer to reasonable agency interpretations of statutes that” they administer, the Court questioned whether “regulations should be accorded weight…with respect to [determining] the extraterritorial application of a statute.” Liu, 2014 U.S. App. LEXIS 15637 at *17. The Court went on to note that the presumption against extraterritoriality was a “canon of construction” which was capable of resolving Congressional intent without resort to agency regulations. Id. at *18. The Court also held that, in any event, extraterritorial application of the bounty program did not necessarily imply extraterritorial application of the Anti-Retaliation Provision. Id. at *18. Interestingly, the Second Circuit decision came after at least one lower court’s pre-Morrison decision that a similar provision of the Sarbanes-Oxley Act of 2002, Section 806, did have extraterritorial application. See O’Mahoney v. Accenture Ltd., 537 F. Supp. 2d 506 (S.D.N.Y. 2008). It is unclear whether the Second Circuit’s decision in Liu overruled this interpretation, or whether SOX will continue to receive extraterritorial application – at least in the Southern District of New York – while Dodd-Frank Act does not.
In light of the Second Circuit’s holding it is worth considering whether Liu similarly cuts off extraterritorial application of the whistleblower bounty provisions. See Liu, 2014 U.S. App. LEXIS 15637 at *18 (“even if we assume that the regulations clearly apply the bounty program to whistleblowers located abroad…”). Of course, there is some reason to believe that the two regimes would be treated differently – as the Second Circuit explained “[p]roviding rewards to persons, foreign or domestic, who supply information about lawbreaking is far less intrusive into other countries’ sovereignty than seeking to regulate the employment practices of foreign companies with respect to the foreign nationals they employe in foreign countries.” Id. at *19.
Indeed, the Securities and Exchange Commission has relied on this argument to distinguish Liu. In Whistleblower Award Proceeding, the SEC awarded Claimant, a foreign resident, a payment in excess of $30 million under 15 U.S.C. § 78u-6(b)(1) and 17 C.F.R. § 240.21F-3(a), the “bounty” provisions of the Dodd-Frank Act. File No. 2014-10, Release No. 73174 (Sept. 22, 2014) (available at: http://www.sec.gov/rules/other/2014/34-73174.pdf). In so doing, the SEC found that “an award payment is appropriate here notwithstanding the existence of certain extraterritorial aspects of Claimant’s application.” Id. at n.2. The SEC reasoned that “there is a sufficient U.S. territorial nexus whenever a claimant’s information leads to the successful enforcement of a covered action brought in the United States, concerning violations of the U.S. securities laws, by the Commission. Id. In such instances, the location of the claimant’s employment, citizenship, and the location where the fraud occurred is irrelevant. Id. The SEC distinguished Liu on the ground that “the whistleblower award provisions have a different Congressional focus than the [A]nti-[R]etaliation [P]rovisions[.]” Id. It is worth noting that nearly twelve percent of the whistleblower tips received by the SEC during FY 2013 came from employees working outside the United States. See U.S. Securities & Exchange Comm’n, 2013 Annual Report to Congress on the Dodd-Frank Whistleblower Program at p. 22 (available at: http://www.sec.gov/about/offices/owb/annual-report-2013.pdf).
The Second Circuit is not the first court to find that the Anti-Retaliation Provision of the Dodd-Frank Act did not apply to primarily extraterritorial events. In Asadi v. G.E. Energy (USA), LLC, Judge Nancy F. Atlas faced a similar set of facts. No. 4:12-345, 2012 U.S. Dist. LEXIS 89746, 2012 WL 2522599 (S.D. Te. June 28, 2012), aff’d on other grounds, Asadi v. G.E. Energy United States, L.L.C., 720 F.3d 620 (5th Cir. 2013). In Asadi, the plaintiff alleged that the defendant had terminated him in retaliation for reporting a violation of the anti-bribery provisions of the Foreign Corrupt Practices Act. Id. Judge Atlas first examined the language of the Anti-Retaliation Provision and, finding that it was “silent regarding whether it applies extraterritorially”, proceeded to “consider the Provision’s ‘context.’” Id. at *15-16; citing Morrison v. Nat’l Australia Bank, Ltd., 130 S. Ct. 2869 (2010). In considering the Anti-Retaliation Provision’s “context”, the Asadi Court gave substantial weight to the fact that the Dodd-Frank Act “explicitly addresses extraterritorial scope of the statute in a limited context” in Section 929P(b) . Asadi, 2012 U.S. Dist. LEXIS 89746 at *17. The Court recognized that Section 929P(b) contained explicit language regarding extraterritoriality, and that “when a statute provides for some extraterritorial application, the presumption against extraterritoriality operates to limit that provision to its terms.” Id.at *18 (internal quotations omitted). Quoting the Supreme Court’s holding in Morrison v. National Australia Bank, Ltd., the Court found that “when a statute provides for some extraterritorial application, the presumption against extraterritoriality operates to limit that provision to its terms” and that, accordingly, the language in Section 929P(b) “strengthens the conclusion that the Anti-Retaliation Provision does not apply extraterritorially.” Id. at *18 (quoting Morrison, 130 S. Ct. at 2883).
Similarly, while analyzing a similar provision of the Sarbanes-Oxley Act of 2002, the Administrative Review Board in Villaneuva v. Core Labs. NV, noted that the Anti-Retaliation Provision of the Dodd-Frank Act does not apply to wholly extraterritorial conduct. ARB Case No. 09-108, ALJ Case No. 2009-SOX-006, 2011 DOLSOX LEXIS 82, 2011 WL 6981989 (ARB Dec. 22, 2011) (en banc) (interpreting 18 U.S.C. § 1514A). In Villaneuva, the plaintiff, a non-U.S. citizen, complained of conduct by the defendant, a Columbian company which does not list securities under Section 12, or file reports under Section 15(d), of the Securities Exchange Act of 1934. Id. at *2-3. The ARB found that the Employee Protection Provisions of Section 806 of the Sarbanes-Oxley Act of 2002 did not apply to the concededly wholly-extraterritorial conduct of which the plaintiff complained. Id. at *3. In so holding, the ARB drew a parallel to the Dodd-Frank Act, in which it endorsed the same reasoning later used by Judge Atlas in Asadi: that because Section 929P of the Dodd-Frank Act expressly provides for extraterritorial application, that other portions of the Dodd-Frank Act should not be extended by judicial interpretation into extraterritorial application. Id. at *27-29; see also Carnero v. Boston Sci. Corp., 433 F.3d 1 (1st Cir. 2006) (In a pre-Morrison case, the First Circuit found that Section 806 of SOX does not apply to extraterritorial conduct); but see Penesso v. LCC Int’l, Inc., 2005 SOX 00016, 2005 DOLSOX LEXIS 95, 2005 WL 4889018 (U.S. Dept. of Labor March 4, 2005) (denying motion for summary judgment because Complainant was a U.S. Citizen, much of the protected activity occurred in the U.S. and at least one of the retaliatory acts occurred in the U.S.). Interestingly, although the ARB based its holding in Villaneuva entirely on Section 806’s lack of extraterritorial application, on appeal the Fifth Circuit again ducked this issue, instead finding against Villaneuva on the grounds that he had not engaged in protected activity. Villaneuva v. United States Dept. of Labor, 743 F.3d 103 (5th Cir. 2014).
Although they have yet to find purchase, it is worth taking a moment to unpack the sophisticated arguments deployed to argue that the Anti-Retaliation Provisions should have extraterritorial effect. On appeal to the Fifth Circuit, the plaintiff in Asadi attempted to distinguish Morrison on the basis that “the whistleblower protections under Dodd-Frank rely entirely on the securities laws incorporated by the statute to establish liability.” Brief of Plaintiff-Appellant at 27, Asadi v. G.E. Energy (USA), L.L.C., No. 12-20522 (5th Cir. Oct. 22, 2012). Plaintiff went on to note that the laws incorporated by 15 U.S.C. § 78u-6(h)(1)(A)(iii) include those with “explicit extraterritorial applicability”, such as the Foreign Corrupt Practices Act and Section 302 of the Sarbanes-Oxley Act of 2002. Id. at 27, 29; 15 U.S.C.S. § 7241(a)(4)-(5). Asadi argued that by incorporating those statutes, the Anti-Retaliation Provision explicitly provided for its extraterritorial application. The Fifth Circuit did not address these arguments, opting instead to affirm the lower court’s holding on the alternative rationale that Asadi was not a “whistleblower” within the meaning of the Anti-Retaliation Provision. See Asadi, 720 F.3d at 630.
Although both Liu and Asadi determined that the Anti-Retaliation Provision of the Dodd-Frank Act did not apply to extraterritorial conduct, in neither case did the facts have more than a “fleeting” connection to the United States. In Liu, the Second Circuit found that the plaintiff had “essentially no contact with the United States”, while in Asadi the plaintiff conceded that “the majority of events giving rise to the suit occurred in a foreign country” and the only alleged connection with the United States was that the plaintiff was a dual U.S. and Iraqi citizen and that the plaintiff’s termination was governed by U.S. law. In neither case did the plaintiff allege that any deceptive conduct had occurred within the United States. So, although “clearly” extraterritorial conduct is not within the reach of the Anti-Retaliation Provision, it remains to be seen what level of domestic connection is required to sustain a successful claim.
USA - What You Need to Know About Supplier ("Sweatshop") Codes of Conduct
By Donald C. Dowling, Jr.
Partner, White & Case LLP, New York
With renewed attention on supply chain ethics after the 2012 California the Supply Chain Transparency Act, the 2013 Bangladesh factory collapse, and construction workers’ conditions in the Middle East, organizations that source products and services from the developing world need a clear strategy as to supplier or “sweatshop” codes of conduct.
Global supplier conduct codes first got traction in the 1990s when American human rights activists championed them as a weapon to fight perceived overseas labor abuses and to promote workers’ rights in the developing world. U.S. labor union activists interested in job security for American workers—“protecting American jobs”—jumped on this bandwagon and promoted supplier codes, too. Then California the Supply Chain Transparency Act, effective since 2012, that required companies to confirm they are not complicit in human trafficking or slavery. More recently, the 2013 Rana Plaza factory collapse in Bangladesh actually reinvigorated the supplier code of conduct movement, even though a building collapse has nothing to do with labor standards and everything to do with real estate construction code standards.
Today, human rights activists and U.S. organized labor continue to urge those multinationals that resell third-world-sourced product in rich first-world markets to impose supplier codes of conduct and to police the labor conditions of the overseas workers working for companies that sell goods to multinationals. (See W. Martucci, et al., “International Workers, Companies and Consumers,” Law360, Aug. 19, 2013) That said, trade unions in developing countries tend to oppose overzealous American attempts to protect third world workers—too much protection threatens the jobs of the very workers ostensibly protected. (See Thomas Friedman, Don’t Punish Africa, N.Y. TIMES, Mar. 7, 2000)
The multinationals that issue robust supplier codes of conduct tend to be businesses that source low-cost manufactured product from the developing world—technology hardware marketers like Apple and Samsung, athletic shoe companies like Nike and Adidas, mass-market retailers like Wal-Mart and Target, mid-market fashion marketers like Liz Claiborne and Donna Karan, sports equipment and toy makers like Mattel and Reebok. Some oil and mining companies and some global manufacturing conglomerates (General Electric, for example) also impose supplier codes. And supplier codes pop up in unexpected sectors, like the Starbucks “fair trade” sourcing protocols and New York University’s Statement of Labor Values (which made headlines in May 2014). But supplier codes of conduct are far from ubiquitous. They remain relatively rare in industries from food and restaurants to finance, professional services, industrial supply, business-to-business sectors and most all services industries. In fact, supplier codes of conduct are not even much of an issue among high-end luxury goods brands that source product from rich countries.
Before drafting, updating or adopting any supplier “sweatshop” code of conduct, consider five issues:
External focus: Unlike internal codes of conduct and business ethics, supplier “sweatshop” conduct codes are external, neither addressed to nor meant to protect the multinational issuer’s in-house staff on its own payroll. Rather, supplier codes protect workers on the payrolls of the multinationals’ unaffiliated suppliers. While some codes purport to reach both supplier employees and the multinational code issuer’s own staff, internal compliance rarely matters to anyone, because any multinational that goes to the trouble of issuing a supplier code thinks of itself as a conscientious employer not operating “sweatshops” of its own. Indeed, even the activists and labor unions that complain about foreign sweatshops rarely accuse multinationals themselves of shoddy labor practices in their own in-house operations (but there are a few exceptions, like discount retailers).
Poor-country focus: External supplier codes of conduct almost always purport to reach a multinational’s suppliers worldwide, across rich and poor countries alike. But as a practical matter, these codes only concern suppliers in the developing world. While labor abuses occur everywhere, no activist who decries sweatshops sees domestic labor abuses as a pressing social issue in, say, Canada, Denmark or Japan. So while multinationals nominally extend their sweatshop codes to suppliers in rich countries, rich-country suppliers often ignore them. No one seems to complain.
Supplier code content: Supplier codes of conduct require the multinational’s sellers to meet whatever minimum labor protections the code spells out. The specific minimum labor standards covered differ widely from code to code. Some supplier codes focus on just a single issue or two—child labor, slave labor or human trafficking, for example. But most supplier codes cover a range of potential workplace abuses, like these topics plus rest periods, bathroom breaks, anti-discrimination, health/safety, unionization, work hours, pay rates and payroll. An emerging additional issue, especially in the Arab world, is recruitment fees and withholding immigrant workers’ passports.
Not surprisingly, when organized labor champions supplier codes, the most vital provision becomes the code clause on union organization (“right to organize”). Thus one must be strategic in addressing unionization within a supplier code. Consider merely committing to follow applicable labor unionization laws. Indeed, a conservative but viable approach to drafting an entire supplier conduct code is to anchor it in a commitment to follow applicable law without second-guessing local legislatures by adding too many additional rights.
While some supplier conduct codes list core labor protections specifically, others incorporate by reference model industry code templates, local employee-protection laws or International Labour Organisation (ILO) conventions. Many of the industries in which supplier conduct codes are common have issued sample codes—forms, models and examples setting out recommended content, or entire codes meant to be incorporated by reference.
Be careful adopting some interest group’s or industry group’s model code; it may contain provisions unworkable in your operations. In particular, the too-common practice of incorporating ILO conventions into a global supplier conduct code can cause unintended consequences. ILO standards are a bad fit for a multinational’s supplier code of conduct because the ILO addresses its conventions to nation-states, not corporations. Just as no U.S. domestic employee handbook would ever incorporate the U.S. Constitution’s bill of rights, to incorporate ILO standards into a supplier conduct code misconstrues what ILO standards are meant to do. (In 2006, the ILO did issue a “Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy,” but this declaration merely offers broad suggestions and is directed only to multinationals, not to their overseas suppliers.) Incorporating the core ILO right to freedom of association opens the door to the argument that the multinational code issuer estopped itself and its suppliers from opposing union drives and resisting certain union initiatives worldwide. “Freedom of association” has widely divergent meanings around the world, and academic literature within the labor movement interprets the free association concept expansively. Never incorporate ILO standards, particularly not the “free association” right, into a supplier code of conduct without embracing the significant ramifications.
Implementation and monitoring: Multinationals usually impose supplier conduct codes as appendices to the supply contracts and sourcing agreements they enter into with the “business partners” around the world that sell them goods. This structure is a lot more awkward and a lot less effective than proponents of supplier conduct codes ever seem to admit. The lurking legal challenge here is privity of employment contract: Multinationals that buy product in arm’s-length sales transactions from unaffiliated foreign sellers are mere customers in cross-border sales of goods transactions. In the normal course of business, a customer—especially one overseas—has little information about and zero say over the seller’s internal terms and conditions of employment. Legally as opposed to economically, customers tend to be powerless to dictate and monitor day-to-day human resources conditions and operations inside the businesses that sell them goods. Indeed, in most all other contexts, business partners are careful to avoid setting terms and conditions of workers they do not employ, as a precaution against findings of co-/dual-/joint-employer liability.
Supplier codes of conduct try to change all this by usurping human resources powers from sellers and bestowing them on customers. But even a customer empowered to set a seller’s labor terms has a tough time establishing and then policing them. The Wall Street Journal has acknowledged “the difficulties Western companies sometimes face in assessing working conditions at the foreign plants that manufacture their products.” (M. Bustillo, Sex Abuse Alleged at Apparel Maker, June 20, 2011). According to “an extensive investigation by The New York Times,” many “Western companies’” supplier code of conduct “inspection systems intended to protect [suppliers’] workers and ensure manufacturing quality [are] riddled with flaws.” (S. Clifford, “Fast and Flawed Inspections of Factories Abroad, September 1, 2013).
After a multinational customer drafts a supplier code of conduct and gets its overseas sellers to agree to it, then what happens? How does the customer (or its agents) access the foreign seller’s premises to monitor their work conditions? What does a customer do if it finds minor violations at a seller’s overseas factories that otherwise are better than industry standards, or if it finds violations that do not justify cutting the seller off? These questions get asked a lot, but there are no easy answers.
Supplier codes rarely ever—and certainly should never—require the multinational customer to monitor sellers’ code compliance. Some class action lawsuits filed in U.S. courts, albeit almost uniformly unsuccessful ones, have sought to enforce supplier codes against multinational customers on behalf of overseas supplier factory workers by asserting a third-party-beneficiary theory, arguing the multinational failed to monitor. (See Doe v. Wal-Mart, 572 F. 3d 677 (9th Cir. 2009)) The best defense to these lawsuits is to be able to show the monitoring provision in the operative code was voluntary, not mandatory.
Service sector codes: Until now the supplier code of conduct movement has targeted institutional buyers of tangible goods, even though most all of the social, compliance, public relations and business-case arguments for supplier conduct codes apply equally powerfully to sellers of services. Will the next frontier be imposing supplier codes on outsourced call centers and other low-wage, back-office services operations from India to the Philippines and beyond?
Partner, White & Case LLP, New York
With renewed attention on supply chain ethics after the 2012 California the Supply Chain Transparency Act, the 2013 Bangladesh factory collapse, and construction workers’ conditions in the Middle East, organizations that source products and services from the developing world need a clear strategy as to supplier or “sweatshop” codes of conduct.
Global supplier conduct codes first got traction in the 1990s when American human rights activists championed them as a weapon to fight perceived overseas labor abuses and to promote workers’ rights in the developing world. U.S. labor union activists interested in job security for American workers—“protecting American jobs”—jumped on this bandwagon and promoted supplier codes, too. Then California the Supply Chain Transparency Act, effective since 2012, that required companies to confirm they are not complicit in human trafficking or slavery. More recently, the 2013 Rana Plaza factory collapse in Bangladesh actually reinvigorated the supplier code of conduct movement, even though a building collapse has nothing to do with labor standards and everything to do with real estate construction code standards.
Today, human rights activists and U.S. organized labor continue to urge those multinationals that resell third-world-sourced product in rich first-world markets to impose supplier codes of conduct and to police the labor conditions of the overseas workers working for companies that sell goods to multinationals. (See W. Martucci, et al., “International Workers, Companies and Consumers,” Law360, Aug. 19, 2013) That said, trade unions in developing countries tend to oppose overzealous American attempts to protect third world workers—too much protection threatens the jobs of the very workers ostensibly protected. (See Thomas Friedman, Don’t Punish Africa, N.Y. TIMES, Mar. 7, 2000)
The multinationals that issue robust supplier codes of conduct tend to be businesses that source low-cost manufactured product from the developing world—technology hardware marketers like Apple and Samsung, athletic shoe companies like Nike and Adidas, mass-market retailers like Wal-Mart and Target, mid-market fashion marketers like Liz Claiborne and Donna Karan, sports equipment and toy makers like Mattel and Reebok. Some oil and mining companies and some global manufacturing conglomerates (General Electric, for example) also impose supplier codes. And supplier codes pop up in unexpected sectors, like the Starbucks “fair trade” sourcing protocols and New York University’s Statement of Labor Values (which made headlines in May 2014). But supplier codes of conduct are far from ubiquitous. They remain relatively rare in industries from food and restaurants to finance, professional services, industrial supply, business-to-business sectors and most all services industries. In fact, supplier codes of conduct are not even much of an issue among high-end luxury goods brands that source product from rich countries.
Before drafting, updating or adopting any supplier “sweatshop” code of conduct, consider five issues:
External focus: Unlike internal codes of conduct and business ethics, supplier “sweatshop” conduct codes are external, neither addressed to nor meant to protect the multinational issuer’s in-house staff on its own payroll. Rather, supplier codes protect workers on the payrolls of the multinationals’ unaffiliated suppliers. While some codes purport to reach both supplier employees and the multinational code issuer’s own staff, internal compliance rarely matters to anyone, because any multinational that goes to the trouble of issuing a supplier code thinks of itself as a conscientious employer not operating “sweatshops” of its own. Indeed, even the activists and labor unions that complain about foreign sweatshops rarely accuse multinationals themselves of shoddy labor practices in their own in-house operations (but there are a few exceptions, like discount retailers).
Poor-country focus: External supplier codes of conduct almost always purport to reach a multinational’s suppliers worldwide, across rich and poor countries alike. But as a practical matter, these codes only concern suppliers in the developing world. While labor abuses occur everywhere, no activist who decries sweatshops sees domestic labor abuses as a pressing social issue in, say, Canada, Denmark or Japan. So while multinationals nominally extend their sweatshop codes to suppliers in rich countries, rich-country suppliers often ignore them. No one seems to complain.
Supplier code content: Supplier codes of conduct require the multinational’s sellers to meet whatever minimum labor protections the code spells out. The specific minimum labor standards covered differ widely from code to code. Some supplier codes focus on just a single issue or two—child labor, slave labor or human trafficking, for example. But most supplier codes cover a range of potential workplace abuses, like these topics plus rest periods, bathroom breaks, anti-discrimination, health/safety, unionization, work hours, pay rates and payroll. An emerging additional issue, especially in the Arab world, is recruitment fees and withholding immigrant workers’ passports.
Not surprisingly, when organized labor champions supplier codes, the most vital provision becomes the code clause on union organization (“right to organize”). Thus one must be strategic in addressing unionization within a supplier code. Consider merely committing to follow applicable labor unionization laws. Indeed, a conservative but viable approach to drafting an entire supplier conduct code is to anchor it in a commitment to follow applicable law without second-guessing local legislatures by adding too many additional rights.
While some supplier conduct codes list core labor protections specifically, others incorporate by reference model industry code templates, local employee-protection laws or International Labour Organisation (ILO) conventions. Many of the industries in which supplier conduct codes are common have issued sample codes—forms, models and examples setting out recommended content, or entire codes meant to be incorporated by reference.
Be careful adopting some interest group’s or industry group’s model code; it may contain provisions unworkable in your operations. In particular, the too-common practice of incorporating ILO conventions into a global supplier conduct code can cause unintended consequences. ILO standards are a bad fit for a multinational’s supplier code of conduct because the ILO addresses its conventions to nation-states, not corporations. Just as no U.S. domestic employee handbook would ever incorporate the U.S. Constitution’s bill of rights, to incorporate ILO standards into a supplier conduct code misconstrues what ILO standards are meant to do. (In 2006, the ILO did issue a “Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy,” but this declaration merely offers broad suggestions and is directed only to multinationals, not to their overseas suppliers.) Incorporating the core ILO right to freedom of association opens the door to the argument that the multinational code issuer estopped itself and its suppliers from opposing union drives and resisting certain union initiatives worldwide. “Freedom of association” has widely divergent meanings around the world, and academic literature within the labor movement interprets the free association concept expansively. Never incorporate ILO standards, particularly not the “free association” right, into a supplier code of conduct without embracing the significant ramifications.
Implementation and monitoring: Multinationals usually impose supplier conduct codes as appendices to the supply contracts and sourcing agreements they enter into with the “business partners” around the world that sell them goods. This structure is a lot more awkward and a lot less effective than proponents of supplier conduct codes ever seem to admit. The lurking legal challenge here is privity of employment contract: Multinationals that buy product in arm’s-length sales transactions from unaffiliated foreign sellers are mere customers in cross-border sales of goods transactions. In the normal course of business, a customer—especially one overseas—has little information about and zero say over the seller’s internal terms and conditions of employment. Legally as opposed to economically, customers tend to be powerless to dictate and monitor day-to-day human resources conditions and operations inside the businesses that sell them goods. Indeed, in most all other contexts, business partners are careful to avoid setting terms and conditions of workers they do not employ, as a precaution against findings of co-/dual-/joint-employer liability.
Supplier codes of conduct try to change all this by usurping human resources powers from sellers and bestowing them on customers. But even a customer empowered to set a seller’s labor terms has a tough time establishing and then policing them. The Wall Street Journal has acknowledged “the difficulties Western companies sometimes face in assessing working conditions at the foreign plants that manufacture their products.” (M. Bustillo, Sex Abuse Alleged at Apparel Maker, June 20, 2011). According to “an extensive investigation by The New York Times,” many “Western companies’” supplier code of conduct “inspection systems intended to protect [suppliers’] workers and ensure manufacturing quality [are] riddled with flaws.” (S. Clifford, “Fast and Flawed Inspections of Factories Abroad, September 1, 2013).
After a multinational customer drafts a supplier code of conduct and gets its overseas sellers to agree to it, then what happens? How does the customer (or its agents) access the foreign seller’s premises to monitor their work conditions? What does a customer do if it finds minor violations at a seller’s overseas factories that otherwise are better than industry standards, or if it finds violations that do not justify cutting the seller off? These questions get asked a lot, but there are no easy answers.
Supplier codes rarely ever—and certainly should never—require the multinational customer to monitor sellers’ code compliance. Some class action lawsuits filed in U.S. courts, albeit almost uniformly unsuccessful ones, have sought to enforce supplier codes against multinational customers on behalf of overseas supplier factory workers by asserting a third-party-beneficiary theory, arguing the multinational failed to monitor. (See Doe v. Wal-Mart, 572 F. 3d 677 (9th Cir. 2009)) The best defense to these lawsuits is to be able to show the monitoring provision in the operative code was voluntary, not mandatory.
Service sector codes: Until now the supplier code of conduct movement has targeted institutional buyers of tangible goods, even though most all of the social, compliance, public relations and business-case arguments for supplier conduct codes apply equally powerfully to sellers of services. Will the next frontier be imposing supplier codes on outsourced call centers and other low-wage, back-office services operations from India to the Philippines and beyond?
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