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

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.

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 (, Beijing Municipal Government Foreign Affairs Office (, and Beijing Education Committee (, 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 (, 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.

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.

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:; Rebekah Mintzer, A Low Note for Whistleblowers at the Second Circuit, American Lawyer Blog (Aug. 19, 2014) (available at:

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: 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:

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.” *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?