NEGOTIATING AND DRAFTING EXPATRIATE EMPLOYMENT AGREEMENTS P

NEGOTIATING AND DRAFTING EXPATRIATE EMPLOYMENT
AGREEMENTS∗
PUBLISHED IN INTERNATIONAL LABOR & EMPLOYMENT LAW, 3RD ED., VOL. 1B (BNA).
I. INTRODUCTION
Negotiating and drafting employment agreements for U.S. citizens going abroad
or foreign residents employed in the U.S. and seconded to a third country is far from
simple. In order to draft and negotiate these agreements, an attorney must consider the
work assignment while understanding the local rules and customs. These attorneys must
think holistically about the process while, at the same time, thinking locally. One of the
most important skills the attorney must have in these instances is the ability to spot the
issues and know when and how to reach out to foreign counsel. The ultimate goal of this
chapter is to point out these issues and propose a course of action for drafting agreements
that will provide predictability and protection in the employment relationship.
The agreements discussed in this chapter may include or reference secondment
letters, human resource manuals, codes of conducts, confidentiality, and restrictive
covenants. Other expatriate provisions may be included in these agreements or exhibits,
depending on the laws of the host country and the company’s form or style. In order to
eliminate confusion in this chapter we will refer to all of these documents as “expatriate
agreements.” However, we will distinguish expatriate agreements from other agreements
that should be drafted separately to ensure enforcement abroad due to the specific laws of
the host country, such as restricted stock grant, stock option, or confidentiality and
proprietary information agreements.
In addition, this chapter will address major challenges faced by U.S. lawyers,
those who represent the U.S. companies as well as those who represent the employees
living and working abroad. It will predominantly focus on the relationship between the
U.S. company-employer and its employees, who are either expatriated to a host country
outside the U.S. indefinitely or seconded or “loaned out” to a host country organization or
branch office for a specific time period or assignment.
Finally, this chapter will provide guidance for both parties in drafting key terms
and provisions in the context of an increasingly global economy fraught with foreign law
landmines. For the expatriate who remains in the host country after a termination or for
the one brought back and then terminated, this chapter will also provide insight into the
options in seeking legal protection. For the company with increasing liabilities as a result
of aggressive foreign law protections, it will provide a practical guide to reducing these
potential liabilities.
For additional information on related topics, see the chapter on Compensating the
Internationally Mobile Executive in Volume IB, Part 6, and the chapter on Extraterritorial
Application of U.S. Law at VIII., in Volume IB, Part 2.
II. DEFINING THE EMPLOYMENT RELATIONSHIP
∗
Wendi S. Lazar, a partner at Outten & Golden, LLP, New York. Katherine Blostein, an associate
of the Firm assisted in the research and writing of this chapter.
A.
The Contracting Parties
It is critical when entering into an expatriate or secondment agreement for both
the employer and employee to understand fully who the contracting parties are and what
the terms of the relationship will be. For example, when a U.S. company sends a U.S.
employee to work in its U.S. headquarters in the United Kingdom (UK), it seems obvious
that the employee will be an expatriate living in a host country—the UK. However, when
the New York headquarters of a UK bank sends a U.S. employee to its branch office in
London, the relationship may be that of a “local” and the host country becomes the home
country. In the latter scenario, the employee may be expected to live like a UK resident,
paying local taxes and subject to all local policies and plans of the UK company, and not
given the usual expatriate advantages such as tax equalization, housing allowances, or
social security protection.1
Defining and drafting what the employment relationship will encompass early on
will determine many of the entitlements and obligations of the contracting parties and
will give the employee an opportunity to understand what the consequences will be of
various situations.
B.
At Will Versus Definite Term
Determining whether an employee will remain at-will or be given a term contract
for the duration of the assignment will significantly affect the terms and conditions of the
relationship and the subsequent expatriate agreement. A U.S. employer will often offer its
mid-level employees an at-will assignment while reserving contracts for a definite term
for its higher level executives.
In an at-will relationship, either party can terminate the relationship with no
liability. The employer is free to discharge the employee for good or bad cause (or no
cause at all) and the employee is just as free to quit, strike, or otherwise stop working.2
There are some exemptions to the at-will doctrine. For example, 43 U.S. states recognize
a public policy exemption under which an employer cannot fire an employee if it would
violate the state’s public policy or a state or federal statute.3 Some states also recognize
implied contracts and the covenant of good faith and fair dealing (“implied-in-law”
contracts) as exceptions to the at-will doctrine.4 Further, federal statutory exceptions
include violations of Title VII5 and other related anti-discrimination statutes,6 such as the
Sarbanes-Oxley Act7 and other whistleblower protections.8
*Wendi S. Lazar, a partner at Outten & Golden, LLP, New York. Katherine Blostein, an associate
of the Firm assisted in the research and writing of this chapter.
1
See V.C., below.
2
See generally Engquist v. Oregon Dep’t of Agric., 128 S. Ct. 2146, 2155 (2008).
3
See Lindsay B. Jackson, A Lesson From Germany on How the United States Could Reform Its
Laws on Dismissal, 4 GEO. J.L. & PUB. POL’Y 522, 533 n. 87(2006) (citing Charles G. Muhl, The
Employment-at-Will Doctrine: Three Major Exceptions, MONTHLY LAB. REV., Jan. 2001, at 4, available at
<http://www.bls.gov/opub/mlr/2001/01/art1full.pdf>).
4
See generally Scott R. Grubman, Think Twice Before You Type: Blogging Your Way to
Unemployment, 42 GA. L. REV. 615, 627–29 (2008) (noting that as of Oct. 1, 2000, only 11 states
recognized the good faith exception and only 38 states recognized the implied-in-law exception).
5
42 U.S.C. §2000e-2 (2000).
In contrast, in many countries outside the U.S. the employment relationships are
governed by contract, collective or trade agreements, works council directives, treaties, or
statutes. Often, employers can terminate only “for cause,” and termination without cause
subjects employers to pay severance benefits.9 In the European Union (EU), for example,
directives,10 treaties, and local law work in tandem in order to achieve uniformity
regarding certain employment terms, including jurisdiction, choice of law, salary, term,
notice, equity, non-competes, and data privacy.11 As more U.S. companies become
increasingly multinational sensitivity to these new directives is required in order to
operate a successful workforce abroad. Hopefully, this increased uniformity will also
make it less cumbersome for multinational companies to employ in or transfer personnel
to more than one EU jurisdiction.
In this regard, as companies and organizations become multinational corporate
citizens it is critical to know the corporate nationality of the employer in order to fully
comprehend who the contracting parties are to an expatriate agreement. When an
employee is offered employment outside the U.S., knowing the nationality of the
company, and its relationship to a U.S. corporation, if any, may, in large part determine
what rights the employee may have to statutory protections and other employment rights
in or outside the U.S.
Sometimes, these relationships are clearly defined at the start, but a recent sale,
merger, or consolidation can change the nationality of the employer and ultimately affect
an employee’s employment rights. U.S. case law on extraterritoriality and its effect on an
employee’s protection against discrimination exemplify how corporate nationality and
relationships between a corporation and its subsidiary will ultimately determine an
employee’s right to this protection.12 Furthermore, a corporation’s tie to the host country
may also influence how the host country’s court will view certain contract clauses and
determine the enforceability of certain provisions during or following termination of
employment.
When discussing choice of law and jurisdiction of employment disputes, this
chapter will focus mainly on the EU, given its popularity as a destination for expatriates.
In reality, expatriate issues can and do occur anywhere in the world and are a part of a
legal system that is most likely foreign to the U.S. In some cases, these issues can involve
multinational jurisdictions if the employee is working in multinational locations or living
in a country different from the one in which he or she works.
6
See, e.g., Americans with Disabilities Act of 1990, 42 U.S.C. §§12101–12213 (2000); Pregnancy
Discrimination Act, 42 U.S.C. §2000e(k) (2000); National Labor Relations Act, 29 U.S.C. §§151–169
(2000).
7
Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 §1, 116 Stat. 745.
8
See, e.g., Whistleblower Protection Act of 1989 (WPA), Pub. L. No. 101-12, 103 Stat. 16;
Notification and Federal Employee Antidiscrimination and Retaliation Act, (No FEAR Act), Pub. L. No.
107-174, 116 Stat. 566 (2002).
9
See V.G.5., below.
10
A directive is a binding act of general application to EU member states that is available to
“European institutions . . . to implement Community policies . . . as a means to harmonise national
legislation.” Activities of the European Union, Summaries of Legislation, SCADPlus: Directive, available
at <http://europa.eu/scadplus/leg/en/lvb/l14527.htm>. For additional information, see the chapter on the EU
in Volume IA, Part 1.
11
See III., below, and the chapter on the EU in Volume IA, Part 1.
12
See the chapter on Extraterritorial Application of U.S. Law at VI., in Volume IB, Part 2.
III. CHOICE OF LAW AND JURISDICTION
A.
Governing Law
Every employment agreement should have a provision binding the parties to a
specific choice of law that will be applied to a dispute pursuant to the agreement. In an
expatriate agreement, the choice of law provision may ultimately determine whether or
not the entire agreement is enforceable. While expatriate agreements generally call for
the law of the home country to apply, these provisions can be superseded by employee
protections in the host country such as local statutes governing vacation, severance,
mandatory notice, and restrictive covenants. A single choice of law provision may govern
all aspects of an expatriate agreement, or multiple choices of law may be used to govern
different clauses in the same agreement. This will depend on what the governing law is in
the host country in terms of an individual issue, as well as under what circumstances the
host country will recognize a choice of law provision in a U.S. contract. It is essential in
reviewing and drafting these provisions to look ahead to the end of the relationship and
consider the enforceability of certain provisions, such as restrictive covenants, notice
provisions, or even the termination provision itself, after the employment ends.
Most U.S. companies will try to impose U.S. choice of law in all of its expatriate
agreements and the employee will be asked to waive local protections. Despite this,
throughout the EU, for example, the laws of the place where the expatriate is performing
services will generally control the employment relationship and local protections will not
be waivable. Generally, a U.S. expatriate living abroad will leave behind the at-will status
often imposed by contract and enjoy the employee protections of the host country.
These approaches to choice of law provisions can create uncertainty and
ambiguity for the U.S. expatriate, rendering certain provisions in an agreement hollow
and impossible for a company to enforce, should the employee remain abroad during a
dispute post-termination. Although this is true in most cases, it does not apply when the
issue concerns a benefit or obligation that is guided by reciprocal treaties with the home
country, such as social security and tax treatment.13 Other exceptions apply to highly
compensated employees whose benefits and compensation are greater than what local
protections provide.
In certain countries, notably the U.S., there are specific employee protections that
are limited to the job being performed in the U.S., unless the employee is a U.S. citizen
and in some cases, a permanent U.S. resident. Although some of these limitations have
been expanded by U.S. case law, the extraterritorial reach of U.S. employment
discrimination statutes such as Title VII,14 the ADA,15 the ADEA,16 and SarbanesOxley17 remain significantly limited to employees performing employment in the U.S.
However, U.S. laws will reach across continents to cover U.S. citizens working abroad
for U.S. corporations and in some cases a foreign corporation, if it is an “integrated
13
See, e.g., V.F., below.
42 U.S.C. §2000e (2000).
15
42 U.S.C. §§12101–12213 (2000).
16
29 U.S.C. §§621–634 (2000).
17
Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 §1, 116 Stat. 745.
14
enterprise”18 of a U.S. corporation.19 This approach has not been mirrored in Europe or in
Asia where there is no extraterritorial reach of its local employee protections. For
example, UK employee protections generally do not extend to UK citizens working
abroad.20
However, Directive 96/71 of the European Parliament and of the Council of
December 16, 1996, concerning the posting of workers in the framework of the provision
of services requires the extraterritorial application of certain employment provisions of
member states within the rest of the EU. The Directive requires that, in certain situations,
member states must ensure that the law applicable to the employment relationships in
their state is applied to workers from other member states that are temporarily posted
there.21
Other countries, such as Japan and China, have taken a different approach to
choice of law by having distinctly local laws for its citizens and other laws for foreigners.
Japan has recently implemented a new law on the choice of law (“Hō no Tekiyō ni
Kansuru Tsūsokuhō,” meaning “Law on the General Rules of Application of Laws”),
which provides in Article 7 that “the formation and effect of a juristic act shall be
governed by the law of the place chosen by the parties at the time of the act.”22 However,
Article 12 has special rules for labor contracts, where an employee is entitled to indicate
that a particular mandatory rule from the law of the place of employment will apply as
the choice of law for the labor contract.23
Article 126 of the Contract Law of the People’s Republic of China articulates
Chinese choice of law.24 It permits parties to a foreign-related contract to select the
applicable law for resolution of a contractual dispute. Where parties to foreign-related
contracts fail to select the applicable law, the contract is governed by the law of the
country closely situated thereto.25
18
Whether two entities form an integrated enterprise is determined by looking at the following
factors: (i) interrelation of operations; (ii) common management; (iii) centralized control of labor relations;
and (iv) common ownership or financial control. Cook v. Arrowsmith Shelburne, Inc., 69 F.3d 1235, 1240–
41 (2d Cir. 1995).
19
See the chapter on Extraterritorial Application of U.S. Laws at VI., in Volume IB, Part 2; see
also Wendi S. Lazar, Counseling Multinational Employees: Their Rights and Remedies Under U.S. Law, 11
BENDER’S IMMIGR. BULL. 423 (2006). See generally Kathy Roberts, Correcting Culture: Extraterritoriality
and U.S. Employment Discrimination Law, 24 HOFSTRA LAB. & EMP. L.J. 295, 305–08 (2007).
20
See Lawson v. Serco Ltd., [2006] UKHL 3 (U.K.) (noting that sec. 94(1) of the Employment
Rights Act of 1996, which gives employees the right not to be unfairly dismissed, shall apply to expatriate
employees in limited situations like where “the employee [is] posted abroad to work for a business
conducted in Britain and [where] the employee [is] working in a political or social British enclave abroad”).
See also the chapter on the UK in the Introduction at E.2., in Volume IA, Part 1.
21
Directive 96/71/EC of the European Parliament and of the Council of Dec. 16, 1996, concerning
the posting of workers in the framework of the provision of services, art. 1, 1996 O.J. L 018. For additional
information, see the chapter on the EU in Volume IA, Part 1.
22
See Act on the General Rules of Application of Laws [Hō no Tekiyō ni Kansuru Tsūsokuhō], Law No. 10
of 1898, art. 7 (as newly titled and amended June 21, 2006), translated in Kent Anderson & Yasuhiro
Okuda, Translation of Japan’s Private International Law, 8 ASIAN-PAC. L. & POL’Y J. 138, 142 (2002).
23
“This mandatory rule shall apply to the matters covered by the rule concerning the labor
contract’s formation and effect.” Id. art. 12(1), translated in Translation of Japan’s Private International
Law , 8 ASIAN-PAC. L. & POL’Y J. at 147.
24
Contract Law of the People’s Republic of China, art. 126 (1999), translation available at
<http://www.novexcn.com/contract_law_99.html>.
25
Id.
Increasingly, negotiating the most favorable choice of law provision for
multinational employees will require a sophisticated knowledge of the host country’s
mandatory law protections as well as other case law in a particular jurisdiction. An
employee may benefit from certain provisions if those provisions do not conflict with
local law such as those pertaining to pensions, equity, or other benefits. Rather than a
“wholesale” choice of law provision, choosing different laws for different terms may
address the needs of the company and the employee in a given situation.
B.
EU—Choice of Law
EU member states are parties to the Rome Convention on the Law Applicable to
Contractual Obligations of June 19, 1980, which identifies rules that govern international
contracts and choice of law principles.26 Under Article 6(1) of the Convention, employers
and employees are free to choose the applicable law to an agreement.27 Thus, European
labor courts are generally bound by the choice of law set forth in the employment
agreement. However, the Rome Convention has certain pro-employee protections, under
which labor courts are allowed to set aside the law chosen if the applicable provisions of
that law are less favorable than the mandatory provisions of law in the country in which
the employee “habitually” performs the work.28 In furtherance of this principle Directive
96/71 was designed to prevent social dumping and to allow the mandatory protective
labor rules of the host country to be applied to employees from other member states.
However, it also takes exception to this rule, in recognizing that the employment
agreement is often more closely connected to the employment than local law.29
On December 17, 2009, the EU officially adopted the “Rome I” Regulation30 (the
Regulation) that was approved with certain changes by the European Parliament on
November 29, 2007.31 The Regulation governs choice of law questions for contracts,
including employment contracts.32 The Regulation seeks to move the EU toward a more
rule-based approach to choice of law with greater party autonomy.33 Under the
Regulation, the place of habitual employment is the presumptive choice of law for
employment contracts, the application of the rule of a law under the Convention will be
applied only if it would be “manifestly incompatible with the public policy of the
forum.”34 The idea of “mandatory rights” has been replaced by “overriding mandatory
provisions” that safeguard the public interests, and can only be applied if the choice of
26
Rome Convention on the Law Applicable to Contractual Obligations, June 19, 1980
(80/934/EEC).
27
Id. art. 6(1).
28
Id. art. 6(2).
29
Id. See also the chapter on the EU in Part I.
30
Parliament and Council Regulation 593/2008, Law Applicable to Contractual Obligations (Rome
I), 2008 O.J. (L 177) 6 [hereinafter Rome I].
31
Id.
32
Although Rome I generally replaces the Rome Convention, neither the Rome Convention nor the
Rome I Regulation applies to Denmark.
33
For a more general discussion of Rome I, see Ole Lando & Peter Arnt Nielsen, The Rome I
Proposal, 3 J. PRIV. INT’L L. 29 (2007).
34
See Rome I, art 4(3). See also Samengo-Turner v. J&H Marsh & Mclennan (Servs.) Ltd., Case
No. A3/2007/1257, [2007] EWCA Civ. 723, 2007 WL 1942883 (July 12, 2007) (denying New York
choice-of-law clause in a restrictive covenant and ruling that case could only go forward in London).
law in the contract renders the performance under the contract unlawful.35 Rome I rules
will be applied by the courts of member states even if applying the rules results in a nonEU law being the governing law of the agreement and even if some parties appearing
before the courts of member states are not European.
C.
Jurisdiction
Many countries outside of the U.S. do not accept an employer’s choice of
jurisdiction even if it was agreed to in advance by both parties, because of the disparity in
bargaining power. When negotiating or drafting a jurisdictional provision in an expatriate
agreement, it is imperative to first consider whether the host country will recognize the
laws of the jurisdiction chosen to govern the employment relationship, then consider
whether the employee has the practical means to meet the jurisdictional requirement in
terms of cost, travel, and adequate representation. Discovering this early on can avoid a
local court finding that the chosen jurisdiction is unenforceable because the needs of the
employee were not adequately considered. The circumstances surrounding the choice of
jurisdiction by the parties at the beginning of the employment relationship may also
change as time goes by depending on how long the assignment abroad turns out to be and
which statute applies.
There are three legal documents that set forth the European view on jurisdictional
issues: the Brussels Convention on Enforcement of Judgments in Civil and Commercial
Matters of September 27, 1968,36 the newly drafted Brussels I Regulation, which
replaced the earlier Convention except in Finland, and the EU Regulation No. 44/2001,37
which in many respects superseded the Brussels Convention when entered into force on
March 1, 2002.
The Brussels Convention, in Article 17, states that employers can invoke
jurisdictional clauses only if they are signed after a dispute has arisen, whereas
employees can invoke the clause even if it was signed before.38 It further states that
jurisdiction is conferred on the court of the country in which the defendant employer
resides.39 Thus, the court of the country in which the employer’s offices are located
generally would have jurisdiction. Nonetheless, courts may recognize fairly bargained-for
jurisdiction if not manifestly contrary to public policy.
The basic principle of the Brussels I Regulation is that jurisdiction is exercised by
the member state in which the defendant is domiciled, regardless of his or her nationality.
However, contrary to the Brussels Convention, Brussels I Regulation markedly gives
35
See Rome I, art. 8(1) (party autonomy cannot “result [in] depriving the employee of the
protection afforded to him [or her] by provisions that cannot be derogated from by agreement under the law
that, in the absence of choice, would have been applicable.”). See also id. art. 9(3).
36
Brussels Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial
Matters, Sept. 27, 1968, as amended, 1990 O.J. (C 189) 1 [hereinafter Brussels Convention].
37
See EU Regulation 44/2001 on Jurisdiction and the Enforcement of Judgments in Civil and
Commercial Matters, Mar. 1, 2002, 2001 O.J. (L 12) 1, amended by 2002 O.J. (L 225) 1 [hereinafter EU
Reg. 44/2001] (binding on all EU member states with the exception of Denmark, where the Brussels
Convention is still effective).
38
Brussels Convention, art. 17.
39
Id.
employee choices of where to sue the employer.40 It can be in a court of the member state
in which the employer is domiciled, of the member state in which the employee
habitually carries out his or her work, or if the employee worked in multinational
jurisdictions, then it can be in the court of the place in which the business that engaged
the employee was situated.41 The employer has no choice as to jurisdiction and can only
bring proceedings in a court of the member state in which the employee is domiciled.42
In drafting jurisdictional clauses, while uncertainty of time and location
surrounding the assignment may warrant the U.S. employer to always choose U.S.
jurisdiction, the employee will almost always have the choice of whether to seek
jurisdiction under European law or file suit in the U.S., at least in so far as EU law is
concerned. Clearly, this decision will depend on the rights in dispute and the convenience
of the forum. Just to be safe, many employers try to circumvent this issue by bringing a
U.S. expatriate home before severing the employment relationship, thus insuring the best
chance of U.S. jurisdiction if a claim is brought by the employee. In addition to drafting a
valid forum selection clause, attorneys representing these parties should be aware of the
peculiarities of different jurisdictions. For example, according to statutory law, a
managing director of a German limited liability company is not entitled to make a claim
in the respective labor court.43 Although this has the potential of depriving the employee
of better protection in this specialized court, it can be avoided by a forum selection clause
in favor of the labor court as the appropriate forum. Finally, these clauses should, and in
many foreign jurisdictions must, be in writing in order to be enforceable.
Ultimately, it is prudent to understand what local laws and policies may govern
and even supersede the choice of the parties in order to avoid litigating in a forum
unfavorable to both the employer and the employee. Although parties are always free to
agree to a specific forum, court, or a mechanism for dispute resolution, a specific court
may not have the power to adjudicate the dispute in question and in many parts of the
world, U.S. mechanisms for dispute resolution, such as arbitration and mediation, may
not even exist.
IV. DISPUTE RESOLUTION
A.
The Use of Arbitration in the United States and Abroad
The use of provisions that bind employees to resolve disputes with their
employers through private arbitration has significantly increased in the U.S. since the
mid-1980s.44 In the rest of the world, however, including the EU, this has not been the
trend. This is because the act of waiving one’s statutory right to be heard in a labor court,
40
Council Regulation (EC) No 44/2001 of Dec. 22, 2000 on Jurisdiction and the Recognition and
Enforcement of Judgments in Civil and Commercial Matters. The Brussels Convention was effective
March 1, 2002, but does not apply in Denmark.
41
Brussels Convention, art. 19. See also id. arts. 18–21 (employment contracts fall within the
special provisions of these articles).
42
Id. art. 20.
43
Bundesarbeitsgericht [BAG] [German Federal Labor Court] May 5, 1999, 5 AZB 22/99 = NJW
1999, 3069.
44
Jean R. Sternlight, Is the U.S. Out on a Limb? Comparing the U.S. Approach to Mandatory
Consumer and Employment Arbitration to That of the Rest of the World, 56 U. MIAMI L. REV. 831, 832–35
(2002).
tribunal, or other judicial process often violates the fundamental system of employment
rights.
Since the 1980s, the U.S. Supreme Court has held in a series of decisions that
arbitration is preferential to court litigation. Further, the court has rejected the public
policy concerns that arbitration requires employees to waive their statutory rights to
litigate civil rights and other statutory actions.45 Substantially influenced by these
decisions, numerous U.S. companies have implemented mandatory arbitration claims in
its employment agreements requiring employees to arbitrate rather than litigate
employment disputes.46
Outside the U.S., however, employment arbitration may be voluntary but
mandatory arbitration is virtually nonexistent.47 In most foreign countries, employees are
not at-will and rely on governmental bodies and labor tribunals to protect their statutory
and contractual rights rather than on individual enforcement of actions.48 In Germany, for
example, an employee is not allowed to waive his or her right to seek a ruling from one
of the specialized labor courts.49 Consequently, arbitration provisions in individual
employment agreements are invalid, although parties to collective bargaining agreements
are permitted, under certain circumstances, to stipulate to arbitration.50 As always, the
different nuances in the law are present from country to country.
In the EU, arbitral agreements must also be consistent with the European
Convention for the protection of Human Rights and Fundamental Freedoms. Article VI
of the Convention stipulates that “in the determination of his civil rights and obligations .
. . everyone is entitled to a fair and public hearing within a reasonable time by an
independent and impartial tribunal established by law.”51 In Germany, for example, an
employee is not allowed to waive his or her right to seek a ruling from one of the
specialized labor courts.52 Consequently, arbitration provisions in individual employment
agreements are invalid, although parties to collective bargaining agreements are
permitted, under certain circumstances, to stipulate to arbitration.53 In the UK,
“arbitration” differs drastically from the U.S. system. Unlike their U.S. counterparts,
British arbitrators are appointed by the government, their powers are derived by statute
and their awards are subject to review by UK courts.54 English law also funnels
45
See, e.g., Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) (holding that a broker
could be required to arbitrate rather than litigate his federal age discrimination claim); Moses H. Cone
Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25 (1983) (“The Arbitration Act establishes that . . .
any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the
problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like
defense to arbitrability.”).
46
Sternlight, at 834–35.
47
Id. at 848–53 (noting that while it is difficult to ascertain the international absence of a legal
practice, research indicates that mandatory arbitration of employment disputes does not occur in the EU,
Mexico, Bolivia, Venezuela, and Peru).
48
Id. at 850–53.
49
Matthew W. Finkin, Privatization of Wrongful Dismissal Protection in Comparative
Perspective, 37 INDUS. L.J. 149, 156–60 (2008).
50
Id.
51
The European Convention for the Protection of Human Rights and Fundamental Freedoms, Nov.
4, 1950, art. VI, 213 U.N.T.S. 221.
52
Finkin, at 156–60.
53
Id. at 157–60.
54
See 1996 English Arbitration Act, ch. 23, §69(3)(c) (Eng.), reprinted in 36 ILM 155 (1997).
employment rights disputes into two categories: contractual claims that are handled by
the High Court or County Court, and statutory claims that are handled by the
Employment Tribunal.55 Increasingly, however, parties whose claims could be brought to
the Employment Tribunal are voluntarily taking advantage of England’s state-run arbitral
body, the Advisory, Conciliation and Arbitration Service (ACAS), to reach binding
resolutions through conciliation.56
Certain provinces in Canada seem to have borrowed their arbitration policies from
both the U.S. and the EU. For example, the province of Quebec has instituted a
mandatory arbitration policy for employees whose employment is governed by collective
bargaining agreements.57 Although the award resulting from such an arbitration
proceeding is considered final as to the merits of the dispute, Quebecois high courts do
retain supervisory authority over the employment arbiters and can set aside an award
where an arbiter has acted outside the scope of his or her jurisdictional authority.58
Although mandatory arbitration still remains a U.S. concept, there is no question
that countries outside the U.S. are discovering that voluntary arbitration is a cost saving
and efficient alternative to employment litigation. Developing universal guidelines and
directives in the future can only help this mechanism become more effective on a
multinational level.
B.
The New York Convention
The legal basis for recognition and enforcement of international arbitral awards is
the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, commonly called the “New York Convention.”59 The New York Convention,
signed by 140 member states, including the EU, ensures the recognition and enforcement
of commercial and civil arbitration matters that are in writing and are capable of
settlement by arbitration.60
The recognition and enforcement of an arbitral award under the Convention may
be refused by a competent arbitral authority in the state in which enforcement is sought if
the “subject matter of the [dispute] is not capable of settlement by arbitration under the
law of that country” or violates public policy.61 For example, disputes surrounding an
employee’s termination cannot be settled by arbitration in France or Germany.62
55
David L. Gregory & Francis A. Cavanagh, A Comparative Assessment of Labor Dispute
Resolution in the United States & the United Kingdom, 81 ST. JOHN’S L. REV. 29, 33 (2007).
56
Id. at 35–37 (noting that though Acas settlements are binding on both parties, either party can
stop the Acas process and take the dispute to the Employment Tribunal).
57
Labour Code, R.S.Q., c. C-27, s. 100.
58
Labour Code, R.S.Q., c. C-27, s. 101, 139 and 139.1; Bisaillon v. Concordia Univ., 2006 SCC
19; Isidore Garon ltée v. Tremblay; Fillion et Frères (1976) inc. v. Syndicat national des employés de
garage du Québec inc., 2006 SCC 2.; Gagnon Robert P. Le droit du travail du Québec, 6th ed., Edition
Yvon Blais, Montreal, Quebec, 2008, paras. 744 and 752–757.
59
United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards,
June 10, 1958, 21 UST 2517, 330 UNTS 3.
60
Id. art. II.
61
Id. art. V(2).
62
In France, for “matters within the jurisdiction of the labour courts, . . . the jurisdiction accorded
is a matter of public policy, of public ordering, for which an arbitral body cannot be substituted by private
agreement; nor, to the extent labour legislation may be enforced by an individual in the civil courts, would
C.
The Use of Arbitration Provisions in Expatriate Agreements
As arbitration clauses are not enforceable in the vast majority of countries outside
the U.S., these provisions are of limited use in expatriate agreements when a dispute
occurs and the employee is abroad. Even if an arbitration agreement leads to an arbitral
award in the U.S., this award would most likely be rejected by a foreign court as a matter
of public policy or because the dispute in question cannot be resolved by the waiver of
the employee’s rights abroad. Should the employee consider negotiating an arbitration
clause in his or her agreement, it is advisable to agree upon an institution participating in
the arbitral process. Without the assistance of the institution, the stated goals of
arbitration—namely, speed, economy, and justice—could not be efficiently realized.
Among the leading institutions are the International Court of Arbitration (ICC),63
the American Arbitration Association (AAA),64 the London Court of International
Arbitration (LCIA),65 the China International Economic and Trade Arbitration
Commission (CIETAC),66 the German Institute for Arbitration,67 the Arbitration Institute
of the Stockholm Chamber of Commerce,68 and the Singapore International Arbitration
Centre (SIAC).69 The choice of the appropriate institution should not only be based on
cost, but also on the institution’s familiarity with expatriate agreements.
Of course, if a U.S. expatriate returns to the U.S. prior to the occurrence of a
dispute, having a detailed arbitration clause in place may be beneficial to both parties.
This clause should cover the choice of law, the arbitral institution and its institutional
rules, situs of arbitration, scope, appointment and number of arbitrators, and procedural
rules as provisions of interim measures, the taking of evidence, confidentiality, and
language of the arbitration. Preferably, the arbitral clause should provide for the employer
to reimburse some portion of the employee’s attorney fees and the employee and its
representative should have reasonable access to all information that is relevant to the
arbitration of their claim.
D.
Mediation
In recent years, mediation has become a popular and useful tool in attempts to
settle employment disputes prior to pursuing arbitration or litigation. Mediation avoids
the expense and delay of litigation, engages the parties in creative problem solving, keeps
an agreement to arbitrate them be enforceable. Finkin at 154. In Germany, “[d]isputes on the application of
individual labour protective law such as fair dismissal, maternal protection and so on, may not be submitted
to arbitration even if the individual contract were to provide for it,” but in limited circumstances disputes
under collective bargaining agreements can be arbitrated. Id. at 157–58.
63
International Court of Arbitration, available at <http://www.iccwbo.org/court/arbitration/>.
64
American Arbitration Association, available at <http://www.adr.org/>.
65
The London Court of International Arbitration, available at <http://www.lcia-arbitration.com/>.
66
China International Economic and Trade Arbitration Commission, available at
<http://www.cietac.org.cn/index_english.asp>.
67
Deutsche Institution für Schiedsgerichtsbarkeit [German Institute for Arbitration], available at
<http://www.dis-arb.de />.
68
The SCC Institute–Arbitration Institute of the Stockholm Chamber of Commerce, available at
<http://www.sccinstitute.com/uk/Home/>.
69
Singapore International Arbitration Centre, available at <http://www.siac.org.sg/>.
the dispute and its resolution confidential, and avoids public disclosure of private or
sensitive matters. Most importantly, mediation gives the parties the opportunity to hear
each other’s position and come to an amicable resolution of the dispute.
In the U.S., many courts have court-annexed mediation programs. The U.S. Equal
Employment Opportunity Commission and many other fair employment practice
agencies have mediation programs. Further, there is private mediation, which involves
the use of professional independent mediators affiliated with different dispute resolution
organizations such as JAMS, the American Arbitration Association, and CPR Institute for
Dispute Resolution, which is often said to be the best approach.70
Considering the choice of law questions discussed earlier, drafting a mediation
provision in an expatriate agreement is well-advised. Requiring mediation as a step in
resolution of a dispute under an expatriate agreement may protect the employer from
having to defend an employment matter in a foreign court while still allowing the
employee his or her chance to have a “day in court” without the burdensome litigation
expenses.
E.
EU—Mediation Directive
The EU has adopted a legal directive (the “Directive”) on mediation that was
entered into force on June 10, 2008.71 However, it may be of limited use in employment
agreements. To date, the Directive has been adopted by the UK and Ireland but rejected
by Denmark. According to the Directive, EU member states have until May 2011 to
comply with the bulk of the Directive.72
The scope of the Directive is to encourage the use of mediation, defined as “a
structured process . . . whereby two or more parties to a dispute attempt by themselves,
on a voluntary basis, to reach an agreement on the settlement of their dispute with the
assistance of a mediator.”73 The Directive “shall apply to civil and commercial matters
except as regards rights and obligations which are not waivable, including statutory
employment rights.”74 The Directive singles out employment.75 Therefore, parties to
employment law disputes may find that mediation as an alternative to the judicial process
is restricted or entirely unavailable.
V. THE KEY TERMS OF EXPATRIATE AGREEMENTS
As discussed earlier, when an employer sends an employee to work in a location
outside the entity’s home country, the parties usually enter into a written agreement
specific to the assignment. Typically, this agreement describes the terms of an expatriate
70
See Wayne N. Outten, Representing the Executive, in Executive Compensation 653 (Yale D.
Tauber & Donald R. Levy eds. 2002).
71
See Directive 2008/52, of the European Parliament and of the Council of May 21, 2008, on
certain aspects of mediation in civil and criminal matters, art. 13, 2008 O.J. (L. 136).
72
Member states have until November 2010 to comply with Article 10 of the Directive, which
mandates the Commission to publicize information on the “competent courts or authorities” approved to
conduct mediations. Id. art. 12.
73
Id. art. 3.
74
Id. art. 1.
75
Id. pmbl. ¶10.
assignment and may augment a pre-existing agreement with the company. Often,
companies give their employees only an offer letter accompanied by an expatriate policy
guide describing the company’s expatriate benefits, and stating that the relationship
remains at will. Whatever the arrangement may be, there are critical legal protections that
an employee going abroad should obtain, and it is counsel’s job to memorialize these key
terms in a document or group of documents.
When stripped of its formalities, these documents should paint a picture of the
most significant duties and obligations of both the employer and the employee. Although
typically drafted before or near the start of the assignment abroad, the agreement will
become the touchstone of the parties’ rights and responsibilities long after it is executed.
However, as noted earlier, parties entering into this agreement should be mindful that,
despite memorializing their intent in writing, some contractual terms may be ineffective
if they conflict with the laws of the host country or purport to waive rights and
entitlements that are statutory and cannot be waived. This section identifies some of the
most common issues that are typically covered in these agreements.
A.
Term of Employment and Renewal
The agreement should indicate whether the employee’s work in the host country
is for an indefinite period or a fixed term. Either way, if the employee was already
working for the employer when the parties agreed to reassign him or her abroad, the
agreement should make it clear that the move does not constitute a break in the
employment relationship. Memorializing the continuous nature of the employment up to
and including the secondment or expatriate period can be integral in retaining eligibility
for various employment benefits or statutory rights that are conditioned on length of
service with the employer.
Agreements that do not include an end-date or event terminating the length of
service in the host country are indefinite. Typically, such agreements will terminate upon
the death of the employee or if one party expresses an intention to end the employment
relationship. In these cases, the agreement should set forth the particular manner in which
the party must indicate its desire to end the agreement.
In fixed term arrangements, the length of service abroad may be indicated by
using actual dates or time periods, or even by referencing a triggering event, such as the
completion of a given project. A fixed term agreement may also set forth procedures and
conditions for renewing or extending the agreement when it expires.
Typically expatriate agreements are for a period of less than five years, because
many reciprocal treaties and tax benefits will expire thereafter and the employee may be
considered localized, and subsequently subject to many of the tax and social benefit
obligations of host country residency.76 The agreement will usually indicate that after a
definite period of time it will be extended or renewed and if not, the employee will return
to the home country or become localized as described below.
In the absence of a renewal provision, depending on the laws governing the
expatriate agreement, it may renew automatically for the same period as the initial term
or for a period of years. Alternately, the agreement may be silent as to renewal except for
76
See the discussion of pensions in the chapter on Extraterritorial Application of U.S. Laws at
VIII., in Volume IB, Part 2.
stating that, prior to or upon termination of the initial term, the parties agree to negotiate
the continuation of the employment relationship in good faith. Either way, it is important
that the agreement spell out what happens at the end of the time period and whether the
employer is agreeing to continue the employment relationship once the employee is back
in the home country. It is also important to determine what if any post-assignment
obligations will exist. Obviously, the latter will demand consideration.77
B.
Reassignment
At the end of the assignment, the parties may agree that the employee will either
return to the position that he or she held prior to the transfer abroad, be promoted to a
higher level position in the U.S., or be localized in the host country. There may also be a
new opportunity for the employee in another country. Therefore, the parties may want to
include a provision in the expatriate agreement indicating that, upon completion of the
assignment or upon termination of the agreement, the employer will reassign the
employee accordingly and negotiate economic terms that are no less favorable than those
that he or she enjoyed during the last assignment. This provision may be especially
important in light of what may be a new state of economy.
C.
Localization
It is not uncommon for an employer to try and localize an employee who has been
successfully employed in the host country for an extended period of time. This may
require the drafting of a localization provision. This provision will become applicable
either after the term ends, or if there have been multiple extensions and it is no longer
cost effective for the employer to continue tax equalizing the employee or continuing to
provide the employee with U.S. benefits and perquisites. From the employee standpoint,
after a number of years in a host country, he or she may want to make a permanent home
there and consider localization the right option. Often, when an expatriate is “localized”
there is an understanding between the employer and employee that the employee does not
intend to return to the home country of employment.
It is extremely important that both the company and the employee explicitly
understand the process of localization, which can differ depending on the situation. Also,
understanding the tax and benefit issues is critical. In this regard, there are several
possible situations.
Sometimes “localizing” means the removal of expatriate benefits but retention of
home-country base salary and long-term benefits. It can also mean the shift of base salary
and compensation payments from the home to the host country at host country levels with
expatriate perquisites continuing. Finally, true “localization” involves the employee’s
compensation, with short and long term benefits becoming localized and their
compensation package becoming identical to locally hired employees.
In many countries, to avoid liability it is critical that during the “localization”
process, the company provides the employee with exactly the same compensation and
benefits as a locally hired employee would get at his or her level. Some countries’
77
See V.H., below.
compensation systems place a great emphasis on non-monetary benefits and each
“localized” employee must be eligible for them.
Most important, a localization agreement must make an employee whole in the
localization process. Further, the company must ensure that the employee has the
necessary information in regard to living and working locally, such as medical and
retirement benefits, the cost of school and housing, and the new tax obligations that could
be imposed if and when the employee becomes local. Drafting specific employer
obligations is key if localization is anticipated. Most of the time, a localization policy
details the gradual phase-out of the expatriate package, where during the transition from
expatriate to local, the expatriate benefits are gradually eliminated. Because this process
involves many complex issues, such as transferring social security and pension plans to
the systems of the host country, counsel must ensure that each issue is addressed
properly.78
Finally, even though an employee may request “localization,” the company
should continue to assist the employee and his or her family with any home country
obligations that remain in effect until the phase-out is complete, such as filing U.S. taxes
and assisting the employee in filing for permanent residence in the host country. Further,
in regard to the transfer of social security and pension plans, the employee will continue
to need transitional assistance until the transfer of benefits is confirmed by the host
country benefit system and fully functional.
D.
Scope of Employment
The expatriate agreement should set forth the employee’s title and position with
the employer and a short description of job duties. Among other things, the “standard
duties” provision should be expanded to include the employee’s reporting structure and
authority. Such a description is particularly important for the expatriate because his or her
reporting line may involve personnel working in different cities or countries. Although
the parties may understand where the expatriate will be working as a practical, day-to-day
matter, the agreement should specify the place of employment for legal purposes.
Ultimately, the more detailed the job description, the more beneficial it can be to
the employee over the course of the assignment period. As noted below, a Company’s
failure to live up to its representations about the employee’s job can be grounds for a
“good reason” resignation or a defense to an employer’s attempt to terminate the
employment “for cause.”79
E.
Foreign Language Requirement
The expatriate agreement and any other agreements that the employer and the
employee enter into prior to or during the assignment should be translated into the official
language of the host country. In this regard, some countries require a translated version of
the agreement to be submitted to their labor departments. Further, many countries require
that agreements governing stock or option grants made to employees in the host country
78
See the discussion of pensions in the chapter on Extraterritorial Application of U.S. Laws at
VIII., in Volume IB, Part 2.
79
See V.G.2. and V.G.3., below.
(even if granted by the home country employer) are translated and filed with certain labor
and securities related organizations. Even if it is not required, translating these documents
into the host country’s language can be a factor in avoiding liability during the
employment relationship or when it ends.
F.
Compensation, Benefit Plans, Social Security, and Stock Plans
1.
Compensation/Taxation Issues
One significant matter that should be addressed in an expatriate agreement is the
manner in which the expatriate will be compensated—specifically, whether the employee
will be carried on the payroll of the home or host company, and in which currency the
employee will be paid. The employee must also take into consideration the potential tax
and pension consequences of working abroad, and should consult with an attorney or
accountant familiar with these issues.
U.S. citizens and permanent residents are subject to taxation on their worldwide
income without regard to the source, and an assignment abroad will not relieve them of
this obligation. For this reason, it becomes more convenient for a U.S. employee to be
paid on the U.S. payroll with the U.S.-entity’s compensation scale and system. At the
same time, the employee must remain mindful that the host country will have its own
system of tax laws that will require some payment or, at minimum, reporting of
compensation or benefits provided during the assignment.
Nonetheless, whether the employee is being paid by the host or the home country,
the agreement should provide for company paid tax advice and tax equalization and
should make an employee financially “whole” in going abroad. Tax equalization, as
discussed later in this chapter, ensures that an employee does not suffer an additional tax
liability by working abroad, and tax assistance fosters compliance with U.S. tax laws as
well as the tax laws of the host country.
For additional information, see the chapter on Compensating the Internationally
Mobile Executive in Volume IB, Part 6.
2.
Benefits
An expatriate agreement is also critical to establishing an employee’s entitlement
to benefits in the host or home country. U.S. compensation programs for employees are
generally at the discretion of the employer, where the employer can add or delete
benefits. In the U.S. there is no inherent right to future or continued benefits, but outside
the U.S., benefits can be considered a contractual obligation and often, only termination
“for cause” can void the obligation. While some expatriates and foreign workers can be
exempt from these rules either because they are considered temporary employees under
local laws or because they are too highly compensated to fall under local labor rules,
employers drafting benefit provisions must be mindful of these issues.
The various contractual obligations and exemptions that may apply in different
countries should be seriously considered when designing compensation programs for
employees working abroad. Accordingly, the agreements should be broadly drafted to
anticipate changed circumstances within the organization, or with the individual, but not
so broad as to risk ambiguity. An agreement should outline the term,80 specify its
temporary nature, if appropriate, and allow for flexibility. If not, in an adverse situation,
an employee may claim perpetual rights to certain benefits under local law.
Further, the employer must be mindful of the “acquired rights doctrine” that may
be applicable to employees on assignment in foreign countries when a transfer, merger,
or acquisition takes place. The doctrine states that once a benefit is offered, the
employees acquire a right to the continuation of the benefit.81 If the employee is going to
receive any increase (or decrease) in compensation, or if the employee will be transferred
to a different company due to a merger or acquisition during the assignment, the parties
should detail what will happen to the employee’s compensation at the end of the
expatriate period and upon return to his or her employment within the home country. If
the employer uses a pay scale, the parties should address the effect that any changes in
compensation related to the assignment will have on the employee’s position and
eligibility for future pay increases.
If an employee experiences a change in compensation or his or her transfer falls
within the EU’s Acquired Rights Directive, the employee’s eligibility or rights to benefits
or any other rights acquired through seniority or tenure are not subject to much
negotiation.82 If an employee is covered by the doctrine, the Directive requires that the
terms and conditions of employment be continued in the same manner upon transfer.
Similar rules apply in Latin American countries, where under the “acquired rights”
doctrine the new employer-owner is responsible for maintaining the same levels of
compensation and benefits provided by the previous employer-owner.83
Further, in addition to individual labor or employment contracts, in certain
countries employers must file documents describing working conditions and public
service regulations with the ministry of labor or a similar body. For example, in Japan, an
employer is required to file “work rules” with the local Labor Standards Inspection
Office.84 These include a description of wage compensation, vacation, health, disability,
retirement, and other rules and plans of the employer. When filed, “work rules” supersede
any individual labor contract and the employees may have rights to the benefits for
current and future services.85 Further, when employers implement changes to the “work
rules,” the modification cannot deprive the employees of existing rights or change the
80
See V.A., above.
See generally Carole A. Scott, Money Talks: The Influence of Economic Power on the
Employment Laws and Policies in the United States and France, 7 SAN DIEGO INT’L L.J. 341, 365 (2006);
Leslie Braginsky, How Changes in Employer Identity Affect Employment Continuity: A Comparison of the
United States and the United Kingdom, 16 COMP. LAB. L.J. 231 (1995).
82
The EU’s “acquired rights” (also known as the “transfer of undertakings”) directive is Council
Directive 77/187/EEC, 1997 O.J. (L 61) 26, amended by Council Directive 98/50/EC, 1998 O.L. (L 201)
88. This is a Council Directive on the approximation of the laws of the Member States relating to the
safeguarding of employees’ rights in the event of transfers of undertakings, businesses, or parts of
businesses. For additional information, see the discussions on redundancy and transfers of undertakings in
the chapters on the EU and EU Member and Applicant States at IV, in Volumes IA and IIA, Part 1.
83
See generally Donald C. Dowling, Jr., How to Ensure Employment Problems Don’t Torpedo
Global Mergers and Acquisitions, 13 DEPAUL BUS. L.J. 159, 165–66 (Fall 2000/Spring 2001).
84
Labor Standards Law Art. 89 (Japan).
85
See HIROSHI ODA, JAPANESE LAW 60 (1992); see generally, Yue-Chin Huang, Laodong Falun
[Labour Law Theory], 63 (1993).
81
working conditions to disadvantage the employees.86 Also, in European countries where
“works councils” play an important role in the relationship between the employee and
employer, such as Germany and France, benefit programs can be changed only with its
consent (or consultation).87 Increasingly, companies are addressing benefit issues in a
separate and free-standing document because of the vast rules governing benefits in
different countries. Outlining the terms of the benefits, the governing law and complying
with any filing obligations can help avoid potential problems for the employer and give
clarity to the employee.
For additional information, see the discussion on pensions and benefits in the
chapter on Extraterritorial Application of U.S. Law at VIII., in Volume IB, Part 2.
3.
Social Security
In order to preserve the right to social security benefits or continued participation
in a retirement plan, the agreement should indicate that the employee is on temporary
assignment abroad and that the employment relationship with the home-employer will
survive the relocation period.88 To continue contributing to social security under U.S.
laws, an employee must remain on the payroll of a U.S.-employer. In the U.S.,
contributions toward social security and some company-operated retirement funds are
made exclusively by the employer, who withholds pre-set amounts from the employee’s
paychecks.
Coverage under the U.S. Social Security system is based on (i) employment
within the U.S. without regard to nationality of the employee or the employer, or (ii)
employment outside the United States if both the employer and the employee are U.S.
persons, i.e., a U.S. corporation, a U.S. citizen, or a U.S. resident. Further, under a special
irrevocable election (“3121(l) agreement”), a U.S. employer can elect to include in the
Social Security system a foreign subsidiary that is at least 10 percent owned by a U.S.
entity.89 The arrangement treats the foreign subsidiary as a U.S. employer and includes in
the Social Security system all U.S. citizens and U.S. residents employed by the
subsidiary. Non-citizens who are nonresidents of U.S. are covered by Social Security
only for services actually performed inside the U.S.90
86
Labor Standards Law Art. 90 (Japan). In Japan, this “work rules” standard is subject to the
“reasonable modification” doctrine, which states that even if a modification is unfavorable to the
employees, it will have a binding effect on all workers if it is “reasonable.” The analysis includes a
balancing of factors including the disadvantage, the business necessity, the justification for changing a
particular term of “work rules,” whether the unfavorable modification was accompanied by any
compensatory measures, whether it conforms to market practices, and whether the majority of employees
agreed to the modification. See Shohoku Bus, 22 Minshu 3459 (Sup. Ct. Dec. 25, 1968); Michinoku Ginko,
54 Minshu 2075 (Sup. Ct. Sept. 7, 2000); Daishi Ginko, 51 Minshu 705 (Sup. Ct. Feb. 28, 1997)(Japan).
87
See generally Carole A. Scott, Money Talks: The Influence of Economic Power on the
Employment Laws and Policies in the United States and France, 7 SAN DIEGO INT’L L.J. 341, 363 and 395
(2006); Wolfgang Daubler, The Individual and the Collective: No Problem for German Labor Law?, 10
COMP. LAB. L. 505, 517 (1989).
88
See generally WENDI S. LAZAR, ABA INT’L LAB. & EMP. L. COMM. ANN. MEETING, ESSENTIAL
ELEMENTS OF NEGOTIATING EXPATRIATE AND SECONDMENT AGREEMENTS 3 (2007), available at
<http://www.abanet.org/labor/annualconference/2007/materials/data/papers/v2/038.pdf>.
89
See I.R.C. §3121(l) (1994).
90
Cf. id. at §3121(b).
The U.S. has entered into bilateral Social Security Agreements (“totalization”
agreements) with other nations that prevent duplicative coverage. The bilateral
relationship allows an individual who is temporarily in two systems at the same time to
get a certificate of coverage from one system and to use that certificate and the
totalization agreement to meet coverage requirements in other systems. In general, if an
assignment abroad does not exceed five years, the individual may elect to remain in the
home country’s social security system and will be exempt from paying tax into the local
system.
Individuals may participate in both home country and host country social security
systems. In those instances, the amounts paid from both the U.S. and the treaty partner’s
social security systems are adjusted, and they “totalize” each system’s benefits to better
approximate full benefits.91
Starting May 1, 2010, the social security coverage of expatriate employees
working in the EU will be impacted by the new EU social security rules.92 Specifically,
some of the rules which apply to short-term and long-term expatriate employees as well
as cross border workers will change. While the changes will not likely impact the
application of the totalization agreements with the U.S., the new rules may have an effect
on an expatriate employee’s coverage in the social security system of the specific EU
member state. For example, depending on the implementation of the rules, short-term
expatriate employees may have to keep contributing to their home country system after
they are assigned to work abroad for two years or less, and it may now be difficult for
long-term expatriate employees to stay insured within their home country for as long as
the five year limit. Accordingly, U.S. expatriate employees working in the EU should
seek advice from tax attorneys, accountants or estate planners familiar with the new rules
that may impact their social security situation.
For additional information, see the discussion of pensions and benefits in the
chapter on Extraterritorial Application of U.S. Law Section at VIII., in Volume IB, Part
2.
4.
Equity Grants
Today, employers commonly provide a portion of an employee’s compensation in
the form of equity or deferred compensation. Equity compensation may take the form of
non-qualified stock options, phantom stock, performance shares, stock appreciation
rights, and other kinds of compensation. In addition to making sure that any such grant of
compensation complies with applicable tax laws, the parties should consult with a lawyer
or accountant about any local rules concerning conditions for vesting, events triggering
loss of equity associated with such equity plans, and securities and compliance matters.
91
See Social Security Administration Online, U.S. International Social Security Agreements,
available at <http://www.ssa.gov/international/agreements_overview.html> (the following countries have
an existing totalization agreement with the United States: Australia, Austria, Belgium, Canada, Chile,
Czech Republic, Denmark, France, Finland, Germany, Greece, Ireland, Italy, Japan, Luxembourg,
Netherlands, Norway, Poland, Portugal, South Korea, Spain, Sweden, Switzerland, and the United
Kingdom).
92
Regulations (EC) 883/2004, 987/2009, and 988/2009.2.
In certain countries, stock options and other stock incentives are considered a
benefit, and are subject to similar rules as other benefit plans.93 Other countries require
reporting of stock option grants, and the drafting of a separate document in this regard
will enable the employer to report only the option grant and not all the other terms of an
agreement.94 However, these agreements in countries such as the UK are treated by the
courts as employment agreements and choice of law and jurisdictional rules of the EU
may apply to their enforcement by a UK court. It is important to note that because stock
options vest over time, and the period for vesting may be longer than the term of
employment, a foreign court could also imply a longer period of employment than what
was intended by either party to the agreement.
From an employee perspective, it makes sense to match the term of employment
to the vesting of equity grants to ensure that the employee has an opportunity to vest in
the equity. Further, every equity plan should contain specific information regarding the
termination and forfeiture of the equity, and a waiver and acknowledgment section in
which the employee attests to his or her knowledge and understanding of the terms.
Also, understanding data privacy rules, which differ from country to country, is
important in administering equity plans abroad. These rules govern how a company is
allowed to transfer the necessary data, including the appropriate taxes and Social Security
contributions related to the equity grant. If the transfer of data violates local law, the
company could be subject to liability.95
The way in which equity is taxed will also depend on the country of the
employee’s assignment, where he or she is working and paying taxes. In the U.S., stock
options, restricted stock grants, and other compensation plans are subject to securities and
tax law. The stock options must be registered or fall under an exemption. Without tax
exceptions or exclusions, stock options and restricted stock grants are taxed as wages.
Incentive stock options and options under an employee stock purchase plan that are
qualified under Section 421 of the Internal Revenue Code receive special tax treatment
and no gain or loss is recognized until the stock is sold other than possible alternative
93
See Susan P. Serota, Global Stock Option Plans: Registration, Disclosure and Tax Issues (Jan.
23, 2008) (on file with author) [hereinafter Serota].
94
Cf. id. at 69–71 (discussing the UK).
95
For example, in Japan, though an employer may monitor an employee’s actions for purposes of
maintaining workplace order, such action may be a violation of an employee’s privacy dependent upon the
propriety of the action in light of the harm done to the worker. Where there is no risk that the employee’s
actions would jeopardize workplace order, employer action, including following an employee or opening
an employee’s personal locker to take pictures of its contents, may be tortious. See Kansai Denryoku, 680
Rodo Hanrei 28 (Sup. Ct. Third Petty Bench, Sept. 5, 1995). Additionally, in Japan, it is wrongful for an
employer to monitor an employee’s email correspondence on the employer’s email system without
reasonable justification such as the investigation of perpetrator of slanderous emails. See INT’L LABOR &
EMP. LAWS Vol. 1, at 32-20 (Japan, Individual Employment, Privacy) (William J. Keller & Timothy J.
Darby eds., 2d ed. 2003). Likewise, in the UK, while there is no prohibition on employee monitoring, the
Data Protection Act requires employers to strike a balance between their needs and their employees’ right
to respect for their private life. For example, workers should be aware what information about them is
being kept and the purpose for which it is used. Covert information gathering is unlikely to be justified. See
INFO. COMM’R OFF., QUICK GUIDE TO THE EMPLOYMENT PRACTICES CODE: IDEAL FOR THE SMALL
BUSINESS (2005), available at
<http://www.ico.gov.uk/upload/documents/library/data_protection/practical_application/quick_guide_to_e
mployment_practices_code.pdf>.
minimum tax.96 Non-qualified stock options do not qualify for favorable treatment and
are considered taxable compensation included in an employee’s gross income and taxes
are paid when the option is exercised. Usually, restricted stock is not considered taxable
compensation, and taxes are not due until the restricted stock vests.97
In some foreign jurisdictions, options are taxed differently than in the U.S.; some
tax them at grant, others not at all, and some tax a portion of the gains. Because taxation
of options differs from country to country, employers must tailor the plans and
agreements according to the peculiarities of each relevant jurisdiction, taking into account
securities, tax, labor, and foreign exchange laws of the jurisdiction. Throughout the EU,
local laws provide a tax benefit to employees who receive grants of stock options,
provided that they meet local law requirements and hold the shares for a period of time
after exercise or purchase.98
Finally, in granting stock options to employees working overseas, employers must
be aware of recent developments in the Internal Revenue Code, specifically Section
409A.99 In this regard, incentive stock options, 423 stock purchase plans, and nonstatutory options with exercise prices not less than fair market value on date of grant are
exempt from Section 409A’s rules.100 However, if the exercise price of an option is less
than fair market value on the date of the grant, the grant violates Section 409A and will
be subject to the 20 percent additional tax and interest. Further, Section 409A provides
that employers whose assets are held in certain types of offshore trusts may be in
violation of the statute. However, the provision does not apply to the assets in a foreign
jurisdiction if most of the services connected to the receipt of nonqualified deferred
compensation from these assets are performed in this jurisdiction. Accordingly, in the
event the employee is working for a foreign employer, the employee’s attorney and
accountant must review the equity arrangements provided to the employee before any
grants are made abroad.101
For additional information, see the discussion of pensions and benefits in the
chapter on Extraterritorial Application of U.S. Law at VIII., in Volume IB, Part 2.
G.
Ending the Employment Relationship
1.
Notice
Regardless of whether the expatriate agreement is for an indefinite or fixed term,
it will typically include some provisions concerning automatic or employer-initiated
notice and termination. These provisions should be drafted with due regard for any
statutory requirements that, depending on the law governing the agreement, might
constrain an employer’s ability to terminate an employment relationship.
96
See I.R.C. §421 (2004).
See I.R.C. §83 (2004). See also Michael S. Knoll, The Section 83(b) Election for Restricted
Stock: A Joint Tax Perspective, 59 SMU L. REV. 721, 722–23 (2006).
98
These countries include Austria, Belgium, Denmark, France, Hungary, Ireland, Italy, Portugal,
Spain, and the UK. See Serota.
99
26 C.F.R. §1.409A-1 et seq. (2008).
100
Shares subject to the arrangement must be “service recipient stock” as defined in treasury
regulations issued under section 409A.
101
Serota.
97
With respect to any form of early termination, a contractual notice period is
critical for any employee on foreign assignment. At the most practical level, living
abroad and losing employment will create many complex and stressful issues that would
otherwise not exist for local employees. A notice period is even more essential than it is
for employment in the U.S., for the challenges of finding new employment from abroad,
as well as relocating one’s family, requires additional time and money. If the employee
has a family, the spouse may still be employed in the host country and the children could
be completing a semester at school. Often, these semesters do not coincide with the U.S.
school terms and the employee will need time to allow his or her spouse and children to
transition into a new work or school situation. Each of these factors is important
consideration for the employee.
Further, because most foreign countries require statutory notice periods in
termination situations (unless the employee is terminated “for cause” or gross misconduct
as discussed below); it is prudent for a U.S. employer to provide its expatriate employees
with at least the statutory notice minimums that apply in the jurisdiction where the work
will be performed.
2.
Termination
Termination clauses most commonly address situations involving the disability or
death of the employee, retirement, and “for cause” termination. Generally, U.S.
employment agreements provide that, in the event the employee becomes disabled,
retires, or dies, the employer will pay to the employee or the employee’s estate his or her
accrued and unpaid salary through the date of termination. The agreement may also call
for payment of any unused vacation time and a pro rata portion of an unpaid bonus. With
respect to retirement, the agreement may specify additional benefits to which the
employee may be entitled.
Notably, most termination provisions can be crafted in a manner that
simultaneously maximizes the expatriate employee’s protections and minimizes
subsequent disputes with the employer in cases of employer-initiated terminations. For
example, the type of disability that will trigger termination should be narrowly defined
and also remain compliant with any relevant local laws concerning disability
discrimination and administration of health benefits. It is important to research what the
local disability and retirement laws are because they may conflict with the agreement and
be unenforceable if there are statutory rights related to these protections that cannot be
waived in the local jurisdiction.
Virtually all jurisdictions also recognize the employer’s authority to terminate the
employment relationship “for cause.” The circumstances that constitute termination “for
cause” may vary depending on the law governing the agreement. While U.S. law for the
most part does not define cause-based terminations by statute, the courts have held
employers to a high threshold of wrongdoing or gross failure in performance before an
employee can be terminated “for cause.”102 Companies have tried to lower this threshold
102
Sanders v. Parker Drilling Co., 911 F.2d 191, 197 (9th Cir. 1990) (Reinhardt, J., concurring) (“It
is elementary that ‘just cause’ for discharge means that the employer must show that the employee
committed an act which warrants his discharge. The employer must have a sound basis—a reasonable
ground—for his decision to terminate the employee. But the employer does not have a reasonable ground if
by agreement to define “cause” as broadly as a breach of company policies, dishonesty,
or failure to perform duties. By contrast, in most countries in the EU, “cause” is defined
by local statute and cannot be superseded by contract.103 In fact, in many countries if the
employer does not follow the statutory requirements of the “cause” dismissal (which
usually involves notice, hearing, and/or the appeal process available for employees), the
employee can in turn file a wrongful and/or an unfair dismissal claim against the
employer.104 These claims brought in some European courts may result in damages that
far exceed severance payments.105 Therefore, employers must be aware of two possible
sources of liability: the wrongful dismissal claim (breach of contract action in many
European countries), which stems from an employer’s breach of the employment contract
and the unfair dismissal claim, which is a claim for a breach of any employment
statutes.106
In the UK, the statute governing termination of employment107 states that
termination of employment without notice or “summary termination” is only permitted in
instances of gross misconduct.108 Termination of a contract of employment in accordance
with the notice period will avoid a claim for damages at common law for wrongful
dismissal, but may still result in an unfair dismissal claim.109 Similarly, the Labor Code in
the beliefs or assumptions on which he bases his decision are incorrect. If the employer cannot prove that
the employee engaged in some misconduct which constitutes cause for discharge, he does not have just
cause for firing the employee.”); Rod Fliegel, Returning to First Principles, ‘Willful Disobedience’ as
Good Cause for Disciplinary Action Against Recalcitrant Employees Under California Labor Code Section
2856, 26 SW. U. L. REV. 259, 267 (1997) (“The widely accepted definition of the good cause standard is a
fair and honest reason for the termination regulated by good faith.”).
103
See generally Carol Daugherty Rasnic, Die Kundigung, Licenciement, Recesso Dal Contrato,
‘Firing’, or ‘Sacking’: Comparing European and American Laws on Management Prerogatives and
Discretion in Termination Decisions, 18 IND. INT’L & COMP. L. REV. 19 (2008) (describing Austrian,
Croatian, Czech, French, German, Greek, Hungarian, Irish, Slovenian, Slovakian, and Turkish employment
termination laws).
104
Cf. id.
105
For example, in the UK if a successful claim for unfair dismissal is brought then
the employment tribunal can award a basic award of up to £4,400 (based on age, length of service, and one
week’s pay) and a compensatory award (see Employment Rights Act of 1996 (ERA 1996), §118 (Eng.)).
The compensatory award is granted when the tribunal considers it “just and equitable” in the
circumstances (see ERA 1996 at §123 (Eng.)) and the maximum capped award is £63,000. This becomes
uncapped if the unfair dismissal was due to discrimination based on sex, race, religion, or belief and sexual
orientation. The maximum award for unfair dismissal awarded by a tribunal in 2006–2007 was £250,470.
See EMP. TRIBUNAL AND EAT STATS. (GB) (Apr. 1, 2006, through Mar. 31, 2007), available at
<http://www.employmenttribunals.gov.uk/publications/documents/annual_reports/ETSAS06-07.pdf>. The
remedy for wrongful dismissal is a contractual claim for breach of contract and the maximum amount that a
tribunal can award for such a claim is £25,000 but there is no limit in a court action.
106
See Mark Freedland, Developing the European Comparative Law of Personal Work Contracts,
28 COMP. LAB. L. & POL’Y 487, 495 (2007).
107
See ERA 1996 at §86 (Eng.) (providing that an employee who has been continuously employed
for one month or more is entitled to one week’s notice and that after two years of employment employee
becomes entitled to one week’s notice for each completed year of service up to a maximum of 12 weeks).
108
Examples of such instances of gross misconduct include stealing from the employer, fighting,
refusal to carry out a legitimate instruction from the employer, breach of confidentiality, and unauthorized
absence. Even when an employee is dismissed without notice due to gross misconduct, that employee can
succeed in an unfair dismissal claim in the UK. See Employment Act of 2002, c. 22, sched. 3 (Eng.).
109
If the employer can justify the reason for dismissing the employee, then termination with or
without due notice is found to have been fair and reasonable. The test determining fairness of a dismissal
France states that all dismissals must be for “legitimate reasons,” either for cause or from
a reduction in force legitimated by economic facts.110 In Japan, a minimum procedural
requirement for dismissal is 30 days of notice or payment in lieu of such notice.
However, an employer can apply for recognition of “for cause” termination to the Labor
Standards Inspection Office. In such instances notice is not required.111
Termination “for cause” often results in consequences far more severe for the
expatriate, including loss of benefits and their vesting, as well as loss of relocation and
repatriation benefits. For these reasons, termination clauses—and the provisions
concerning “for cause” termination in particular—should be closely examined and
drafted as narrowly as possible, limiting “cause” to willful, material, and intentional acts
of malfeasance that could cause significant damage to the company, with due regard for
the laws of the governing jurisdiction. Finally, in addition to providing for adequate
notice, an agreement should provide for a cure. With this protection, an employer would
be required to give the employee notification, in writing, of the alleged reasons for
termination and a reasonable period of time to remedy the situation.
3.
Good Reason Resignation
Another important provision to include in these agreements is resignation for
“good reason,” which should enumerate the grounds for which the employee may
terminate the agreement and trigger the notice and severance benefits of the employer.
This clause can provide a counterweight to an employer’s “for cause” provision. Often,
such “good reason” clauses permit the employee to end the employment relationship if
the employer materially breaches the agreement, fails to provide employee with resources
for carrying out the position, substantially reduces employee’s duties, responsibilities,
reporting line, or compensation, or if there is a change in corporate control or structure.
Although often reserved for executive agreements in the U.S. and not mid-level
employees, it may be particularly beneficial and prudent for the employer to include a
“good reason” clause in an expatriate agreement rather than be sued by the employee in
the host country under a foreign jurisdiction’s wrongful or unfair dismissal laws. In this
regard, a number of European employment statutes recognize certain circumstances
under which the employee’s breach of an employment contract is actually considered a
dismissal by the employer and the employee will sue for notice, severance, and damages.
The UK recognizes a similar legal theory in its employment agreements and it is
referred to as “constructive dismissal,” which can be claimed as unfair dismissal under
states that whether a dismissal is fair or unfair “depends on whether the circumstances (including the size
and administrative sources of the employer’s undertaking) the employer acted reasonably or unreasonably
in treating it as a sufficient reason for dismissing the employee, and . . . shall be determined in connection
with equity and the substantial merits of the case.” ERA 1996 at §98 (4).
110
Even if the termination is for cause (“dismissal for personal reasons”), an employee has to be
called in writing to a conciliatory meeting. Only after this process, notice can be given and employee
terminated for “gross negligence” or “willful misconduct,” if that is the finding, will not be denied notice.
The average notice period ranges from one to three months. If the employee is terminated without the
required legitimate reason, the employee may be entitled to compensation and damages for abusive breach
of the employment contract. In these cases, courts tend to grant a minimum of six months salary if the
employee had at least two years of service. See Code du travail [C. trav.], arts. L.122-14 (Fr.).
111
Labor Standards Law Art. 20 (Japan).
UK law.112 The UK standard for constructive dismissal is recognized when an employer
commits a breach that goes to the heart of an employment agreement or if employment
suddenly becomes intolerable and the employee can no longer remain employed. 113
France also recognizes the theory of “self-dismissal” in instances where the employee is
forced to leave because the office atmosphere or his manager’s treatment is intolerable, or
in instances where the employee is forced to resign.114
From the employee perspective being able to trigger notice and severance benefits
(including repatriation and relocation115) by resigning for “good reason” is critical,
particularly if the job has been misrepresented by the Company or the position has been
subsequently diminished abroad. Moreover, because it is not a “voluntary” resignation
the Company will find it difficult to enforce automatic payback provisions for moving
and relocating the employee, which are often obligations of the employee if he quits
during the assignment. In short, “good reason” can be a necessary and cost saving
provision for both parties.
4.
Resolving Disputes
Finally, any termination provision should set forth procedures that must be
followed to effectively end the agreement and resolve disputes. Despite best efforts in the
drafting process to address and avoid potential disagreements, such conflicts do and will
arise surrounding an early termination or resignation. The process for resolving disputes
(as discussed above) must be clear but also relevant to dispute resolution mechanisms in
the jurisdiction where the parties will be heard.116
5.
Repatriation and Severance Packages
To avoid disputes at the time of termination, mutual or otherwise, or at the end of
a fixed term, every expatriate agreement should include a provision that outlines in full
the employer’s post-employment obligations. Obviously, these obligations may vary
depending on the reason for ending the relationship, as discussed earlier. For some
employees this may be limited to severance, but for others it may entail a total “make
whole” package that will include many of the perquisites that the employee was entitled
to at the start of employment abroad, including full repatriation and relocation benefits.
While there is no statutory right in the U.S. to severance, if the expatriate is
terminated prior to the end of a fixed term the employer should offer no less than the
minimum mandatory severance often provided by statute in the host country or risk being
sued later on by the employee for that minimum and more. Under the laws of many host
countries, unless terminated “for cause,” the employee will be entitled to severance based
on a statutory formula. However, if an employer is trying to attract and retain employees
who are willing to work abroad and move abroad with their families, they will usually
112
See, e.g., The Chancellor, Master & Scholars of the Univ. of Oxford v. Humphreys & the
Associated Examining Bd., 1 C.M.L.R. 647 (Sup. Ct. Judicature Dec. 10, 1999) (UK).
113
Cf. id. at 664 (noting that an adverse change in the employee’s terms and conditions of
employment, and accordingly, the seller was liable for the employee’s constructive discharge).
114
Cass. Soc. Jul. 2, 2002; Cass. Soc. July 10, 2002.
115
See V.G.5. and VI.B., below.
116
See III. and IV., above.
agree to far more equitable repatriation and severance packages. If this is not offered in
the agreement, or in a company’s expatriate policy, counsel for the employee should
vigorously negotiate for this at the beginning, not the end, of the employment
relationship.
In addition to drafting an equitable severance package, full repatriation costs and
expenses associated with the employee’s return to the U.S. (and that of his or her family)
should be part of any post-employment obligations and drafted accordingly. Although
severance, repatriation costs, and expenses are usually contingent on an employee not
being terminated “for cause,” they should not be contingent on early termination but
offered even if the employee has worked through the fixed term or secondment period.117
In addition to severance payments, repatriation costs, and expenses, there may be
a critical need for the employee to receive continued tax services, equalization, and
indemnification and defense, which often will be necessary for several years postemployment. These obligations must be clearly stated and anticipated by the employee,
even though a claim may not arise until years after the employment relationship ends.
6.
Bringing the Employee Back to the U.S.
In order to avoid liability in a foreign jurisdiction, employers frequently bring
their expatriates back to the U.S. and terminate them in the home country. Certainly, this
will reduce the impetus on the part of the employee to file a claim in a country he or she
no longer resides in. However, in most foreign jurisdictions this will not vitiate or waive
the employee’s right to file a claim where he or she had been performing work or where
he or she previously resided. In fact, sometimes, if the foreign court believes the
repatriation was done in order to avoid the imposition of foreign law in a foreign
jurisdiction it may be more inclined to accept jurisdiction over the claim.
H.
Post-Employment Obligations and Restrictions: Confidential Information,
Trade Secrets, and other Restrictive Covenants
Depending on which jurisdictions’ laws govern and what the expatriate agreement
states, an employee will have varying responsibilities to his or her former employer after
the employment relationship ends. In the U.S. the enforcement of post-employment
restrictions is a matter of state law and varies from state to state. In some countries, duties
to the former employer may arise as a matter of common law, and apply regardless of
whether it was specifically provided for in an employment agreement. In others, such
obligations must be agreed upon in writing to be enforceable.
Many foreign jurisdictions require that other conditions, such as financial
considerations, be met before an employer can limit an employee’s ability to engage in a
competitive business or otherwise impinge on the employee’s future employment by
imposing post-employment restrictive covenants. When drafting these restrictions in an
expatriate agreement, stock option grant, or other benefit plan, it is important for both
parties to understand what elements must be present in these provisions to guarantee
enforcement outside the U.S.
117
See VI.B.9., below.
1.
Post-Employment Obligations: Confidential Information/Trade Secrets
One common post-employment obligation concerns the prohibition from using or
disclosing the former employer’s confidential information and trade secrets. In the U.S.,
an employee’s duty not to disclose or use confidential information arises under common
law and thus need not be expressly contracted to be enforceable.118 In contrast, under the
laws of many foreign jurisdictions, no comparable post-employment duty exists unless
clearly set forth in a contract. Even when express, they are usually unenforceable unless
they are no more than reasonably necessary to protect the former employer’s legitimate
business interest in its confidentiality or trade secrets.119 Although the specific criteria
vary from one jurisdiction to the next, as a general matter, to be lawful under the laws of
most foreign jurisdictions, confidential information provisions must be drafted narrowly
to protect the company’s interests without restricting the flow of ideas or the knowledge
of an employee after employment.120
Some foreign courts follow the rule that each employment contract carries with it
an implied obligation of confidentiality. This duty encompasses the employer’s unique
business, technical, and trade secrets. Usually, this restriction survives the end of the
employment relationship. However, the duty of loyalty ends when employment does
unless there is a contractual relationship that states differently.
In the UK, for example, the duty of good faith is implied in all contracts.
Therefore, the employee is prohibited from disseminating or using for his or her own
benefit the company’s confidential information or trade secrets.121 However, the duty of
loyalty and basic confidentiality ends with the termination of the employment
relationship, unless it is continued by contract.122 Notwithstanding that rule, an obligation
not to expose an employer’s trade secrets and highly confidential information does
continue to apply after employment.123
In France, all employees, and in particular senior executives, are subject to an
implied obligation of confidentiality during the term of employment and after the
employment ends. Breach of this obligation may justify summary termination without
118
See, e.g., Lamorte Burns & Co., Inc. v. Walters, 770 A.2d 1158, 1166 (N.J. 2001) (“Even in the
absence of an [employment] agreement, however, the [common] law protects confidential and proprietary
information.”).
119
For example, Japanese courts typically refuse to impose a duty of non-competition after
termination because, even where there is general agreement among the parties concerning non-competition,
the contract as drafted does not clearly describe the extent and limits of the employee’s post-employment
duty. Takashi Araki, Legal Issues of Employee Loyalty in Japan, 20 COMP. LAB. L. & POL’Y J. 267, 275
(1999) (citing The Chubu Kikai Seisakujo Case, 522 Hanrei Jiho 83 (Kanazawa Dist. Ct., Mar. 27, 1968)).
120
Finland, for example, allows employees to use “know-how,” defined as “memory-based
information,” gained from a former employer in future employment, providing that trade secrets
(information in documented or physical form) are not disclosed. Erika C. Collins, Labor and Employment
Developments From Around the World, 38 INT’L LAW. 149, 160 (2003).
121
Bob Hepple, The Duty of Loyalty: Employee Loyalty in English Law, 20 COMP. LAB. L. &
POL’Y J. 205, 221–22 (1999) (“The employee’s implied contractual duty extends beyond the termination of
the employment relationship only in respect of trade secrets and not mere confidential information; to do
so, the confidential information must be protected by an express covenant.”).
122
Greg T. Lembrich, Note, Garden Leave: A Possible Solution to the Uncertain Enforceability of
Restrictive Employment Contracts, 102 COLUM. L. REV. 2291, 2307 (2002).
123
Hepple, at 221–22.
any notice or compensation being due. The disclosure of confidential information for
payment constitutes a criminal offense under the French Criminal Code.124 However,
absent a contractual post-employment obligation, the employee is free to use the
professional knowledge and skills acquired in his previous employment.125
In Germany, contracts of employment contain an implied obligation on the
employee to respect the employer’s business, technical, and trade secrets for the term of
employment.126 The obligation continues after the effective date of termination only if it
is expressly provided for in the employment contract. The restriction is limited to the
extent to which the employer has an interest in continued non-disclosure of the
information and the employee’s future career is not adversely impaired.127 If the
continued confidentiality obligation restricts the employee in the use of knowledge he or
she has gained through his or her personal efforts, the provision may be construed as
overly restrictive and unenforceable under the German Commercial Code.128
Unlike many Western countries, in China the employee does not have a specific
duty of loyalty to the employer.129 Although business secrets are protected by the Unfair
Competition Law, technical and business information is not protected unless employers
take specific steps to keep the information confidential. However, execution of a
confidentiality agreement is considered acceptable. Further, employees who breach a
confidentiality agreement must pay the employer for the economic losses incurred by the
breach.130
Japan is similar to the U.S. in that without work rules or an express provision, a
duty of loyalty is considered an ancillary duty of the employee.131 An employee has an
obligation to keep confidential any business secrets obtained during the term of
employment and not to compete with the employer’s business during the term. Generally,
the duty of loyalty does not continue once the employment relationship ends unless there
is a specific contractual relationship detailing the continuation of the duty. However,
under the Unfair Competition Prevention Law, “trade secrets” (production methods, sales
methods, and any other technological or operational information useful to the enterprise
that is not publicly known) are protected.132
124
See C. PEN. ART. 408 (use of employer’s proprietary documentation, such as client list, for
unauthorized purposes can constitute criminal breach of confidence); C. TRAV. ART. L 152-7 (disclosure of
manufacturing secrets is criminal offense); C. PEN. ART. 432-11, 441-8 (disclosure of confidential
information for payment constitutes criminal corruption). Such confidential information includes client or
supplier lists and technical or unique advertising information of the employer, or any original techniques of
the employer.
125
Cass. Soc. Jan. 27, 1972; Cass. Com. June 14, 1983.
126
See the chapter on Germany at I.F.2., in Volume IA, Part 1 .
127
Id.
128
Id.
129
George Ribeiro, Drafting Effective Restrictive Covenants and Confidentiality Agreements in the
People’s Republic of China, EMP. & INDUS. REL. LAW COMMITTEE NEWSL., at 23 (Oct. 2007) [hereinafter
Ribeiro].
130
Id.
131
Takashi Araki, Legal Issues of Employee Loyalty in Japan, 20 COMP. LAB. L. & POL’Y J. 267,
271 (1999).
132
Where no express provision exists, some courts have found a duty of non-competition where
trade secrets obtained in the former employer’s employ were used by the former employee in violation of
the general duty of good faith and fair dealing. See, e.g., Chesukomu Hisho Center, 651 Rodo Hanrei 161
(Tokyo Dist. Ct. Jan. 28, 1993).
2.
Post-Employment Restrictions: Non-Competition, Non-Solicitation
Another common post-employment restriction found in many expatriate
agreements and post-employment agreements is the proscription against engaging in
competitive business activities and solicitation of clients and customers. Drafting
enforceable provisions with international scope will require research on U.S. enforcement
of international restrictive covenants as well as foreign enforcement of U.S. covenants.
Also, knowledge of the local law in regard to non-competition agreements (including
choice of law and jurisdiction) where the employee is habitually working must be
considered as well.
a.
U.S. Enforcement of Non-Competition Agreements
In the U.S., non-competition provisions whose geographic terms are international
in scope are enforced along the same lines as those which only impose domestic limits.
Under U.S. law, in most state jurisdictions, such a restraint on an individual’s ability to
find employment is disfavored and thus will only be enforced if reasonable where it
protects the legitimate business interest of an employer, but imposes no undue burden on
the employee.133
In evaluating a restrictive covenant’s reasonableness, many U.S. jurisdictions will
consider factors such as the employer’s interest in protecting trade secrets and
confidential information.134 In the U.S. and in many EU countries as well, the factors that
are considered are often seniority or position held by the employee, the uniqueness and
skill of the position, the range of activities considered to be “competitive,” and the nature
of the employer’s business.135 Additionally, although it is widely recognized in the U.S.
that geographic and temporal restrictions of a non-competition clause should not be
greater than necessary to protect the employer’s interest, U.S. courts have enforced non-
133
E.g., Campbell Soup Co. v. Desatnick, 58 F. Supp. 2d 477, 488 (D.N.J. 1999) (internal citations
and quotations omitted).
134
See Fabrication & Machining, Inc. v. Beiler, No. 05-2276, 2006 U.S. Dist. LEXIS 52, at *16
(E.D. Pa. Jan. 3, 2006).
135
Silipos, Inc. v. Bickel, No. 1:06-cv-02205, 2006 U.S. Dist. LEXIS 54946, at *20 (S.D.N.Y.
Aug. 8, 2006) (refusing to enforce non-compete agreement that prevented employee from working for
anyone “directly or indirectly” engaged in the employer’s business, because it would have effected a total
bar to the employee’s participation in the industry); Estee Lauder Cos. v. Batra, 430 F. Supp. 2d 158, 180
(S.D.N.Y. 2006) (“An additional factor courts will look to in evaluating the reasonableness of a restrictive
covenant is whether an employee receives continued consideration for his loyalty and good will.”); Lumex,
Inc. v. Highsmith, 919 F. Supp. 624, 629–30, 634 (E.D.N.Y. 1996) (health and fitness industry was “copy
cat” industry where a competitor’s ability to introduce products “first to the market” would be severely
harmed by disclosure of confidential information and thus weighed in favor of enforcement of restrictive
covenant); Webcraft Techs., Inc. v. McCaw, 674 F. Supp. 1039, 1045–46 (S.D.N.Y. 1987) (court noted that
where company engaged in unusual, specialized technology business, enforcement of a “broad worldwide
covenant not to compete or solicit customers” for a period of two years was reasonable, but did not rule on
its enforceability); Business Intelligence Servs., Inc. v. Hudson, 580 F. Supp. 1068, 1073 (S.D.N.Y. 1984)
(“The unlimited geographic scope of the restrictive covenant is more troublesome, but [plaintiff employer’s
software development] business is worldwide.”).
competition agreements
internationally.136
b.
worldwide
where
the
employer
conducts
business
Enforcement Outside the U.S.
Most EU courts strongly disfavor non-competition agreements and will set aside
U.S. choice of law and jurisdictional contract provisions in finding them
unenforceable.137 Also, they will not uphold U.S. decisions enforcing non-competition
agreements abroad unless the agreement would otherwise be enforceable in the foreign
court where the judgment is to be enforced. Usually, no recognition of a judgment is
possible if the court enforcing it is not competent under the law of the foreign jurisdiction
in which the judgment has to be recognized or if the employee was unable to defend
himself or herself adequately.138
For example, in Germany any agreement not to compete will end when
employment does unless there is a new written agreement with adequate consideration.139
German employees are always subject to a statutory non-competition obligation during
the term of agreement if they are “commercial employees” under the 1980 German
Commercial Code.140 This restriction is extremely narrow and prohibits an employee
from actively engaging in competitive business during employment and intentionally
persuading other employees to join in a competitive business.141 In France, a noncompete cannot restrict the use of know-how or knowledge learned on the job or acquired
from his or her previous employer. Any restriction in a contract of employment must be
limited in time, space, or scope, and is always subject to the overall condition that it must
allow the employee to earn his or her living in an occupation consistent with his or her
expectations.142
Further, this requirement of compensation in exchange for these restrictions is
prevalent in many countries, including China and Japan, and the compensation can be as
136
Guang Dong Light Headgear Factory Co. v. ACI Int’l, Inc., No. 03-4165, 2008 U.S. Dist.
LEXIS 526, at *62–63 (D. Kan. Jan. 2, 2008) (because employer had an international business and thus “a
local restriction on the covenant would not have provided [it] protection,” worldwide covenant not to
compete was enforced); Beiler, 2006 U.S. Dist. LEXIS 52, at *18, 25 n.11; Weseley Software Dev. Corp.
v. Burdette, 977 F. Supp. 137, 144–45, n.7 (D. Conn. 1997); but see Deutsche Post Global Mail, Ltd. v.
Conrad, 116 F. App’x 435, 438–39 (4th Cir. 2004) (no enforcement of worldwide non-compete agreement,
even where employer and former employees both had international business interests, because terms were
so broad that employees were prevented from using a competitor’s service, even for personal use); Tandy
Brands, Inc. v. Harper, 760 F.2d 648, 653 (5th Cir. 1985).
137
Samengo-Turner v. J&H Marsh & Mclennan (Servs.) Ltd., Case No. A3/2007/1257, [2007]
EWCA Civ. 723, 2007 WL 1942883 (July 12, 2007) at p. 7, ¶44 (declining to apply an express New York
choice-of-law clause in a restrictive covenant and ruling that case could only go forward in London). See
also Duarte v. Black & Decker Corp., Case No. HQ07X02401, [2007] EWHC 2720, 2007 WL 4190497
(Nov. 23 2007) (refusing to enforce Maryland choice-of-law provision).
138
Gerlind Wisskirchen, Jurisdiction and Choice of Law in Employment: Germany, 6 (Jan. 2007)
(on file with author).
139
Handelsgesetzbuch [HGB], §§74 et seq. (F.R.G.).
140
Id.
141
Id. at §§60–61.
142
Cass. Soc. Mar. 31, 1981; Oct. 12, 1983; June 27, 1984; Oct. 11, 1984; Jan. 10, 1985; July 9,
1985, etc.
high as two-thirds of total compensation depending on the province.143 In Japan, an
express restrictive covenant is required in order for the employer to enforce an
employee’s obligation not to compete post-termination, and payment may only be
required when the restrictive covenant did not exist during the term of employment but
was created upon termination.144
Notably, unlike in the U.S., where courts will “blue pencil” or rewrite the clause
to make it reasonable,145 most foreign courts will not revise an unreasonable restrictive
covenant and will instead refuse to enforce it in any respect.146
c. Choice of Law and Jurisdiction Revisited: Duarte and Samengo-Turner
Two recent UK decisions dealt with issues of choice of law and jurisdiction as
they apply to enforcement of restrictive covenants. In both cases, English courts refused
to recognize the application of a foreign law or jurisdiction expressly set out in
compensation agreements containing restrictive covenants.
The first, Duarte v. Black and Decker Corp.,147 is an important decision
concerning UK courts’ willingness to enforce restrictive covenants governed by foreign
law. In Duarte, the employee lived and worked in England. When he resigned to go work
for a competitor, he sought a declaration that the restrictive covenants set out in his longterm incentive plan (LTIP) were unenforceable. The employer sought an injunction to
enforce the restrictive covenants. The LTIP was governed by Maryland law with
jurisdiction in the UK courts.
The UK court applied the rules of the Rome Convention to determine what law
should govern.148 As discussed in the main volume in III.B., the Convention provides that
employers and employees are free to choose the law applicable to an agreement.149
However, in a contract of employment the parties’ choice of law shall not deprive the
employee of the protection of mandatory rules of law in the country in which the
employee “habitually” performs the work.150 In addition, under Article 16 of the
Convention, the foreign law cannot be applied if it would be “manifestly incompatible
with the public policy of the forum.”151
Deciding whether English instead of Maryland law should apply, the court in
Duarte found that the LTIP agreement was an employment contract as it was part of an
overall package of employment terms offered to the employee. The court emphasized that
the application of the Convention rules should not be avoided because some of the terms
143
Ribeiro, at 22.
See the chapter on Japan at I.H.3., in Volume IA, Part 4.
145
See, e.g., Deutsche Post Global Mail, 116 F. App’x at 439 (“If a restrictive covenant is
unnecessarily broad, a court may blue pencil or excise language to reduce the covenant’s reach to
reasonable limits.”).
146
See Greg T. Lembrich, Note, Garden Leave: A Possible Solution to the Uncertain
Enforceability of Restrictive Employment Contracts, 102 COLUM. L. REV. at 2307...
147
Case No. HQ07X02401, [2007] EWHC 2720, 2007 WL 4190497 (Nov. 23, 2007).
148
Rome Convention on the Law Applicable to Contractual Obligations, 80/934/EEC (June 19,
1980).
149
Id. art. 6(1).
150
Id. art. 6(2).
151
Id. art 16.
144
and conditions of employment were agreed to in a document separate from the actual
employment contract.152
However, the court held that English law on restrictive covenants in employment
contracts does not consist of “mandatory rules” which afford protection to an employee
for the purpose of Article 6(1), and instead it is part of the general law on restraint of
trade. However, turning to Article 16 of the Convention, the court found that the clearly
established public policy underlying the law of restraint of trade is directly connected if
the covenants are enforced by an English court applying Maryland law when they would
be unenforceable under English law. (In Duarte the restrictive covenants were found to
be unenforceable both under Maryland and English law.) Therefore, the court held that
English law should apply because of public policy concerns.153
The second decision, Samengo-Turner v. J & H Marsh & McLennan (Services)
154
Ltd., was a controversial decision addressing the choice of jurisdiction in an agreement
containing a restrictive covenant. In Samengo-Turner, the employees were working in
England for J & H Marsh & McLennan (Services) Ltd., an English company and part of
the Marsh & McLennan Companies. As senior executives, the English employees were
granted stock under the Marsh & McLennan stock award plans. The stock award plans
included a restrictive covenant with repayment and cooperation provisions and New York
courts had exclusive jurisdiction over any dispute under the plan.155 After the employees
resigned, the Marsh & McLennan Companies successfully brought proceedings to
enforce the repayment and cooperation provisions in the New York courts. The
employees sought an anti-suit injunction in the UK courts to restrain proceedings brought
in New York. The UK Court of Appeal granted the injunction.
Article 20 of the Brussels I Regulation provides that an employer may sue EUdomiciled employees in relation to “matters relating to individual contracts of
employment” only in the courts of the country in which those employees are domiciled.
The Court of Appeal ruled that the stock plan was so closely related to the individuals’
employment that it was part of the terms of their contracts of employment. Therefore, the
claims related to individual contracts of employment and should be brought in England,
where the employees were domiciled. The court concluded that the only way to give
effect to the employees’ statutory rights was to grant the anti-suit injunction and restrain
the New York proceedings. In conclusion, the court wrote that “[a] multinational business
must expect to be subject to the employment laws applicable to those they employ in
different jurisdictions.”156
Both Duarte and Samengo-Turner have been widely criticized for their practical
applications as well as the courts’ interpretation of EU regulations. However, until these
decisions are overturned or confirmed, international employers sending their employees
to work abroad or making long-term compensation grants to employees in a foreign
jurisdiction should be concerned with whether the choice of law and jurisdiction
provisions in their agreements can meet the standards of the EU regulations Further,
152
Duarte, Case No. HQ07X02401, [2007] EWHC 2720, 2007 WL 4190497 (Nov. 23 2007).
Id.
154
Case No. A3/2007/1257, [2007] EWCA Civ. 723, 2007 WL 1942883 (July 12, 2007); ICR 18
153
[2008].
155
Id.
Id. at 43.
156
employers must be prepared to defend the enforcement of their restrictive covenants
under different laws or in different jurisdictions than was originally intended by the
employment contract or compensation plan.
3.
Practice Points in Drafting Restrictions
Knowing that some foreign courts may refuse to enforce a U.S. judgment on
restrictive covenants should be reason enough to draft thoughtful provisions with due
regard for the governing law in which the employee is domiciled. These covenants should
be reasonably related to the expatriate’s role in the company, his or her knowledge of
confidential information and trade secrets and certainly should exist only if there is a
protectable interest that the employer has from unfair competition. In addition, drafting
narrow provisions that encompass shorter restrictive time periods and refrain from
demanding worldwide geographic scope may give the employer enforcement rights
abroad.
As discussed above, most foreign courts will enforce these provisions if they are
expressly written into an agreement and the position of the employee is one where they
are privy to highly confidential information and trade secrets. In order to bind these
employees not to compete, however, the employer will usually need to commit a
percentage of total compensation as consideration for this restriction. In addition, it is
important that the restriction is one which will allow the employee to still perform
productive work in the same or similar skill set that he or she possesses.
Finally, it is important to consider the local law in a particular jurisdiction where
the employee will be working or residing. In fact, it may be prudent to use a different
choice of law or jurisdictional provision in regard to post-employment restrictions than
what is being applied to the rest of the employee’s agreement. Other laws, including the
right to privacy must also be considered in particular jurisdictions where employees have
a right to and an expectation privacy. Defining confidential information too broadly and
restricting know-how and acquired skill and knowledge learned on the job can render a
restriction unenforceable. In the end, this may mean that drafting agreements with
minimal demands on the employee may, in the end, give the employer maximum
protection in protecting its confidential information and trade secrets abroad.
I.
Conclusion
Negotiating and drafting the key terms of an expatriate agreement has become a
challenging task for counsel representing either the employer or the employee. Ensuring
that these agreements are flexible enough to meet the changing laws of foreign
jurisdictions but specific enough to have U.S. law enforced outside the U.S. is a difficult
but worthy undertaking.
As companies become increasingly multinational and transfer U.S. employees to
different countries abroad, they have greater and more complex responsibilities to those
employees and to their families, as well as an increasing risk of liability. Having a
detailed and specific U.S. agreement will not necessarily prevent an employee from
having a foreign jurisdiction move to enforce the statutory rights of U.S. expatriates
abroad, nor will it give a company the right to enforce certain post-employment
obligations abroad if enforcement would conflict with local law and statutes.
In an effort to control these risks, many companies have produced form
documents that are intended to meet the needs of all its expatriates or seconded
employees, or merely offer at will employment with an accompanying list of perquisites
for the employee going abroad. Often this results in vagueness for both parties and an
inability for either of them to meet the challenges inherent in the different global legal,
tax, and benefit systems. Special rules relating to data privacy, equity compensation and
Social Security benefits can also make these challenges even harder to meet. One solution
to avoid drafting documents that are unenforceable and that fail to give either party any
predictability is to work with foreign counsel in countries where the employees are
domiciled.
Most important in this process is for both parties to know and understand the
needs of the assignment and the employee before the assignment begins and draft
provisions that can meet the company’s needs and the very human needs of the employee
and his or her family. This will help avoid the pitfalls often seen when unreasonable
disputes arise during termination or post-employment. Finally, memorializing agreements
that are fair and equitable and that provide mechanisms for adequate notice, termination,
severance, and dispute resolution will ultimately determine the success of the document.
VI. THE REQUIREMENTS FOR EXPATRIATES GOING ABROAD
A.
Understanding the Employees’ Needs Abroad
As emphasized throughout the Chapter, expatriates have a unique relationship to
the companies they work for. They also have special needs and requirements because
there is little separation between their work and home lives. In many instances expatriate
families are living abroad temporarily or permanently in order to accommodate the needs
of the company. The goal therefore, in preparing expatriate benefits, is to ensure that the
needs of the expatriate and his or her family are met and that economically and from a
quality of life perspective the expatriate and his or her family remain “whole” throughout
the assignment. If this is achieved, the expatriate experience is a win-win for both the
company and the employee.
B.
Expatriate Benefits Checklist
1.
Tax Equalization
Every expatriate agreement should provide the employee with tax advice and tax
equalization and should make an employee financially “whole” in going abroad. Tax
equalization ensures that an employee does not suffer an additional tax liability due to
working abroad, and tax assistance ensures compliance with the U.S. expatriate tax laws
as well as the tax laws of the host country.
Typically, a hypothetical home country tax is deducted from the employee’s base
salary, and any actual withholding tax required in the host country is reimbursed by the
employer. Thus, the employee’s income tax is equalized to the U.S. tax for which he or
she would have been responsible in accordance with the employer’s tax equalization
policy. As a general rule, employers also enlist and pay for accountants to assist
employees in preparing these tax equalization forms.
Thus, employers absorb the difference between taxes withheld (based on the
“home country” tax return) and the employee’s real taxes. Any extra tax paid by
employers on behalf of the employees is extra taxable income to the employees for their
individual tax purposes. Companies usually gross up employees for this difference. If an
employee works in a jurisdiction in which tax rates are lower than in the U.S. (the home
country), the employer actually ends up with a profit because the sums withheld from the
employee’s pay exceed what is paid to the local tax authorities.
For U.S. citizen employees, a tax equalization program can be costly to the
employer because the employee pays U.S. tax on worldwide income. Although the U.S.
citizen gets a tax credit for foreign income taxes, U.S. tax law limits the amount of this
foreign tax credit to the U.S. tax rate times the foreign income. The employee always
pays the higher of the local rate or the U.S. rate on foreign-source income. In the
alternative, under Section 911 of the IRC, the first $80,000 of foreign-earned income
(plus “qualified housing expenses”) is excludable. This primarily benefits only lowerpaid employees because many highly paid employees earn much more than the exclusion
amount.
In many instances, employees are paid via their home country payroll to their
home country accounts.
2.
Cost-of-Living, Housing, and Automobile Allowance
Usually, an employer provides employees with additional compensation to help
offset cost differentials for living in the host country and provides for this in an
agreement. This extra compensation, determined using the employee’s base salary, often
changes due to fluctuations in costs in the home and the host country and in the exchange
rate. The “cost-of-living” compensation usually is paid once the employee moves into
permanent housing in the host country and is discontinued when he or she moves out of
that housing at the end of the assignment. Cost-of-living allowances typically end if an
employee changes from expatriate to local status. In addition, the employer rents a
residence for the employee or reimburses the employee for a residence he or she secures
for himself or herself. In any case, the employer usually sets a limit on the amount that
will be reimbursable or paid for housing and utilities. House hunting trips, home
purchase, brokers, and closing fees should be reimbursed by the employer and included
in a package. In expatriate or secondment arrangements the employer usually leases a car
for the employee and his or her family to use during the foreign assignment and often
pays for the car’s monthly maintenance and gas.
3.
Health Benefits
Employees should be provided with at least the same health benefits that would
be available to them in their home country. Some international plans may not guarantee
that a U.S. citizen or resident will, upon return to his or her home country, be entitled to
COBRA. If that is the case, an employee may want to negotiate continued coverage.
4.
Relocation Allowance
The employee and his or her family should receive a miscellaneous relocation
allowance for some of the expenses incurred during the trip to the host country. This
allowance, usually a percentage of the employee’s monthly salary, typically sets a limit
per person traveling. Similarly, employees are customarily reimbursed for shipment costs
to cover personal belongings and miscellaneous moving expenses but policies vary, and
some may contain unreasonable limits on the amount that will be reimbursed.
5.
Vacation
The employee usually qualifies for the same number of vacation days/weeks that
he or she would be entitled to in the U.S. Nonetheless, during the time of assignment, the
host country’s holiday schedule applies. This allows an expatriate to use vacation time to
return home for U.S. holidays that are not celebrated in the host country.
6.
Home, Personal, or Emergency Leave
Generally, the employee and his or her family are eligible for one or two home
leaves per year. The employer may recommend that these trips be combined with
business trips back to the home country so it should be specified if these are to be
considered vacation days. The employee and his or her family are generally reimbursed
for actual and reasonable transportation costs in accordance with the employer’s travel
policy during a home leave, however, the employee may be responsible for living
expenses. In the event of the death or any serious illness or injury involving a member of
the employee’s family in the home country, the employer generally reimburses the
employee for the cost of round-trip transportation for emergency leave.
7.
Children’s Education
The employer often pays for the cost of the private education of an expatriate’s
children.
8.
Social Security
The rules concerning Social Security are different from country to country but
employees should be protected in expatriate agreements from duplicative coverage.157
a.
U.S. Rules
Coverage under the U.S. Social Security system is based on (i) employment
within the U.S. without regard to nationality of the employee or the employer, or (ii)
employment outside the U.S. if both the employer and the employee are U.S. persons,
i.e., a U.S. corporation, a U.S. citizen, or a U.S. resident. Further, under a special
157
See V.F.3., above.
irrevocable election (“3121(l) agreement”) a U.S. employer can elect to include in the
Social Security system a foreign subsidiary that is at least 10 percent owned by a U.S.
entity. The arrangement treats the foreign subsidiary as a U.S. employer and includes in
the Social Security system all U.S. citizens and U.S. residents employed by the
subsidiary. Non-citizens who are non-residents of the U.S. are covered by Social Security
only for services actually performed inside the U.S.
b.
Foreign Rules
The U.S. has entered into bilateral Social Security Agreements (“totalization”
agreements) with other nations that prevent duplicative coverage. The bilateral
relationship allows an individual who is temporarily in two systems at the same time to
get a certificate of coverage from one system and to use that certificate and the
totalization agreement to avoid coverage in other systems. In general, if an assignment
abroad does not exceed five years, the individual may elect to remain in the home
country’s social security system and will be exempt from paying tax into the local
system. However, if the assignment to the host country will exceed five years, host
country coverage will apply. Totalization agreements avoid only duplicative coverage;
they do not grant coverage where it does not exist by statute. Consequently, the
exemption from the local system will depend on the employee producing proof of
coverage under his or her home country system. This is usually done by obtaining a letter
from the home country system certifying the employee’s ongoing coverage. In the U.S.,
the Social Security Administration will require a commitment from the U.S. parent or
affiliate to pay the U.S. social security taxes on the employee’s behalf.
The following countries have entered into bilateral Social Security agreements
with the U.S.: Australia, Austria, Belgium, Canada, Chile, Czech Republic, Denmark,
Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands,
Norway, Poland, Portugal, Spain, South Korea, Sweden, Switzerland, and the United
Kingdom.
9.
Reassignment/Repatriation
Most U.S. employers reimburse employees for relocation expenses as long as the
employee is still employed by the employer in the home country. Beyond that period,
employers should make an employee “whole” by paying all relocation and repatriation
expenses even if the employment is terminated, as long as the termination was without
cause and the employee is returning to his or her home country.
10.
Immigration Issues
If necessary, the employer will hire immigration counsel to assist the employee in
obtaining necessary documents and licenses to work abroad. In addition, the employer
will usually obtain counsel for immigration issues related to the employee’s family and
their ability to work/live abroad. These arrangements should be made prior to departure
and the job should not be conditioned on immigration approval “after the fact.”
11.
Language Training
The employer should provide the employee and his or her family with language
training before and during the expatriate assignment.
12.
Spousal Assistance
The employer should provide the employee’s spouse with career assistance in the
host country. Many times, in order for an expatriate to move abroad for an assignment,
the expatriate’s spouse is uprooted from a job with no immediate prospects for a position
in the host country. Upon arrival in the host country, the expatriate spouse should be
provided with career and housing assistance in order to make an easy transition for the
expatriate family.
13.
Hardship Payments
If the expatriate and his or her family are going to or are already residing in a host
country where there is political turmoil or a war has broken out, the expatriate agreement
should provide for hardship payments for the expatriate.
14.
Claw-backs
In regard to the monetary allowances or benefits provided to the expatriate and his
or her family, such as the relocation allowance or relocation benefits, an expatriate
agreement may state that the employee is expected to repay these benefits if his or her
assignment ends in a shorter time than anticipated (usually in cases where the employee
voluntarily terminates employment earlier than the initial term or if the employee is
terminated “for cause”). Minimizing the possible effect of these claw-backs is an
important point for the employee and his or her counsel. At a minimum, these claw-backs
should not require the employee to pay back the whole amount but should be pro-rated
depending on the amount of time the employee spent in the host country.