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 companys 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 countrythe 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 states 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. 1See V.C., below. 2See generally Engquist v. Oregon Dept of Agric., 128 S. Ct. 2146, 2155 (2008). 3See Lindsay B. Jackson, A Lesson From Germany on How the United States Could Reform Its

Laws on Dismissal, 4 GEO. J.L. & PUB. POLY 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 ).

4See generally Scott R. Grubman, Think Twice Before You Type: Blogging Your Way to Unemployment, 42 GA. L. REV. 615, 62729 (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).

542 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 employees employment rights. U.S. case law on extraterritoriality and its effect on an employees protection against discrimination exemplify how corporate nationality and relationships between a corporation and its subsidiary will ultimately determine an employees right to this protection.12 Furthermore, a corporations tie to the host country may also influence how the host countrys 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.

6See, e.g., Americans with Disabilities Act of 1990, 42 U.S.C. 1210112213 (2000); Pregnancy

Discrimination Act, 42 U.S.C. 2000e(k) (2000); National Labor Relations Act, 29 U.S.C. 151169 (2000).

7Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 1, 116 Stat. 745. 8See, 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).

9See V.G.5., below. 10A 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 . For additional information, see the chapter on the EU in Volume IA, Part 1.

11See III., below, and the chapter on the EU in Volume IA, Part 1. 12See 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 Sarbanes-Oxley17 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

13See, e.g., V.F., below. 1442 U.S.C. 2000e (2000). 1542 U.S.C. 1210112213 (2000). 1629 U.S.C. 621634 (2000). 17Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204 1, 116 Stat. 745.

enterprise18 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 (H no Tekiy ni Kansuru Tssokuh, 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 Peoples 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

18Whether 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, 124041 (2d Cir. 1995).

19See 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 BENDERS IMMIGR. BULL. 423 (2006). See generally Kathy Roberts, Correcting Culture: Extraterritoriality and U.S. Employment Discrimination Law, 24 HOFSTRA LAB. & EMP. L.J. 295, 30508 (2007).

20See 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.

21Directive 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. 22See Act on the General Rules of Application of Laws [H no Tekiy ni Kansuru Tssokuh], Law No. 10 of 1898, art. 7 (as newly titled and amended June 21, 2006), translated in Kent Anderson & Yasuhiro Okuda, Translation of Japans Private International Law, 8 ASIAN-PAC. L. & POLY J. 138, 142 (2002).

23This mandatory rule shall apply to the matters covered by the rule concerning the labor contracts formation and effect. Id. art. 12(1), translated in Translation of Japans Private International Law , 8 ASIAN-PAC. L. & POLY J. at 147.

24Contract Law of the Peoples Republic of China, art. 126 (1999), translation available at .

25Id.

Increasingly, negotiating the most favorable choice of law provision for multinational employees will require a sophisticated knowledge of the host countrys 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. EUChoice 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

26Rome Convention on the Law Applicable to Contractual Obligations, June 19, 1980

(80/934/EEC). 27Id. art. 6(1). 28Id. art. 6(2). 29Id. See also the chapter on the EU in Part I. 30Parliament and Council Regulation 593/2008, Law Applicable to Contractual Obligations (Rome

I), 2008 O.J. (L 177) 6 [hereinafter Rome I]. 31Id. 32Although Rome I generally replaces the Rome Convention, neither the Rome Convention nor the

Rome I Regulation applies to Denmark. 33For a more general discussion of Rome I, see Ole Lando & Peter Arnt Nielsen, The Rome I

Proposal, 3 J. PRIV. INTL L. 29 (2007). 34See 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 non-EU 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 employers 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 employers 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

35See 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).

36Brussels 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].

37See 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).

38Brussels Convention, art. 17. 39Id.

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 ones statutory right to be heard in a labor court,

40Council 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.

41Brussels Convention, art. 19. See also id. arts. 1821 (employment contracts fall within the special provisions of these articles).

42Id. art. 20. 43Bundesarbeitsgericht [BAG] [German Federal Labor Court] May 5, 1999, 5 AZB 22/99 = NJW

1999, 3069. 44Jean 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, 83235 (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

45See, 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 Meml Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 2425 (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.).

46Sternlight, at 83435. 47Id. at 84853 (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).

48Id. at 85053. 49Matthew W. Finkin, Privatization of Wrongful Dismissal Protection in Comparative

Perspective, 37 INDUS. L.J. 149, 15660 (2008). 50Id. 51The European Convention for the Protection of Human Rights and Fundamental Freedoms, Nov.

4, 1950, art. VI, 213 U.N.T.S. 221. 52Finkin, at 15660. 53Id. at 15760. 54See 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 Englands 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 employees termination cannot be settled by arbitration in France or Germany.62

55David L. Gregory & Francis A. Cavanagh, A Comparative Assessment of Labor Dispute

Resolution in the United States & the United Kingdom, 81 ST. JOHNS L. REV. 29, 33 (2007). 56Id. at 3537 (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). 57Labour Code, R.S.Q., c. C-27, s. 100. 58Labour Code, R.S.Q., c. C-27, s. 101, 139 and 139.1; Bisaillon v. Concordia Univ., 2006 SCC

19; Isidore Garon lte v. Tremblay; Fillion et Frres (1976) inc. v. Syndicat national des employs de garage du Qubec inc., 2006 SCC 2.; Gagnon Robert P. Le droit du travail du Qubec, 6th ed., Edition Yvon Blais, Montreal, Quebec, 2008, paras. 744 and 752757.

59United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards, June 10, 1958, 21 UST 2517, 330 UNTS 3.

60Id. art. II. 61Id. art. V(2). 62In 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 employees 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 arbitrationnamely, speed, economy, and justicecould 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 institutions 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 employees 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 15758.

63International Court of Arbitration, available at . 64American Arbitration Association, available at . 65The London Court of International Arbitration, available at . 66China International Economic and Trade Arbitration Commission, available at

. 67Deutsche Institution fr Schiedsgerichtsbarkeit [German Institute for Arbitration], available at

. 68The SCC InstituteArbitration Institute of the Stockholm Chamber of Commerce, available at

. 69Singapore International Arbitration Centre, available at .

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 others 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. EUMediation 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 entitys home country, the parties usually enter into a written agreement specific to the assignment. Typically, this agreement describes the terms of an expatriate

70See Wayne N. Outten, Representing the Executive, in Executive Compensation 653 (Yale D.

Tauber & Donald R. Levy eds. 2002). 71See 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). 72Member 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.

73Id. art. 3. 74Id. art. 1. 75Id. 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 companys 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 counsels 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 employees 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

76See 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 employees 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

77See 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 employees 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 employees 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 Companys failure to live up to its representations about the employees job can be grounds for a good reason resignation or a defense to an employers 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

78See the discussion of pensions in the chapter on Extraterritorial Application of U.S. Laws at

VIII., in Volume IB, Part 2. 79See 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 countrys 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 compensatedspecifically, 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.-entitys 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 employees 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 employees 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 employees position and eligibility for future pay increases.

If an employee experiences a change in compensation or his or her transfer falls within the EUs Acquired Rights Directive, the employees 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

80See V.A., above. 81See 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 INTL 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).

82The EUs 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.

83See generally Donald C. Dowling, Jr., How to Ensure Employment Problems Dont Torpedo Global Mergers and Acquisitions, 13 DEPAUL BUS. L.J. 159, 16566 (Fall 2000/Spring 2001).

84Labor Standards Law Art. 89 (Japan). 85See HIROSHI ODA, JAPANESE LAW 60 (1992); see generally, Yue-Chin Huang, Laodong Falun

[Labour Law Theory], 63 (1993).

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 employees 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

86Labor 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).

87See 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 INTL 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).

88See generally WENDI S. LAZAR, ABA INTL LAB. & EMP. L. COMM. ANN. MEETING, ESSENTIAL ELEMENTS OF NEGOTIATING EXPATRIATE AND SECONDMENT AGREEMENTS 3 (2007), available at .

89See I.R.C. 3121(l) (1994). 90Cf. 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 countrys 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 partners social security systems are adjusted, and they totalize each systems 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 employees 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 employees 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.

91See Social Security Administration Online, U.S. International Social Security Agreements,

available at (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 employees 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

93See Susan P. Serota, Global Stock Option Plans: Registration, Disclosure and Tax Issues (Jan.

23, 2008) (on file with author) [hereinafter Serota]. 94Cf. id. at 6971 (discussing the UK). 95For example, in Japan, though an employer may monitor an employees actions for purposes of

maintaining workplace order, such action may be a violation of an employees privacy dependent upon the propriety of the action in light of the harm done to the worker. Where there is no risk that the employees actions would jeopardize workplace order, employer action, including following an employee or opening an employees 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 employees email correspondence on the employers email system without reasonable justification such as the investigation of perpetrator of slanderous emails. See INTL 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. COMMR OFF., QUICK GUIDE TO THE EMPLOYMENT PRACTICES CODE: IDEAL FOR THE SMALL BUSINESS (2005), available at .

minimum tax.96 Non-qualified stock options do not qualify for favorable treatment and are considered taxable compensation included in an employees 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 non-statutory options with exercise prices not less than fair market value on date of grant are exempt from Section 409As 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 employees 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 employers ability to terminate an employment relationship.

96See I.R.C. 421 (2004). 97See 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, 72223 (2006). 98These countries include Austria, Belgium, Denmark, France, Hungary, Ireland, Italy, Portugal,

Spain, and the UK. See Serota. 9926 C.F.R. 1.409A-1 et seq. (2008). 100Shares subject to the arrangement must be service recipient stock as defined in treasury

regulations issued under section 409A. 101Serota.

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 ones 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 employees 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 employees 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 employers 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

102Sanders 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 basisa reasonable groundfor 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 employers 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.).

103See 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. INTL & COMP. L. REV. 19 (2008) (describing Austrian, Croatian, Czech, French, German, Greek, Hungarian, Irish, Slovenian, Slovakian, and Turkish employment termination laws).

104Cf. id. 105For 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 weeks 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 20062007 was 250,470. See EMP. TRIBUNAL AND EAT STATS. (GB) (Apr. 1, 2006, through Mar. 31, 2007), available at . 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.

106See Mark Freedland, Developing the European Comparative Law of Personal Work Contracts, 28 COMP. LAB. L. & POLY 487, 495 (2007).

107See ERA 1996 at 86 (Eng.) (providing that an employee who has been continuously employed for one month or more is entitled to one weeks notice and that after two years of employment employee becomes entitled to one weeks notice for each completed year of service up to a maximum of 12 weeks).

108Examples 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.).

109If 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 clausesand the provisions concerning for cause termination in particularshould 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 employers 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 employees 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 jurisdictions wrongful or unfair dismissal laws. In this regard, a number of European employment statutes recognize certain circumstances under which the employees 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 employers 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).

110Even 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.).

111Labor 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 managers 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 employers 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. Howe