Multinationals, Multiple Claims

As businesses go global, so does litigation.

By Barbara Roth Aug 1, 2012
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August CoverAs employers move staff from one country to another, they are facing a new set of problems in managing the legal ramifications of such relocations.

The initial relocation is seldom the issue: International moves are typically plum assignments reserved for high-performing employees perceived to have bright futures.

The problem arises, however, when the employment relationship breaks down, causing the company to discharge the employee while he or she is working abroad. Who is then the employee's employer? Is it the original entity the employee worked for or the international subsidiary where the employee has been providing services in another country? And what rights does the employee have–those of employees in the United States or those of employees in the country where he or she now lives?

These questions do not always have clear-cut answers. But with careful planning, an employer may optimize its position in the event of a dispute with such an employee.

These problems are very real.

Here are two true stories, with identifying details altered, that illustrate some of the issues.

Secondment Agreement

An effective managing director named John Jones had worked for a company for many years in various locations. For five years, he was located in New York heading an important business unit. He was asked to move for three to five years to the company's London subsidiary to develop an area of business.

Following its standard practice, the company "seconded" Jones to London and gave him its standard written agreement for secondment. Merriam-Webster defines this term as "the detachment of a person É from his regular organization for temporary assignment elsewhere." The agreement provided that Jones would receive a guaranteed base salary, moving and other expenses of the transition, and a $12 million guaranteed bonus at the end of his first year.

The agreement stated that Jones would be required to work in London and Madrid, where his new boss Hector was located, during his secondment, but that the U.S. company would remain Jones' "employer" no matter where he was actually performing services. It promised Jones that at the end of his secondment, he would be brought back to New York and given a comparable or better job, with comparable or better pay and benefits. After reviewing and signing the agreement, Jones returned it to HR.

Jones arrived in London and, following standard practice, the HR department in London gave him an employment contract that specified his job duties and provided that he would follow the employment policies of the company in London.

Worker Fired

Jones initially fulfilled expectations in London. One day, however, at a meeting in Madrid, Hector blamed Jones for a costly error made by someone in another business group that indirectly reported to Jones. Hector demanded that Jones take responsibility for the mistake and accept a salary decrease and reduction in his guaranteed bonus because of it.

Jones disagreed with Hector and would not agree to the boss's demands. Hector therefore fired Jones and said the discharge was for "cause." Jones immediately hired counsel and commenced proceedings for wrongful discharge and breach of contract in three locations simultaneously: London, Madrid and New York.

He claimed the company had violated his rights in London and in Madrid by wrongfully terminating him, breaching his contract and failing to pay the sums his contract entitled him to. Jones filed a third legal action in New York, alleging that he was still a New York employee and that the company had violated his contractual right to be returned to New York at the end of his secondment and to receive a comparable position and comparable pay and benefits.

The company was compelled to hire counsel in all three locations to defend itself against Jones' multiple lawsuits.

From Europe to America

Another story: Peter Muller, an employee of a German company, had a German employment agreement. He was transferred to New York to be the president of a subsidiary. He liked living in New York, and the German employer seemed satisfied with his performance.

After 11 years in New York, however, the company discovered that a young employee had been embezzling funds. Everyone in the line of supervision, including Muller, was fired for cause.

Muller believed he should not have been fired. He filed a lawsuit against the subsidiary in New York. He filed a lawsuit in Germany against the company, because his employment agreement with the German entity was still in existence and provided that disputes with the company would be adjudicated in Germany.

Dealing with multiple lawsuits simultaneously in multiple jurisdictions is costly, disruptive and reventable.

Preventable Dual Litigation

The result in both situations–multiple lawsuits pending simultaneously in multiple jurisdictions–was costly and disruptive to business. In these two cases, it was preventable.

In Jones' case, the company had failed to document its intention that when Jones left New York, he would cease being an employee of any U.S. entity. To the contrary, the secondment agreement gave Jones an explicitly stated continuing connection to the New York organization and even promised him the right to return in a comparable position and with comparable compensation when his secondment ended–regardless of the reason.

Jones therefore had ample basis to contend that when his secondment ended, he had a right to return to New York to continue working for the company in a position equal to that from which he had been fired.

Not surprisingly, company officials–having discharged him for cause in Europe–did not find the notion of returning Jones to a high-level position in New York to be palatable. As to his discharge in Europe, Jones was discharged in a moment of anger by his boss, who did not establish any record to justify termination. Since his London contract did not contemplate termination for the reasons given by Hector, Jones had claims in London under his contract, as well as in Spain where the allegedly wrongful act occurred.

The bottom line in Jones' case: In a settlement, Jones was still discharged, but he was paid the $12 million guarantee and given a clean record. With $12 million in his pocket, Jones moved back to New York and took a long vacation before finding a new job.

German Contract

In Muller's case, the fact that the company left his German employment contract in place–even during all the years he had been working for the New York subsidiary–put the company at a disadvantage when he was fired.

If Muller's German contract had been terminated early in his New York tenure and he had become a local hire of the U.S. company, he would not have had a strong claim against the German entity when he was fired years later.

Muller would have been left only with claims available to him under U.S. and New York laws and would have had the possibility of only one lawsuit, resulting in cost savings for the company. Instead, in Muller's situation, both the U.S. and German cases went to court.

Consider Alternatives

While it is not always possible to achieve optimal legal results in situations such as these without compromising a company's business goals, certain steps might have yielded quicker results with fewer legal fees and proceedings. The employers could have considered the following alternatives:

Instead of seconding Jones from New York and retaining him as an "employee" in that location, the company might have transferred his employment, giving him a transfer document in which he and the company both agreed to terminate his employment in New York and not providing any right to return to New York.

While this strategy might have had negative implications with respect to Jones' participation in the company's retirement plan, this could have been handled by ensuring Jones' ability to participate in a plan in the host country–which is not always possible–or by "grossing up" his total compensation to compensate him for lost benefits, including the tax consequences of any lost deferrals.

And instead of seconding Jones, the employer might have considered whether Jones could be a "local hire" where he was relocating.

As for Muller, the German company could have terminated his German employment contract upon Muller's relocation or after a short period of time, and certainly when it appeared he would stay in the United States indefinitely. Muller could have been given an employment agreement with the U.S. company.

Retirement benefits, again, might have been an issue, but these can often be accommodated. However, treaties among some countries may affect the ability of employers to leave expatriated employees in home-country benefits plans indefinitely.

Had Muller's German employment contract been terminated, Muller might have been left only with his U.S. employment status and therefore unable to sue in Germany when he was fired. A result such as this is typically a great benefit to employers, as U.S. employment law–with the concept of employment at will–tends to be more favorable to employers than the laws in many other countries. Note, however, that courts in some countries will continue to entertain claims by their nationals under situations such as Muller's.

Examine Relationships

The bottom line is simple: It may not be possible to prevent every lawsuit and foresee every problem in an employment relationship. But in some cases, consideration of the options at an early stage of an employment relationship–and again when any change of employment location is contemplated–can remove some potential legal liabilities that employers face if and when the employment relationship ruptures.

Finding the most advantageous structure for an employment relationship can save large sums in legal fees and prevent departed employees from embroiling the company in multiple legal disputes over a single termination.

The author, a former journalist for The New York Times, is a partner in Hogan Lovells in New York and the global co-head of its employment practice group.

Web Extras

SHRM web page: Legal Issues home page

SHRM article: Layoffs in Europe: Deal or No Deal? (HR Magazine)

SHRM article: Offshored Headquarters (HR Magazine)

SHRM article: Canadian Employment Law Is a World Apart from Its U.S. Counterpart (Legal Report)

SHRM article: 10th Circuit: Challenge to At-Will Employment Status Dismissed (Legal Issues)

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