The growth of many US businesses hinges in large part on their ability to capitalize on development opportunities in China.
US companies, frequently working through Chinese subsidiaries, regularly expand their operations into Chinese markets, often expecting to take advantage of a more favourable legal and regulatory climate in China than exists at home. However, operating in China does not necessarily mean that such companies are exempt from the strictures of US employment laws.
Federal laws in the United States impose numerous restrictions and regulations on the relationship between businesses and their employees. Companies operating in the US must be careful to avoid civil liability for violations of a variety of statutes and regulations, including failing to pay employees statutorily-mandated wages, and discriminating on the basis of age, sex, race and disability. Yet even companies that operate entirely outside the US can come under the purview of the US legal framework governing employment.
Extraterritoriality
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US courts generally hold that, without an express provision in a statute or some other indication from the US Congress to the contrary, a presumption against the extraterritorial application of federal employment statutes will limit the geographic scope of a statute to the territorial jurisdiction of the United States. Nevertheless, Congress has extended the scope of many statutes to reach beyond US territorial boundaries. Most notably, American anti-discrimination laws, including those that prohibit employment discrimination based on race, sex, age, and disability, apply to US companies with operations in China and other foreign countries, and to foreign subsidiaries of US companies or other entities that are under the control of a US corporation.
While the implications of such extraterritorial application of US law on business in China could be profound in light of the great potential for costly litigation arising from these laws, several important caveats are noteworthy. US employment laws do not apply to non-US nationals who are employed in China, even if they are employed by a US or US-controlled entity. Therefore, US employment laws are most likely to apply to upper-level management who have been transferred or seconded from the US corporate parent to a Chinese subsidiary or related entity.
Problems of enforcement
Although many US employment laws apply to businesses in China, US authorities often encounter difficulties attempting to enforce compliance overseas.
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The US Equal Employment Opportunity Commission (EEOC), the government body responsible for enforcing anti-discrimination laws, lacks both offices outside the US and established procedures for processing and investigating claims against employers located abroad. Moreover, the EEOC has authority to issue subpoenas for witnesses and documents only from within US territory, thereby further complicating its ability to investigate cases of discrimination occurring abroad.
Enforcement of US employment laws will also recede in the face of countervailing law in the applicable foreign country. US courts have repeatedly denied employee claims where the alleged discriminatory conduct was mandated by local laws or regulations.
In addition, plaintiffs who are pursuing litigation against a foreign company face a significant barrier in establishing jurisdiction over the foreign defendant, which requires the plaintiff to prove that the company was sufficiently under the control of a US entity. Generally, a four-part test applies to determine whether an American corporation controls a foreign employer. The four factors considered are
- the interrelation of operations between the entities;
- the extent to which they are commonly managed;
- whether control of labour relations is centralized in the US; and
- common ownership or financial control. The presence of all four criteria is not required, and courts will evaluate all of the circumstances of a particular case.
In a recent case, a federal appeals court in California demonstrated the difficulty inherent in establishing jurisdiction in the US over a foreign employer, upholding the dismissal of a lawsuit against the German company DaimlerChrysler AG (Bauman v DaimlerChrysler) despite its having a subsidiary that conducted extensive business in California and elsewhere in the US. The court held that to assert jurisdiction over the foreign parent company, control over the US subsidiary must be “so pervasive and continual that the subsidiary may be considered an agent or instrumentality of the parent, notwithstanding the maintenance of corporate formalities”. By the same token, US companies can limit their exposure to some US legal liability by permitting a significant degree of autonomy in financial and personnel management authority for the Chinese subsidiary.
Key laws inapplicable in China
Fortunately for businesses operating in China, many of the most burdensome and intricate US employment regulations have no applicability overseas. For instance, federal statutes such as the Fair Labor Standards Act, which regulates minimum wages, overtime, and child labour, do not apply extraterritorially. Likewise, US laws imposing safety standards in the workplace, obligating employers to grant leaves of absence to employees with medical or family care issues, and requiring companies to provide advance notification to employees of a plant closing or mass layoffs, cannot be applied to companies that operate in China.
However, the extraterritorial applicability of several significant US laws means that employers cannot simply develop policies and awareness of those laws in the US alone – for instance, if a Chinese executive sexually harasses a female US expatriate working in China, the company will not be able to use as a defence the fact that the harasser was a non-US national who did not understand the concept of “sexual harassment” and its implications under US law.
Company-wide policies should be developed and implemented that make all employees aware of such prohibitions, subject to cultural nuances and sensitivities.
Anthony Oncidi is a partner at Proskauer and head of the firm’s labour and employment group in its Los Angeles office. Jeremy Mittman is an associate at Proskauer
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E-mail: aoncidi@proskauer.com
