Recent discrimination lawsuits against foreign companies challenge “rotating staff” practices

February 13, 2009

Global Employment Law Alert

A recently filed lawsuit in New York against a large Japanese multinational raises the stakes for foreign employers who employ “rotating staff,” hired in the parent company’s country but assigned to the United States. The case highlights a significant potential legal exposure for foreign companies employing “rotating staff” in the United States.

Rotating staff are usually citizens of the home country, hired by the parent company overseas. They usually occupy senior positions at the U.S. subsidiary of the foreign company for a predetermined amount of time—perhaps three to five years—and receive beneficial compensation to account for the overseas assignment.  

In lawsuits over rotating staff, home country employees of the U.S. subsidiary allege that the rotating staff are preferred for senior management positions, receive higher compensation than their U.S. counterparts, have more lenient disciplinary standards, and conduct meetings in the home country language, all of which result in the U.S. employees feeling excluded and having limited advancement opportunities. 

These employees allege that these kinds of practices constitute unlawful employment discrimination on the basis of national origin, citizenship, and/or race.

These kinds of practices have been challenged in the past, and courts have recognized that the rotating staff are in fact employees of the parent company, and that the parent company has a legitimate interest in assuring that its U.S. operations are overseen by people familiar with the parent’s operations and with the home country’s language and culture.
Recent case

On February 5, 2009, a former employee of a Japanese company’s U.S. subsidiary sued that company, and its Japanese parent, in New York federal district court. He claimed that the companies discriminated against him and other non-Asian employees on the basis of nationality and race by (among other things):

  • appointing rotating staff employees to the top management positions;
  • denying non-Asian employees access to important company information through writing important documents in Japanese;
  • refusing or failing to provide non-Asian employees with opportunities to demonstrate their qualifications;
  • applying more lenient disciplinary procedures to the rotating staff and more severe discipline to the national staff; and
  • paying the rotating staff on a different and more lucrative pay scale.

He claimed that these practices violated federal, state, and local law prohibiting employment discrimination on the basis of national origin, including Title VII of the Civil Rights Act of 1964 (“Title VII”). He also claimed that all the rotating staff’s U.S.-hired direct reports were younger than their managers, creating an “age hierarchy” in violation of the Age Discrimination in Employment Act (“ADEA”) and analogous New York state law.

Other cases with similar factual allegations against other foreign companies and their U.S. subsidiaries are pending in New York federal courts. 

Court decisions

An early case against another Japanese company considered a related issue, and rejected the discrimination claims. There, the employee alleged discrimination based on her national origin (American). She attempted to use as evidence of discrimination the fact that her termination, and that of other American employees, was not accompanied by comparable dismissal of Japanese rotating staff.  However, the court found that “the Japanese were in reality employees of the parent corporation assigned to an American subsidiary for varying periods of time as part of a rotation program.” Thus, rotating staff, in that instance, were not considered U.S. employees. Shiseido Cosmetics, Ltd. v. State Human Rights Appeal Board, 72 A.D.2d 711, 712 (N.Y. App. Div. 1st Dep't 1979).

A similar holding emerged in a case involving expatriate employees of a Swiss bank; due to the temporary nature of their assignments (3-5 years) at a New York bank branch, they were held to be employees of the parent bank in Zurich, and not of the New York branch.  Rovtar v. Union Bank of Switz., 852 F. Supp. 180, 186 (S.D.N.Y. 1994).

At least two courts have held that pay differentials between rotating staff and U.S.-hired employees are not unlawful when the differential can be explained by (1) different job positions and responsibilities, or (2) foreign relocation allowances to defray the cost of overseas travel.  Fitzgibbon v. Sanyo Securities America, Inc., No. 92-Civ-2818, 1995 U.S. Dist. LEXIS 10601 (S.D.N.Y. July 31, 1995); Yap v. Sumitomo Corp. of America, No. 88-Civ-700, 1991 U.S. Dist. LEXIS 2124 (S.D.N.Y. Feb. 22, 1991).

Guidance for foreign employers

It seems clear that keeping expatriates and U.S. citizen employees on separate employment policy “tracks” may increase the likelihood that the rotating staff will be considered employees of the parent, and not the U.S. subsidiary, and hence decrease the parent’s exposure to the anti-discrimination provisions of the ADEA and Title VII.

To best assure the lack of application of these laws, rotating staff should be considered and treated, to the maximum degree possible and practical, as employees of the parent company, as opposed to the U.S. subsidiary. Thus, expatriates should be classified as employees on international assignment, not as U.S. employees. 

An employee of the parent company (not a U.S. employee) should apply the employment policies of the parent company to determine compensation, compensation increases, performance evaluations, and promotions for any expatriates on international assignment. The U.S. subsidiary company should have no authority to discipline or discharge the expatriates. The employee benefit plans for expatriates should also remain separate from those of the U.S. employees. 

The practice of the rotating staff holding meetings in the home country language, while understandable, should be minimized, as it can result in employees feeling alienated, and believing that they are being deprived of opportunities. Similarly, it is not prudent to write documents in the native language with the hope and expectation that only rotating staff will understand what is written. 

Two dozen countries have entered into treaties of Friendship, Commerce, and Navigation with the United States. Those treaties generally permit companies of those countries to favor citizens of the particular country in certain circumstances. However, courts allow this defense in only narrow circumstances.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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