LEGAL
Japanese companies often send trainees and other expatriates to the United States to hold positions for which they may not be as qualified as U.S. workers – yet, between salary and expatriate benefits, they may be paid substantially more than what the position would pay if it were offered to a local hire.
U.S. laws prohibit employers from discriminating on the basis of, among other things, race or national origin. U.S.-based employees might claim that favorable treatment given to expatriates constitutes unlawful discrimination.
The Friendship, Commerce and Navigation (FCN) Treaty between Japan and the United States permits Japanese companies doing business in the United States to engage “accountants, and other technical experts, executive personnel, attorneys, agents and other specialists of their choice.” This Treaty may permit the Japanese parent to favor expatriate employees in these positions.
The FCN Treaty permits favorable treatment based on citizenship only, not national origin. But because Japan is a relatively homogeneous society with regard to national origin, a claim of “disparate impact” discrimination based on the employer’s exercising its Treaty right to prefer its own citizens for management positions will also be barred by the FCN Treaty.
However, the FCN Treaty generally requires that expatriates be sent to the United States on an “E” visa, which is reserved for “treaty traders.” Further, the individuals must generally be at the senior executive levels described above.
Even if the individuals are not protected by the FCN Treaty, courts may permit the Japanese parent to favor expatriates in certain positions or provide them with special benefits under two other theories: first, if the Japanese parent can show that there is a “business necessity” to provide this favorable treatment, it may prevail in a discrimination case.
And second, the Japanese parent may prevail in a discrimination case if it can show that the U.S. local hires are not “similarly situated” to the expatriates, and therefore that any claim of discrimination is not valid. Normally, the Japanese company can accomplish this by showing that the expatriates are paid by the Japanese parent, report to a Japanese supervisor, and are evaluated by Japanese home-country employees and not a local U.S. employee.
The FCN Treaty
The FCN Treaty with Japan has been interpreted by several U.S. courts as permitting Japanese employers, in certain circumstances, to discriminate in favor of Japanese nationals in filling certain positions in the United States. However, the courts have placed limits on the scope of the protection of the Treaty, and whether a Japanese parent’s U.S. subsidiary may invoke the protection of the Treaty.
The FCN Treaty allows Japanese companies operating in the U.S. to engage only certain “executive personnel” or “technical experts” of their choice. Therefore, a key issue is to determine whether expatriate employees are considered executive personnel or technical experts under the Treaty.
In MacNamara v. Korean Air Lines, 863 F.2d 1135 (3d Cir. 1988), the court ruled that an individual’s entering and remaining in the United States pursuant to an E-1 “treaty trader” visa “which is granted exclusively to foreign employees who perform duties of a supervisory or executive character,” is strong evidence of that individual’s “executive personnel” status.
In almost all of the cases that upheld application of the FCN Treaty (whether between the United States and Japan, or with Korea, or France, Greece, or other countries), the expatriate was in the United States on an E-1 “treaty trader” visa. In cases where the expatriate did not have an E-1 visa, there was no dispute that the expatriate was either an executive or a technical expert as defined by the FCN Treaty.
Even if the FCN Treaty provides protection against a discrimination claim, it is not clear that subsidiaries of the foreign company may invoke the protection. In Sumitomo Shoji Amer., Inc. v. Avagliano, 457 U.S. 176 (1982), Sumitomo argued that, as a subsidiary of a Japanese company, it should be considered a “company of Japan,” and thus able to invoke the protections of the Treaty.
The United States Supreme Court rejected that argument, holding that the U.S. subsidiary was “constituted under the applicable laws and regulations” of New York, and was therefore “a company of the United States, not a company of Japan.” The Court held the subsidiary could not invoke the rights provided in Article VIII(1) on its own behalf, as these rights are only available to Japanese companies operating in the United States, and U.S. companies operating in Japan.
Nonetheless, the Supreme Court expressly left undecided the question of whether a U.S. subsidiary of a Japanese company may invoke the FCN Treaty rights of the foreign parent company where there is a contention that the parent had dictated the subsidiary’s discriminatory conduct. Most federal courts considering the issue have held that an American-incorporated subsidiary of a Japanese parent company may in such circumstances assert the FCN treaty rights of its parent. However, the Equal Employment Opportunity Commission (EEOC) has issued guidance stating its view that the “place of incorporation [is] determinative of the FCN treaty protection to which Japanese-owned companies are entitled.”
“Similarly situated” argument
A Japanese company may be able to defend a claim of intentional discrimination by arguing that U.S. employees are not “similarly situated” to the Japanese expatriates.
U.S. courts tend to understand that expatriate employees can be paid differently and sometimes much more than U.S.-based employees, principally in recognition of their status as expatriates. They often receive expatriate allowances and special benefits to compensate their unique expenses. Also, these employees tend to be employed by the parent and not the subsidiary, on the payroll of the parent, and supervised either by another expatriate or someone in Japan. Thus, they are, arguably, not similarly situated to the U.S. employees.
However, if the expatriates are not supervised by an individual in Japan, do not work directly for the parent, and are on the U.S. payroll, it may be more difficult to assert a “similarly situated” defense.
In a recent New York case, the court held that there were genuine issues of fact as to whether the U.S. employees and expatriates were similarly situated, because:
All of these factors indicated that the employees in fact could be considered similarly situated, and therefore the expatriates’ status might not protect the company from a “similarly situated” lawsuit.
There was a different result, more favorable to the employer, in a different case, where the court held that rotational employees were not similarly situated to the plaintiff and other national employees in all material respects when considering the following factors:
Conclusion
To be able to assert the protection of the FCN Treaty, the Japanese parent should, to the extent it can, utilize E-1 visas when sending to the United States accountants and other technical experts, executive personnel, attorneys, agents, and other specialists. Trainees and more junior employees should, to the extent it is practical, continue to be on the payroll either of the parent or of the payroll company. Further, to the extent it is practical, the executives and trainees should report to Japanese home-country employees, and they should be evaluated by those employees.
The company should also consider articulating, in English, a policy that explains the nondiscriminatory business-related reasons for sending expatriates to the United States. In this way, the Japanese parent and subsidiary will be better positioned to defend claims of discrimination brought by U.S.-based employees by utilizing the defenses provided by the FCN Treaty, a “business necessity” defense, or a defense that the U.S. employees are not similarly situated to the expatriates.
Philip M. Berkowitz is a shareholder of Littler Mendelson and cochair of the firm’s U.S. International Employment Law Practice Group and the Financial Services Industry Group.
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