CWS 3.0: November 9, 2011 - Vol. 3.32

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Employment Law: Outsourcing and Offshoring

Outsourcing and offshoring the production of goods and services have become important ways for businesses to increase efficiency and reduce costs. Reliable and economical transportation systems, together with the revolution in communications technology of the last decades, have enabled businesses to shift production to locations far from where goods or services are actually delivered. Furthermore, in the case of offshoring, international trade agreements have fostered a growing interconnectedness that has in many cases created a global perspective on the production of goods and services.

Outsourcing and offshoring, as well as the general movement of workers across borders, present unique challenges and raise compliance questions for businesses. In some instances, federal and state employment laws, such as the Fair Labor Standards Act (FLSA), may still apply to a company’s relationship with workers who are employed by an outsourcing firm or are working abroad. If a company engages in offshoring or has workers performing services abroad, it will also want to ensure compliance with local laws of the foreign country. Outsourcing and offshoring can bring significant advantages, but these employment relationships can also add additional layers of complexity and legal risk. The issues raised in this article are only an introduction to some of the problems that may arise in these situations.

Outsourcing and Offshoring

As companies have increasingly looked to outsourcing and offshoring as ways to contain costs, they have encountered various forms of resistance, including legislative initiatives and class action litigation. Moving call centers abroad, for instance, has long been a contentious issue, and a recent wave of litigation has alleged that the transmission of data to these offshore locations may violate U.S. privacy protections. Earlier, the movement of these jobs offshore resulted in various legislative initiates to curtail, even if not eliminate, the practice. These efforts were particularly noticeable at the state level, and some states have in fact passed legislation intended to restrict outsourcing overseas.

Domestic outsourcing also involves legal risks for companies, particularly if the company is found to be a “co-employer” or “joint employer” with the outsourcing firm. A determination of “joint employer” status will turn on the particular facts of each case, as illustrated by two recent cases involving allegations of FLSA violations. In Lepkowski v. Telatron Mktg. Group, Inc., the plaintiff was one of 200 call center employees who worked exclusively for the same client company. The plaintiff alleged violations of the FLSA, including failure to compensate for time spent logging into computer systems, and she filed suit against the call center and its client company. She also sought class certification. In response, the client company successfully argued that under the FLSA “economic realities” test it was not the worker’s “joint employer.” In its decision, the federal district court focused on the “totality of circumstances” and applied factors used in other circuits to reject the plaintiff’s joint employer assertion. Conditional class certification was, however, granted against the call center.

By contrast, in Ling Nan Zheng v. Liberty Apparel Co., a client company was found to be a “joint employer” with its outsourcing firm. In Zheng, a garment company (Liberty) outsourced manufacturing to a factory in New York City that performed finishing work on the clothing. Although the factory subcontracted work from several companies, the plaintiff employees testified that approximately 70 to 80 percent of their work was done on Liberty garments, and Liberty regularly sent quality control representatives to the subcontractor’s factory to supervise the workforce. The plaintiffs worked, on average, more than 85 hours per week, they were paid at a rate below the federal and state minimums, and they were never paid overtime. Indeed, sometimes they were not paid at all. The plaintiffs sued both Liberty and the subcontractor, who seems to have disappeared. Based on this set of facts, a jury found that Liberty was a joint employer for purposes of the FLSA and New York state employment laws. The Court of Appeals for the Second Circuit held that, as a mixed question of law and fact, the issue of joint employer status was properly sent to the jury (rather than determined by the judge), and U.S. Supreme Court recently declined to review the lower court’s decision. The Zheng case involved a particularly egregious set of facts, but it nevertheless demonstrates that a company using an outsourcing firm may still be liable for FLSA violations if it is a “joint employer.”

Offshoring

In general, U.S. federal employment laws will not apply outside of the United States, unless a statute provides for extraterritorial applicability. Congress has, for example, provided that Title VII of the Civil Rights Act applies to U.S. citizens employed outside of the United States by U.S. companies or by non-U.S. companies, if the non-U.S. company is under the control of a U.S. company. The Age Discrimination in Employment Act and the Americans with Disabilities Act have similar extraterritorial effect. These laws do not, however, apply outside of the United States to non-U.S. nationals; companies with employees abroad should also ensure compliance with any local laws in the foreign country.

In some cases, even though federal law might not apply to a particular employment relationship, state law nevertheless will. A good example is the applicability of the Fair Labor Standards Act  and state minimum wage laws to employees who temporarily work abroad. Under U.S. Department of Labor regulations, the FLSA does not apply to employees who perform all of their services in a foreign country during a workweek. If, however, an employee works for part of the week in the United States and for part abroad, then the FLSA will apply to all of the time worked that week, including the time worked abroad.

By contrast, state law minimum wage laws might apply, even if an employee is working outside of the United States. In Truman v. DeWolff, Boberg & Associates, Inc., for instance, an employee performed work for an American company in England and in Canada, and he sometimes worked more than forty hours a week. The employee, a Pennsylvania resident, conceded that the FLSA did not apply to the time he had worked abroad, but he argued that he was nevertheless entitled to overtime pay under the Pennsylvania Minimum Wage Act (“PMWA”). The federal district court found that the FLSA did not preempt state minimum wage laws from offering greater protection to employees than under federal law. Furthermore, no provision of the PMWA restricted its applicability to work performed in the United States. Indeed, the court observed that nothing in the statute indicated that work performed abroad by a Pennsylvania resident should receive less protection than work performed within Pennsylvania by the same resident for the same company. Accordingly, the court denied the company’s motion for partial summary judgment on the state law claim.

Conclusion

Companies need to be aware of compliance considerations and potential litigation risks when outsourcing and offshoring the production of goods and services. If a company is a “joint employer” with an outsourcing firm, it may face individual or class action claims based on state or federal employment laws, including claims under the FLSA. No bright-line test determines whether a company is a joint employer, so each case will turn on its own facts and circumstances. If a company engages in offshoring or has workers or contingents performing services abroad, it will want to ensure compliance with local laws of the foreign country. Furthermore, if a company employs U.S. citizens abroad, some state or federal laws might also apply. Outsourcing and offshoring can raise challenging legal questions, and the issues addressed in this article are only a sample of potential issues that can arise in the context of these complex employment relationships.

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