In June of this year, the U.S. Supreme Court held that, despite the Foreign Sovereign Immunities Act (FSIA), investigators could conduct post-judgment discovery into the Republic of Argentina’s assets outside the United States. To justify this decision, Justice Antonin Scalia wrote an overview of the FSIA’s history: In 1976, he explained, Congress replaced the “old executive-driven, factor-intensive, loosely common-law-based immunity regime” with the FSIA. He noted that the “key word” here was “comprehensive”—meaning that “any sort of immunity defense made by a foreign sovereign in an American court must stand on the Act’s text. Or it must fall.”

Despite the conclusion of this most recent case, foreign sovereign employers are often presumed to be immune from U.S. court jurisdiction under the FSIA’s “comprehensive” clause—in spite of a multitude of federal, state, and local laws protecting employees throughout the United States. But breaking these laws could be a costly mistake. Under the “commercial activity” exception to the FSIA, foreign employers could be subject to a myriad of complex U.S. employment laws. And failure to comply with these laws can cost those employers millions of dollars in damages and attorneys’ fees, not to mention reputation costs. 

The FSIA’s commercial activities exception states that a “foreign state shall not be immune . . . in any case . . . in which the action is based upon a commercial activity carried on in the United States by the foreign state.” The statute does not define “commercial activity,” but the U.S. Supreme Court has filled in the blanks. Simply put, a foreign state that acts like a private player in the market (that is, it is not exercising powers peculiar to sovereigns) can be sued based on that activity just like any ordinary U.S. citizen. But where does employment fall in this spectrum? Is it a commercial or a governmental activity? 

The courts have given no uniform answer. Almost 20 years ago, in Holden v. Canadian Consulate, the U.S. Court of Appeals for the Ninth Circuit held that employment of diplomatic, civil service, or military personnel is governmental. After all, a private party cannot create such posts or hire for them. But a private party can hire personnel responsible for promoting a country’s products and businesses. These posts, the court ruled, are commercial in nature. For example, the Holden plaintiff responded to inquiries from Canadian companies regarding information on prospective buyers, obtaining sales representation or wholesale distributors, providing names or appointments with trade contacts, and spending a significant amount of time at trade shows and the like. Her title as a “Commercial Officer” in performing such tasks no doubt strengthened her argument that she carried on “commercial” activity, and the court indeed held that she could sue her Canadian Consulate employer for discrimination.

Thus under Holden, a foreign sovereign employee who is not diplomatic, civil service, or military personnel could haul his employer into court for any number of U.S. employment law violations. And there are many such potential plaintiffs: This year, the Department of State’s listing of foreign and honorary consular offices in the United States exceeds 100 pages, and includes locations in every U.S. state except for Delaware and West Virginia. Most, if not all, of these locations presumably employ clerical staff, public relations agents, drivers, and other personnel whose duties have little bearing on a government’s official functions—meaning that U.S. courts could exercise jurisdiction over suits arising out of these employment relationships.

Foreign sovereign employers should be somewhat reassured by more recent federal decisions that depart from or soften the Holden ruling. The Second Circuit, for example, disagreed with the Ninth Circuit’s approach in a 2004 case, Yuka Kato v. Shintaro Ishihara. In Yuka Kato, the plaintiff alleged sexual harassment and retaliation under federal and state law during her employment by the Tokyo Metropolitan Government in its New York office. Like the Ninth Circuit’s Holden plaintiff, she engaged in promotional activities on behalf of Japanese companies. But unlike the Ninth Circuit, the Second Circuit focused on the government’s purpose in promoting the products, not the employee’s actions taken on the government’s behalf. According to the Second Circuit, providing business development assistance, including product promotion, to Japanese businesses seeking to enter U.S. markets was not “commercial activity.” Rather, the Tokyo Metropolitan Government was performing actions “that were only superficially similar to actions typically undertaken by private parties,” because a private party would not have as its primary intent the promotion of Japanese companies. The court, therefore, extended immunity to the government under the FSIA. 

The D.C. Circuit likewise focused on a government’s broader purpose with respect to the employment relationship in El-Hadad v. United Arab Emirates, in which an Egyptian citizen who worked as an auditor in the UAE’s embassy in Washington D.C. sued for breach of his employment contract and defamation. In this case, the court favored a two-step test: First, it asked whether the employee was a civil servant, diplomat, or soldier. Even if the answer was “no” (and in El-Hadad it was), the court moved on to scrutinize whether the work involved exercising powers peculiar to foreign sovereigns. The court treated this second question as the key inquiry. The D.C. Circuit gently criticized the Holden decision for treating “the civil servant question as effectively superseding the commercial/governmental distinction”—that is, for suggesting that anyone who is not a civil servant, diplomat, or soldier is necessarily a commercial employee.

In other words, for now, the scope of the “commercial activity” exception means different things depending on where a foreign sovereign employer is located in the United States. And employment litigation in the United States shows no signs of slowing down. The Equal Employment Opportunity Commission’s (EEOC) chart of federal charges filed and resolved under statutes enforced by the EEOC jumped from 82,792 to 95,402 in 2008 and has remained above 90,000 (and often close to 100,000) ever since. In employee-friendly California, the California Department of Fair Employment and Housing released statistics showing that between 2007 and 2013, the settlement or judgment amount in closed employment cases rose from nearly $9,300,000 to $21,000,000.

Individual employment claims pose just one of many threats to foreign sovereign employers: The Consulate General of Mexico in San Francisco was recently named as a defendant in a wage and hour class action lawsuit brought by employees who worked in the Consulate’s San Francisco office, who alleged failure to pay overtime under California and federal law, failure to provide meal and rest breaks under California law, and a variety of other California law violations. The plaintiffs sought to represent other “similarly situated” employees who worked for the Consulate General in other U.S. cities. The court dismissed the case because the plaintiffs assisted the Consulate in “official governmental functions” by providing notarial services and issuing passports and visas. Even if the work was not entirely governmental, the court found that it was sufficiently “intertwined” with government work to be classified as non-commercial. The court’s ruling could have been radically different if the class action plaintiff representative had been a clerical employee, such as a receptionist or another office worker, who did not assist the Consulate in “official governmental functions.” This is not a far-fetched possibility, as wage and hour class action lawsuits have been extremely attractive for attorneys representing employees in recent years.  

Some courts interpret the commercial exception under the FSIA more liberally, thereby affording U.S. employees a forum for their grievances against foreign sovereign employers. A district court judge in the District of Columbia, for example, recently issued a memorandum opinion taking the Embassy of France to task. In that case, Ashraf-Hassan v. Embassy of France, the Pakistani employee had supervised the embassy’s internship-placement program and coordinated the embassy’s partnership with a cultural exchange in New York. Employed for five years, she claimed that she suffered discrimination on the basis of her national origin, race, religion, and pregnancy. The court decided that the embassy had “impliedly” waived any argument that it was immune under the FSIA by accepting the court’s jurisdiction unless the case “intruded on governmental matters.” And the court refused to allow the embassy to withdraw that waiver on the “eve of trial.” The court also criticized the embassy’s “creative” argument (made three years into the lawsuit) that a suit cannot be “based upon” commercial activity if the discriminatory acts never occurred.

Ashraf-Hassan highlights how important it is for foreign sovereign employers to take care in waiving immunity and reserving rights, and in asserting immunity defenses. Yet foreign sovereign employers in the United States are often unaware of how vulnerable they are under U.S. employment laws. There are some basic steps every foreign sovereign employer can take to minimize that vulnerability. These measures have three goals: first, to help prevent lawsuits from occurring; second, to provide protection to the employer when lawsuits do arise; and third, to understand in advance what immunities are available.

The first two goals—prevention and protection—go hand-in-hand. Harassment- and discrimination-prevention training can educate employees who might otherwise unwittingly not comply with U.S. employment laws, and employers can demonstrate to a court that they trained employees to use a reporting system to receive and resolve complaints. Employers should also review all job descriptions and, most importantly, actual responsibilities to delineate diplomatic and commercial posts. Sovereign employers may want to consider creating contractual “at-will” relationships with employees to avoid situations where it is difficult but necessary to terminate the employment relationship. These employers should also consider implementing arbitration agreements with class action waivers to prevent employee class action lawsuits, minimize due process limitations that employers may face in U.S. courts, and benefit from the cost-effective arbitration system. Lastly, any foreign sovereign employer should regularly audit their commercial support staff to ensure that they are complying with applicable federal and state wage and hour laws.

As for immunity, foreign sovereign employers should think beyond the FSIA. Article 43(1) of the Vienna Convention, for example, provides that “[c]onsular officers and consular employees shall not be amenable to the jurisdiction of the judicial or administrative authorities of the receiving State in respect of acts performed in the exercise of consular functions.” The Vienna Convention includes 12 enumerated consular functions and one “catch-all” provision, covering “functions entrusted to a consular post.” Hiring and supervising an employee who, for example, cooks and serves in connection with official Consulate events, does not qualify as a legitimate “consular function,” at least according to the Ninth Circuit in Park v. Shin. However, the defendant consulate in Park could have used the Vienna Convention to object to certain discovery requests and argue that disclosure is not permitted pursuant to international treaty. The Royal Norwegian Embassy recently took this successful tack in a Minnesota discrimination case (Ewald v. Royal Norwegian Embassy), in which a U.S. citizen and former employee of the embassy complained that she was being paid less than a male colleague and being “ostracized” at the office. The embassy convinced the court that the plaintiff’s requests for information about complaints of discrimination made by female employees against the Norwegian Foreign Service fell afoul of the Vienna Convention by infringing upon the inviolability of the embassy’s archives and documents. But the case is still going forward, with some of the plaintiff’s discovery requests (such as for certain laptops and phones provided by the embassy) passing muster with the court. 

Foreign sovereign employers embroiled in employment litigation face considerable uncertainty in U.S. courts. There is no guarantee of immunity and the potential liability can be significant. The preventative measures articulated above can help prevent lawsuits from arising and assist employers in defending themselves when they do.

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  • REBECCA M. ARAGON is a Shareholder at Littler Mendelson’s Los Angeles offices. She focuses on leading employment-related litigation in federal and state courts. JEAN M. FLANNERY is an Associate in Littler Mendelson’s Los Angeles offices. Jean represents and advises employers on a wide range of labor and employment law matters.
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