Crash Course in U.S. Employment Law: How a Multinational Based Outside the United States Can Avoid Big Mistakes Managing a U.S. Workforce

  • Multinationals based outside the United States that enter the U.S. market and employ U.S. staff tend to encounter hurdles, and to make mistakes, because the U.S system of labor/employment regulation is of a fundamentally different character from those of every other country in the world.  
  • Multinationals entering the U.S. market can avoid five common mistakes if they focus on certain fundamental differences between U.S. workplace regulation and that of other countries.
  • The five main problem areas are: the unique “employment-at-will” system; uniquely U.S. “offer letter” employment contracts; a unique regime regulating unions and organized labor; the unique procedural hurdles of U.S. lawsuits and litigation; and the lack, under the U.S. system, of a comprehensive data protection law.

Every country’s own legal system is of course unique. Local laws vary significantly even between next-door neighbors―French law differs significantly from German, Venezuelan law is unlike Colombian, and Thailand’s laws are quite distinct from Cambodia’s. But as to regulation of the workplace, one legal regime diverges fundamentally from all the rest: The United States stands apart in its own one-country category as the world’s only jurisdiction operating under so-called “employment-at-will.” Just a step across the world’s longest international border, for example, Canada’s various federal and provincial labor/employment law systems do not follow employment-at-will.

When entering the U.S. market and employing U.S. staff for the first time, a multinational headquartered outside the United States (and its executives and human resources experts) may not appreciate what makes the U.S. workplace regulatory system so unusual. Basic features of the labor/employment regime tend to surprise those from countries with more mainstream approaches to structuring employer/employee relationships. Not surprisingly, these unexpected features of U.S. workplace law often cause expensive mistakes. Many of those mistakes happen repeatedly.

U.S. labor/employment law is complex; it takes a multi-volume treatise or an entire law school course just to summarize it adequately. Here, this short crash course on the laws that regulate U.S. employment relations attempts a practical and concise approach by focusing only on what makes the U.S. system different, cataloging the most common employment-law challenges that confront outside-U.S. companies (and managers) steeped in their own home-country workplace laws, when they enter the U.S. market and start employing staff stateside.

Our discussion lists, and explains, the five most common mistakes that overseas-based employers make when they come to the United States and employ workers in any of the 50 states.

  1. Managing human resources while overlooking the unexpected ramifications of employment-at-will

As noted, the United States is the only country with an employment-at-will system. While employment-at-will originated under old English common law, these days even England, Ireland, Canada, Australia, South Africa, Jamaica, Kenya, Malawi, Hong Kong, Singapore and all other Anglo-system countries have moved beyond.

U.S. employment-at-will has several unusual features:

  • Dismissals. Under employment-at-will, the employer can legally dismiss (fire, lay off, make redundant) an employee for any reason or no reason―other than an illegal discriminatory or retaliatory reason―without notice and without owing any severance pay. Therefore, generally, in the absence of a special contractual obligation, under U.S. law whether an employer did or did not have “good cause” for dismissal is not even a legally relevant issue. 
  • Cuts. An employer can legally demote, cut pay, “restructure” or otherwise reduce or eliminate any term or condition of employment for any reason or no reason―other than an illegal discriminatory or retaliatory reason―without notice and without having to get worker consent or do a “buy out” (except for cuts to certain protected benefits provided under an employee benefit plan that is subject to the Employee Retirement Income Security Act).
  • Regulations. Employee-protective legal systems outside the United States impose various types of rules on employers that laissez faire employment-at-will leaves unregulated, a matter for each employer to decide when it structures its internal HR policies and offerings. For example, besides not requiring dismissal notice or severance pay, U.S. law does not require issuing written work rules; does not require issuing written employment agreements or statements; does not require paying profit-sharing or any bonuses; does not impose caps on hours worked in a workweek; and generally does not require paid or unpaid vacation, paid or unpaid public holidays, paid sick leave, paid maternity leave or other paid leaves, although some U.S. laws require certain unpaid leaves, and laws in a minority of U.S. states and cities require some types of paid leave.

One U.S. state has technically eliminated employment-at-will: tiny-population Montana, but by international standards even Montana’s system is notably employer-friendly. To some, California seems to have gone its own way in regulating employment law, but even California retains employment-at-will, albeit with significantly more exceptions and employer obligations. 

Employment-at-will is a sort of legal vacuum. Scientists say “nature abhors a vacuum,” and what rushed in to fill the employment-at-will legal vacuum is discrimination and harassment law (under U.S. employment law, harassment is a form of discrimination). Compared to other countries, in the United States a huge percentage of worker disputes and court lawsuits involve a claim of discrimination, harassment or retaliation for complaining about discrimination or harassment; these claims tend to allege “animus” against the employee-victim because of one of about a dozen “protected” traits―race, national origin, religion, disability, old age over 40, gender, veteran status, genetic predisposition and a handful of others.  

For example, a wrongful dismissal claim in another country gets framed in the United States as a discriminatory dismissal claim. A claim overseas alleging “disproportionately” imposing discipline gets brought in the United States as a claim for discriminatory discipline. A bullying claim overseas gets asserted stateside as a discriminatory harassment claim. And an abuse-of-discretion case in another country (say, challenging a low pay raise, a withheld bonus or a demotion) gets framed in the United States as a claim of discrimination in pay or terms/conditions of employment.  

Therefore, stateside, most every HR decision and policy needs to account for complex doctrines of U.S. discrimination law. Multinationals headquartered abroad but operating in the United States make mistakes related to employment-at-will when they stomp, rather than tiptoe, through the minefield of nuanced discrimination law doctrines that disgruntled U.S. workers commonly invoke―because employment-at-will leaves them no better claim.

And a separate challenge (if not really a mistake) related to employment-at-will’s laissez faire regulatory approach is that employers setting up new U.S. employment operations face too many choices, compared to other countries. A new U.S. employer must decide on a full suite of HR policies and HR offerings―ideally set out in a U.S. “employee handbook”―and must make many basic decisions, including for example even what holidays to offer, if any. (The day after Thanksgiving is a sacrosanct rest day in many U.S. workplaces but is just another regular workday, business as usual, in others.) A mistake that overseas-based employers are vulnerable to is voluntarily offering overly expensive HR offerings―such as above-market vacation and severance pay policies―that mimic the generous legal mandates common outside employment-at-will. 

  1. Imposing formal written employment contracts on U.S. staff

U.S. law does not require employers to issue either written employment contracts or written statements of employment particulars, and only a tiny percentage of U.S. non-government workers are party to formal written employment contracts (the exceptions tend to be some, not all, high-level executives and technical workers). Instead, most U.S. workers either work under an oral employment arrangement or else have a so-called “offer letter”―in effect, creating an informal employment contract.

Some U.S. workers are parties to formal but limited-topic restrictive covenants, non-competes, non-disclosure agreements and intellectual property assignments. These are formal contracts, but they address only special topics―not employment terms generally.

Superficially, a U.S. offer letter looks like correspondence―a letter, not a contract. It addresses some but not necessarily all key employment terms. Almost all well-drafted offer letters contain a clause declaring employment is “at-will” (point # 1 above). The employer is supposed to sign the offer letter and typically the worker is also supposed to sign as “AGREED.”

In the United States even HR experts and lawyers tend to say that an offer letter is not a “contract” because it expressly says employment is at-will, and many U.S. offer letters contain a clause inaccurately claiming: “This Is Not a Contract.” But legally, in all 50 U.S. states, any offer letter accepted by the worker is a contract, enforceable until terminated or changed. For example, most U.S. offer letters set out the worker’s wage rate; if (hypothetically) an employer were to underpay a worker less than the offer letter’s stated wage rate but above statutory minimum wage, that worker enjoys a legal right―under contract law―to force the employer to pay the difference until the last day worked or until the employer lowers the wage going forward. The point is that while a terminable at-will agreed offer letter leaves the employer free to dismiss the worker and to change employment terms going forward, it contractually prohibits the employer from making changes retroactively.  Even the label or phrase “offer letter” is deceptive. As soon as the employee addressee executes or accepts the document, it converts, as a matter of law, from a mere “offer” to a full-on (albeit terminable-at-will) contract.

Employers headquartered overseas operating in the United States are prone to the mistake of giving U.S. job applicants overly formal, overly detailed employment contracts that restrict the employer’s flexibility to make changes going forward. These formal employment agreements sometimes export employer-restrictive “garden leave” and severance pay provisions that are uncommon and may be inappropriate in the U.S. context. A better practice is to embrace the quirky practice of the informal-but-written terminable-at-will U.S.-style offer letter contract. These documents, unusual as they may seem from an international perspective, are familiar to onboarding U.S. staff and perfectly suited to the U.S. HR environment.

  1. Managing labor relations while overlooking the U.S. approach to organized labor

In U.S. parlance, “labor law” refers to collective labor relations while “employment law” means workplace law regulating individual employees. U.S. labor law generally recognizes trade unions―in the United States called “labor” unions―as the only legal form of collective labor representative, meaning that an in-house works council, worker committee or even health-and-safety committee is subject to being held flatly illegal. Also under U.S. labor law, collective bargaining agreements are bilateral, between one union and just one company (or a voluntary “multi-employer” consortium of signatory companies). And U.S. labor law does not impose union contracts industry-sector-by-sector. This means that a non-union U.S. employer: has no bargaining relationship with any labor union; it need not (indeed may not) sponsor any in-house worker/management bodies; and it need not comply with any industry-wide (“sectoral”) collective labor contract. By definition, it has no negotiating obligations or relationships or agreements with any worker representatives.

These features of U.S. labor law bifurcate a stark all-or-nothing dichotomy, making every U.S. workplace either “unionized,” or not. And only about 6% of U.S. non-government workers are unionized; 94% are not.

The late Belgian law professor Roger Blanpain, a champion of international union solidarity universally recognized as the greatest international-employment-law expert of his day, once said that―thanks to the all-or-nothing bifurcated model of U.S.-style unionization―the money cost to an employer of being unionized (versus being union-free) is greater in the United States than in any other country on Earth. Blanpain appreciated how the bifurcated labor model imposes an outsized impact of unionization on employer profits and the “bottom line.” He understood that the U.S. labor law framework explains why U.S. companies might take proactive steps to maintain direct negotiation relationships with their individual employees, in the hope of making unionization seem unnecessary.  

Many multinationals based in Europe and beyond bring a different approach to interacting with worker representatives. They speak of being “social partners” with their various organized labor groups, and they proclaim how their collective labor bodies contribute to business results. Some companies reserve seats on their corporate boards for labor representatives (although usually local corporate law compels reserving board seats for organized labor, anyway).  

When these companies enter the domestic U.S. market, the local model of labor/management relations may appear regressive, antagonistic, insensitive to social justice and inconsistent with International Labour Organization declarations on the right to labor “free association.” These companies may seek to defuse U.S.-style labor/management tensions, even by declaring neutrality and committing not to oppose union drives. U.S. labor unions, of course, welcome this position. U.S. unions might easily unionize one of these companies, materially pushing up its U.S. labor “spend.”

A multinational’s social commitments are a vital, laudable business imperative. Meanwhile, to operate stateside with a blind eye toward U.S. employers’ usual responses to the starkly bifurcated model of U.S. labor/management relations might create distinct strategic, business, operational, financial and labor-relations challenges.

  1. Managing HR while overlooking U.S. court lawsuit processes

Because U.S. employment-at-will leaves employers mostly free to demote and even fire their staff without having to give notice or pay anything (point # 1, above), we might assume that U.S. workers rarely get a viable legal claim to sue an employer in court. And this assumption actually is correct: By international standards, employment-context cases tread more lightly on U.S. court dockets. Many other countries have had to set up special-jurisdiction “labor courts” expressly to handle thousands of employment lawsuits pending at any given time, while in the United States, on both a per-worker and per-redundant/“laid-off”-worker basis, court-filed lawsuits are notably less common. In the United States, no one is surprised to find an employer with hundreds of workers that is not party to even a single pending employment court case, or a company conducting a collective redundancy (“lay-off”/“reduction-in-force”) without getting sued by even one dismissed worker.

But in those scenarios where a U.S. employer does get sued in court, the stakes can get enormous because of four challenging aspects of U.S. “civil procedure” (court process):

  1. Damages. U.S. metrics for lawsuit money damages radically outstrip comparable awards even in other developed countries. Imagine two workers, one in the United States and the other in another developed country, both suffering the identical workplace wrong―say, the same act of discrimination, harassment or retaliation. If both sue in court and win, we might expect the money judgment in the U.S. case to come in at several multiples, or more, above the money award in another country.
  2. Discovery. A U.S. court claimant enjoys a broad right to conduct pre-trial “discovery.” In the employment context, this means the employer often must answer “interrogatory” questions in writing; disclose huge volumes of internal, confidential company documents including reams of emails and text messages; and require staff to sit through adversarial under-oath interviews (“depositions”). Sometimes this discovery ignites other lawsuits from other workers.
  3. Motions. U.S. court proceedings typically involve a complex “motion practice”―pre-trial disputes with lawyers asking the judge to frame the scope of the case.
  4. Class actions. U.S. “class actions” are unique because they are opt-out: Judges have power to define an entire class of people suing the company, without individual claimants signing up or even being told about their lawsuit. In other countries, by contrast, a “collective action” is opt-in―it merely consolidates the claims of adversaries who have affirmatively stepped forward and ask to sue.

In managing the U.S. workplace, avoiding even the occasional court lawsuit has become a business imperative. Too many employers headquartered in other countries enter the U.S. market overlooking the vital need to manage U.S. HR defensively, proactively avoiding employment lawsuits.

  1. Inserting cumbersome personal data protections where they do not belong

The European Union’s General Data Protection Regulation (GDPR) confers broad personal data protection rights on worker “data subjects,” such as the rights: to be informed about what personal data an employer/data “controller” has; to access (see) all a worker’s own data; to have the employer purge obsolete and business-unnecessary personal data; to get data “impact assessments,” and to bar the employer from doing “automated decision-making” and from improperly “exporting ” or “onward transferring” a worker’s personal data to third parties or overseas. Beyond the EU, these days dozens of other countries across Eastern Europe, Asia, Latin America, the Caribbean and Africa now impose their own EU-inspired data protection laws conferring most or all of these same personal-data-protection rights on local “data subjects,” including workers.

The United States is an outlier in not imposing an analogous data law. In fact, the U.S. constitutional Bill of Rights may prohibit a law that infringes someone’s freedom of speech to disclose personal data about someone else. Even so, California and a few other states now regulate personal data in a modest way, and some specific federal laws protect certain categories of personal data such as medical records, consumer data, financial credit reports and children’s internet activity―but not employee records. Even as a complex legal framework has emerged to regulate privacy and personal data in the United States, U.S. workers still do not enjoy broad GDPR-like personal-data-protection rights like personal data “information transparency,” “data subject access,” data “impact assessments,” purging “[un]necessary” personal data, or restrictions against “automated decision-making,” personal data “exports” and “onward transfers.”

No responsible employer is cavalier about workers’ interests in protecting their private information. And in recent years, even though local U.S. workers still do not expect broad GDPR-like data protections, attitudes have become more enlightened about the need to protect personal data and privacy. Still, very few local domestic U.S. employers promulgate internal HR policies that confer GDPR-like data protection rights on U.S. staff. Meanwhile, though, many multinationals based outside the United States have issued global GDPR-compliant personal data protection policies to their workforces worldwide, therefore reaching employees in the United States. Not surprisingly, some of the multinationals that have voluntarily granted to stateside staff GDPR-like data rights encounter difficult consequences.    

Given the high stakes of the U.S. litigation environment (point # 4 above), employers operating in the United States should think hard before issuing any HR policy that grants U.S. workers the full suite of GDPR personal data protections. In the U.S. context, scenarios are easy to imagine of a GDPR-compliant policy being used in court against a well-intentioned but hapless employer.

Three unexpected features of U.S. HR

Beyond these five mistakes, three additional features of the U.S. workplace and U.S. labor/employment law tend to surprise multinationals first entering this market:

  1. Tiered legal system. The U.S. federal government imposes some labor/employment laws, while individual states and cities impose others. Different, often overlapping issues of workplace regulation get regulated at these three different tiers. The result is that the answers to certain employment law questions can get significantly more nuanced in, say, San Francisco, California and New York City than in Phoenix, Arizona or Little Rock, Arkansas.
  2. Medical insurance. The United States does not offer a public/government-funded medical system, so U.S. residents need medical (“health care”) insurance. Many U.S. employers offer medical insurance plans―employers of over 50 employees must offer them to avoid potential tax penalties―but workers themselves often have to pay some or all of the insurance premium.
  3. Private pensions. The U.S. public pension system, called “Social Security,” pays retirees only a low replacement rate of their final average pay, so U.S. workers need supplementary private pensions. Many employers sponsor tax-deferred defined-contribution private pensions called “401(k) plans,” but workers themselves pay the bulk if not all contributions to such plans. And U.S. law prohibits mandatory retirement―many older U.S. workers choose to continue to work.

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U.S. labor/employment law is complex. Indeed, we have not yet even mentioned some entire sub-areas of it here―such as wage/hour (working time) law; drug testing and background checking; the comprehensive federal statute regulating employee benefit plans; workplace health/safety law and the “workers’ compensation” system for workplace personal injury claims; unemployment insurance for redundant workers; and mandated notice before certain large collective redundancies. Most of these issues have counterparts under employment law in other countries, but the U.S. approach to regulating them differs.  

Our high-level discussion here is meant not as a comprehensive summary of all U.S. labor and employment law, but rather as an issue-spotting crash course to point out which aspects of the U.S. employment law regime differ most markedly from systems in other countries―to highlight, for a multinational entering the U.S. market, the most hazardous issues likely to cause expensive mistakes.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.