Recent events have resulted in greater scrutiny of arrangements involving the outsourcing of certain business functions by U.S. employers, particularly where such arrangements involve foreign workers on visas in the United States. This alert examines a recent discrimination charge filed by the former U.S. employees of the Disney Corporation alleging that their outsourcing activity has resulted in national origin and other forms of discrimination, and a recent Technical Advisory Letter (“TAL”) issued by the Department of Justice’s Office of Special Counsel (“OSC”), the agency charged with enforcing the non-discrimination provisions of the Immigration and Nationality Act in the United States.  As explained below, both employers who rely on outsourcing firms, and firms engaged in outsourcing, are increasingly at risk of discrimination claims. 

Outsourcing: What It Is

At its core, outsourcing is a business decision to move certain functions to a lower cost center or shift the functions to lower cost personnel, either in the United States or abroad.  While outsourcing to countries such as India, the Philippines, and Mexico has become increasingly common, reliance upon visa holders in the U.S. to assist in the outsourcing of this work, particularly in the IT industry, is drawing increasing political and media scrutiny. In some cases, visa holders engage in “knowledge transfer” from U.S. workers, which may include the transfer of knowledge of the company’s products and processes, and the U.S. worker’s job responsibilities, to the visa holder.  Many of these contracts result in the eventual displacement of U.S. workers who have traditionally been engaged in the business function that is being outsourced.   The work formerly performed by U.S. workers ends up being performed by visa holders employed by the outsourcing firm in the U.S. or, alternatively, visa holders assist the outsourcing firms in transferring the work to their home country. 

Recent Claims and Developments Alleging Employment Discrimination:

The New York Times ran several articles in 2015 reporting on how laid-off U.S. workers of several large U.S. corporations were forced to train employees of third party contractors, many of whom were on visas, as a condition of their severance packages. On June 3, 2015, the N.Y. Times ran a story about outsourcing and layoffs at the Disney corporation.  On September 29, 2015, the N.Y. Times ran a story about outsourcing and layoffs at Toys ‘R’ Us. The laid off employees’ job functions were ultimately outsourced to the contractor or yet another third party.  The newly trained foreign workers would then return to their home country to perform the jobs of the displaced U.S. workers or to train other workers to perform those jobs.

Disney: In January 2015, Disney laid off approximately 250 U.S. IT workers. Approximately 120 of these workers were hired back into other roles. The workers alleged that they were forced to train their replacements, who were on U.S. work visas (such as an H-1B). In November 2015, 27 former Disney IT workers filed a charge with the EEOC alleging discrimination under Title VII of the Civil Rights Act of 1964 based on national origin, age, and race. They also allege that their employer created a hostile work environment by forcing them to train their replacements.   

DOJ Office of Special Counsel: On November 2, 2015, former U.S. Representative, Bruce Morrison (D-NJ), sent a Technical Assistance Letter (“TAL”) to the Department of Justice (“DOJ”)’s Office of Special Counsel seeking guidance on the DOJ’s interpretation of the citizenship discrimination provisions set forth under the Immigration and Nationality Act (“INA”). Morrison specifically asked the DOJ to comment on the following questions:

1)      Can an employer be liable for citizenship discrimination when it terminates a U.S. worker and hires or retains a worker on a visa to perform the same functions, even if reductions in the cost of wages, benefits, or other employment-related expenses are the basis for displacing U.S. workers?

2)      Can an employer be liable for citizenship discrimination when it terminates a U.S. worker, obtains the services of a worker on a visa through a contractual arrangement, and establishes contractual terms to shield itself from knowledge of the contract worker’s immigration status?

Notably, Rep. Morrison was one of the drafters of the 1990 bill that established the H-1B visa program. He is now adviser to the IEEE-USA, a vocal critic of the H-1B program.

The DOJ issued its response on December 22, 2015.  While the DOJ did not directly answer the questions posed by Rep. Morrison, it did offer general guidelines regarding employer compliance with the INA’s anti-discrimination provisions in the context of terminations that result from outsourcing to foreign workers. 

First, the DOJ confirmed that a violation of the non-discrimination provisions of the INA could be shown even if the job functions of the displaced U.S. workers ultimately ended up being outsourced to a third-party contractor who relies on foreign workers, rather than the employer directly hiring a replacement employee who is a non- U.S. citizen.

The DOJ further stressed, however, that the anti-discrimination provisions of the INA only prohibit intentional discrimination, in contrast to other federal anti-discrimination laws that also prohibit facially neutral employment practices that have a “disparate impact” on a protected group.  This means that an employer only violates the INA anti-discrimination provision if it acts “because of” citizenship or immigration status.  Presumably, in many cases an employer will be able to successfully defend against intentional discrimination claims by showing that the outsourcing was motivated by legitimate business considerations, such as cost cutting.   

The Disparate Impact Theory of Liability Under Title VII Is a Growing Risk.

Notably, Title VII of the Civil Rights Act prohibits discrimination based on national origin, and Title VII, unlike the INA, prohibits practices that have a “disparate impact” on a protected group even where there is no evidence of intentional discrimination.

Two leading outsourcing consulting firms who rely heavily on HIB visa workers from South Asian countries are currently facing putative class action lawsuits that rely on “disparate impact” theories.  In each lawsuit a group of applicants and employees with these firms contend that these firms’ reliance on foreign visa workers result in unlawful race and national origin discrimination under both disparate impact and disparate treatment theories.   See Heldt, et al. v. Tata Consultancy Services, et al. (Case No. 15-CV-1696-YGR) and Koehler, et al., v. Infosys (Case No. 13-CV-885-pp). In each of these cases, the court has ruled that a theory alleging that the firms’ reliance on H1B visa workers has a “disparate impact” based on race and/or national origin may be potentially viable under Title VII.

In addition to the increased legal scrutiny placed on outsourcing firms that rely disproportionately on foreign visa holders, the pending EEOC charges against Disney and DOJ’s response to the Morrison letter suggest that clients of such outsourcing firms who rely primarily on South Asian workers may be vulnerable to “disparate impact” claims under a theory that the client and the outsourcing firms are “joint employers.”   To prove disparate impact discrimination, a plaintiff must show that a particular employment practice has a statistically significant disparate impact on individuals of U.S. national origin as compared to other national origin.  If this showing is made, the employer must show that the challenged practice is supported by a legitimate business justification.  Even if the employer makes such a showing, the plaintiff can prevail if it can show that the same business objective could have been achieved by a less discriminatory alternative. 

Typically, employers have avoided discrimination liability in outsourcing situations because the employer can show that all of the employer’s workers in the outsourced job function lost their jobs or were reassigned, and thus there was no “disparate impact” on any particular protected group.  If, however, an employer is deemed to be “joint employers” with the firm it hires to perform the outsourced work, a court could determine that “disparate impact” exists if the job functions of the displaced workers end up being disproportionately performed by foreign workers at the outsourcing firm.  It remains to be seen whether outsourcing firms, their clients, or both, will end up being held legally responsible for such a “disparate impact.”     

Practical Pointers:

Employers contemplating outsourcing of job functions to a third party that may rely on foreign workers should take the following steps:

• Make sure that the decision is supported by a sound economic analysis that demonstrates expected cost savings or efficiencies resulting from the decision.  This analysis should include consideration as to whether the same business objective could be achieved through other means that would not result in the reliance on a large number of foreign workers, such as the outsourcing of job functions to other lower cost areas of the U.S.
• Impacted employees should be offered severance conditional upon the signing of a full waiver and release to minimize the risk of discrimination claims brought by individual workers or a class of workers. Note, however, that while private severance agreements may avoid private lawsuits and limit the nature of the relief that the EEOC or DOJ could obtain, they will not protect against litigation initiated by a federal government agency.   
• To the extent possible, employers should minimize the level of control asserted over outsourced workers and job functions in order to minimize the risk of “joint employer” liability.