Act Now Advisory: Japanese Parent Company May Be Liable for Employment Decisions of Its US Subsidiary

by Epstein Becker & Green

The US Court of Appeals for the Second Circuit recently decided a case that should be taken into consideration when Japanese (and other foreign-based) companies determine the level of active involvement that their parent company will have in making employment decisions affecting US-based employees. In Brown v. Daikin Am. Inc., the plaintiff, Todd Brown, filed a race and national origin discrimination lawsuit against both his employer, Daikin America, and its Japanese parent company, Daikin Industries, Ltd., located in Japan.

The federal district court (the lowest-level federal court) for the Southern District of New York (which includes New York City) had held that Brown failed to state a claim against the Japanese parent company, Daikin Industries, on his race and national origin discrimination claims. The court held, among other things, that Daikin Industries, as the parent company, was not Brown's "employer," a primary element of a discrimination claim under federal, state, and New York City anti-discrimination laws. On appeal by the plaintiff, the Second Circuit Court of Appeals "reversed," finding that the American subsidiary and the Japanese corporate parent were, on the facts before it, part of a "single integrated enterprise" and that the parent could therefore be considered Brown's "employer."

The Facts

Daikin Industries is a Japanese company with a wholly owned subsidiary in the United States, Daikin America. As many Japanese and other foreign companies do, Daikin Industries assigned a number of its own employees to its US subsidiary to perform services at Daikin America. In 2009, Brown's department, comprised of three locally hired non-Japanese Americans and three rotational Japanese employees, experienced a reduction in force. Brown and one other locally hired American were terminated, while a third American was transferred to another department. The only remaining employees in the department were the three Japanese rotational employees assigned from the parent. Brown brought his lawsuit against both Daikin America, his actual employer, and Daikin Industries, its Japanese parent, for race and national origin discrimination.

Daikin Industries as Brown's "Employer"

After the lower court granted a motion to dismiss the case against Daikin Industries, holding, in part, that it was not Brown's employer, Brown appealed and the Second Circuit reviewed this determination. The Second Circuit applied the following four-factor test to ascertain whether Daikin Industries and Daikin America were, for purposes of this case, a "single integrated enterprise," sufficient to hold Daikin Industries liable as Brown's employer for the alleged discrimination: (1) interrelation of operations, (2) centralized control of labor relations, (3) common management, and (4) common ownership or financial control. The Second Circuit found that, because of the role the Japanese parent company played in connection with certain employment decisions affecting the US subsidiary, there was centralized control over labor relations in this case.

Further, and importantly, the Second Circuit ruled that whether the operations and decision making at two related entities are sufficiently integrated to find that they are a "single integrated enterprise" (meaning here that the parent in Japan could be found to be an employer of the plaintiff) is generally a question of fact and, for that reason, not suitable to resolution in a motion to dismiss.

In this case, Brown was found to have sufficiently alleged that Daikin Industries directed Daikin America to discharge "only employees who were not Japanese" in connection with the reduction in force. He further alleged that Daikin Industries prohibited Daikin America from terminating or reassigning Japanese rotational employees of the parent company who were on a temporary assignment to the US subsidiary. The Second Circuit found these allegations sufficient to withstand a motion to dismiss the complaint against Daikin Industries.

Rotational Employees as "Similarly Situated" to Brown

Daikin Industries' other argument in support of its motion for dismissal of this case was that Brown had not sufficiently argued that he was "similarly situated" to the Japanese rotational employees who remained employed when Brown was fired. Indeed, in order to successfully allege a claim of discrimination, a plaintiff must allege that (1) he falls within a protected group, (2) he held a position for which he was qualified, (3) he experienced an adverse employment action, and (4) the adverse action occurred under circumstances giving rise to an inference of discrimination. A plaintiff may satisfy this fourth prong by alleging that he was treated less well than similarly situated employees of other races or national origins.

The Second Circuit found that, notwithstanding the fact that the rotational staff and Brown were, in fact, ultimately employed by different employers, Brown was, nevertheless, similarly situated to the rotational employees because the majority of his group reported to the same supervisor and was thus subject to the same performance evaluation and disciplinary standards. Indeed, the Second Circuit noted that, at this early stage in the case (a motion to dismiss the complaint), where the facts of the case had not yet been established and analyzed, and the plaintiff's allegations must be treated as being true, the Second Circuit must give the plaintiff the benefit of the doubt on questions supported by facts, such as the question of whether local and rotational staff are "similarly situated."

Next Steps

Now the case will be sent back down to the federal district court so that the discovery process can begin, and Daikin Industries can attempt to build its case that (1) it is a separate enterprise from Daikin America, and (2) the rotational employees were not similarly situated to Brown.

What Japanese Employers Should Do Now

The holding of this case is particularly important for Japanese and other foreign-based companies doing business in the United States through locally incorporated subsidiaries. The involvement of the parent company in its subsidiary's day-to-day decision making, particularly in employment decisions, can render the parent company liable for its subsidiary's actions.

Of course, the holding in this case merely precludes dismissal of the Japanese parent at this early pre-discovery stage in the case. It does not mean that liability will ultimately be found on behalf of Daikin Industries or that the parent and subsidiary will be found to be a single integrated enterprise when the law is applied to the actual facts. We will keep you informed of future developments in this case.

In light of the holding in this case, we recommend that the following protocols be undertaken when employment decisions are made at US subsidiaries of Japanese and other foreign-based companies:

  • As much as possible, localize personnel decision-making. While it is certainly appropriate for parent companies to make broad decisions regarding the US business (e.g., whether a reduction in force should occur or whether incentive bonuses should be provided generally), to the extent possible, the local US company should be charged with making individual employment decisions, such as how big a bonus a particular employee should receive or whether an employee should be terminated as part of a layoff.
  • Rotational staff should be trained with respect to the legal and cultural differences attendant to working in the United States.
  • All managers should be trained as to the legal issues related to managing, disciplining, and terminating employees and applicable company policies.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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