The Extraterritorial Application of State Wage and Hour Laws
August 16, 2022
“Standing up for fair pay” by Simon Oosterman (CC BY-NC-SA 2.0).
Many U.S. states have enacted wage and hour laws. These laws generally set a minimum wage and require employers to pay overtime. When a company headquartered in one state hires an employee to perform work in a foreign country, however, it is not always clear which jurisdiction’s laws will apply. Is the payment of wages governed by the laws of the state where the employer is based? Or is it governed by the laws of the country where the employee performs the work?
A federal court in Maryland (Judge Theodore H. Chuang) grappled with these questions in a case decided earlier this year. The employer was a translation company based in Maryland. The employees were U.S. residents hired to provide translation services at the U.S. Embassy in Kabul, Afghanistan. The question presented was whether Maryland’s wage and hour laws applied to the plaintiffs’ claims against their employer. The court looked to the Maryland state presumption against extraterritoriality to answer this question. It ultimately held that that presumption defeated the plaintiffs’ claims notwithstanding the existence of a Maryland choice-of-law clause in the relevant employment agreements.
In this post, I first provide an overview of the court’s decision. I then argue that this decision is problematic across three dimensions. First, it shortchanges the doctrine of party autonomy by ignoring the choice-of-law clause. Second, it runs the risk of creating a “law-free” zone where no laws apply to protect the rights of U.S. workers employed overseas. Third, it allows the employer to avoid a choice-of-law clause that it wrote into its own contract.
In Poudel v. Mid Atlantic Professionals, Inc., Krisna Poudel (“Poudel”), a Virginia resident, entered an employment contract with Mid Atlantic Professionals, Inc. (“MAPI”), a company incorporated and headquartered in Maryland, to work as an interpreter at the U.S. Embassy in Kabul, Afghanistan. A second plaintiff, Binod Dhakal, a resident of North Carolina, entered a similar agreement with MAPI to provided translation services. Poudel worked at the Embassy from 2017 to 2021. Dhakal worked at the Embassy from 2017 to 2019.
In 2021, Poudel and Dhakal sued MAPI in federal court in Maryland alleging violations of the Maryland Wage and Hour Law (“MWHL”) and the Maryland Wage Payment and Collection Law (“MWPCL”). Among other things, they alleged that MAPI had failed to pay each of them a promised $10,000 bonus, that it had unilaterally cut their hourly wages from $48 per hour to $40 per hour, and that it refused to pay the overtime rate when they worked more than 40 hours per week. Each plaintiff’s employment contract contained a Maryland choice-of-law clause.
MAPI moved to dismiss. It argued, first, that the Maryland courts generally presume that state statutes do not apply extraterritorially, and, second, that there was no language in the Maryland wage laws to rebut this presumption. Since all of the work had been performed in a foreign country, MAPI argued, the Maryland wage laws were inapplicable and the plaintiffs’ claims must fail.
Presumption Against Extraterritoriality
The court began its analysis by acknowledging that the relevant statutes were silent on the question of whether they applied to work performed outside of Maryland. There was no express legislative text stating that the statutes did not apply when work was performed overseas. The court ultimately concluded, however, that the claims asserted by the plaintiffs must fail by operation of the judicially created presumption against extraterritoriality:
If status as a covered employer under the MWPCL, even one that issues payroll from Maryland, is sufficient to establish that all Maryland wage law claims by any employee are not extraterritorial, then all employees of any company based in Maryland, even a multinational corporation, would potentially be able to invoke the MWPCL, even if they work only at offices or worksites in other states or countries and have never been to Maryland. The Court is not prepared to reach that conclusion absent some “expressly stated” intent to cover such extraterritorial work.
The situation would be different, the court observed, if the plaintiffs were Maryland residents or if some portion of the work had been performed in Maryland. It would also be different if they had attended work meetings in Maryland at periodic intervals. Since all of the work performed by Poudel and Dhakal had been performed in Afghanistan, however, the court reasoned that the Maryland wage laws were inapplicable notwithstanding the fact that their employer was headquartered in Maryland.
In theory, the presence of a Maryland choice-of-law clause in the employment agreements might have led the court to adopt a different conclusion. The court might have reasoned, for example, that the parties’ decision to select Maryland law should be given effect since there was no language in the relevant statutes stating that they did not apply extraterritorially. Instead, the court held that the choice-of-law clause was irrelevant because “an employee cannot create by contract a cause of action that state law does not provide.” Since the presumption had not been rebutted, in other words, the parties’ decision to choose Maryland law to govern their agreement was neither here nor there.
There is much to admire in the court’s decision in Poudel. At the end of the day, however, the decision is problematic in at least three respects.
First, the court’s decision shortchanges the principle of party autonomy. In cases where a statute expressly states that it does not apply extraterritorially, then the parties cannot create a cause of action by writing a choice-of-law clause into their contract. The Maryland wage statutes were, however, silent on this issue. When a statute is silent on the issue, a number of courts have held that the parties may opt into the statute via a choice-of-law clause. The court in Poudel failed to engage with or meaningfully distinguish these decisions.
Second, the court’s decision raises the uncomfortable possibility that the plaintiffs have entered a “law free” zone with respect to their wage claims. While the court held that the Maryland wage laws cannot support a cause of action on these facts, it is unclear whether the wage and hour laws of Afghanistan govern an employment relationship between a U.S. employer and a U.S. employee for work performed at the U.S. Embassy. If the laws of Afghanistan do not reach the employment relationship, then the employment relationship will not be governed by any wage laws.
Third, and finally, the court’s decision overlooks the fact that the Maryland employer was the one who wrote the Maryland choice-of-law clause into the agreement in the first place. It presumably did so because it saw some benefit in having the agreement be governed by the laws of its home jurisdiction (Maryland) rather than the home jurisdictions of the plaintiffs (Virginia and North Carolina) or the jurisdiction where the work was to be performed (Afghanistan). The court’s decision effectively allows the employer to have it both ways. It can invoke Maryland law if it wants to sue its employees for breach of contract. It can avoid the Maryland law, however, when its employees bring claims under the Maryland wage acts. This asymmetry would be defensible if the wage statutes contained express language stating that they do not apply extraterritorially. In the absence of such language, however, the court’s refusal to allow the plaintiffs’ claims to proceed amounts to an undeserved windfall for the employer.
Employees are increasingly mobile. They may reside in one jurisdiction, be employed by a company in a second jurisdiction, and perform their work in a third jurisdiction. In such situations, wage and hour laws have an important role to play in protecting employees against unfair treatment. When courts invoke the presumption against extraterritoriality to deny legal protections to employees whose employers require—as a condition of employment—that their employment contracts be governed by the laws of the employer’s home state, then one may fairly wonder whether it is time to rethink the presumption.