Big boys of Indian IT need to guard against class action suits
There is a body of experts who feel that as Indian IT companies hire more
locals in foreign markets and grow larger in size, exposure to such
lawsuits will only increase.
It was a Valentine's Day Tata Consultancy Services (TCS) would rather forget. On February 14, 2006, a former employee filed a class action lawsuit in a US court against India's largest software services exporter.
Gopi Vedachalam, an Indian sent by TCS to work on a client project in the US, alleged that the company was violating local employment laws. His suit, filed on behalf of 13,000 employees, stressed that TCS had "unjustly enriched" itself by asking all non-US citizen employees to pay federal and state tax refunds to the company. TCS, he alleged, was also making unauthorised deductions from pay cheques.
The case dragged on for seven years - a second plaintiff, another former TCS employee Kangana Beri, joined the lawsuit. Many witnesses were examined and thousands of pages of documents were produced as evidence by both sides in a California court. Finally, on February 25 this year, TCS announced that it has reached a $29.75 million settlement, but did not admit to any wrongdoing.
"We decided to end this case so we can focus our energies entirely on continuing to provide world-class service to our clients," the company said in a statement.
Class action lawsuits such as this, where a group of people join hands to fight a large corporation for a common cause, is a rare event for Indian companies operating in the US. While many multinational technology companies have been at the receiving end of class action suits, Indian companies have been largely insulated thus far.
The only other prominent example is that of Mahindra Satyam's $125-million settlement in 2011 - a group of investors sued the company for damages in the aftermath of the Satyam scam in 2009.
"The last year has seen an overall increase in the number of employment related class action lawsuits being filed in the US and it is expected that this trend will continue. However, we do not see any reason for an increase in class action lawsuits that are targeted at Indian technology companies," says Inderpreet Sawhney, General Counsel at IT firm Wipro.
According to US-based law firm Seyfarth Shaw LLP, 7,672 Fair Labor Standards Act (FLSA) class action lawsuits were filed in 2012, an increase of 893 cases from 2011. The firm expects the number to grow again in 2013 in employee-friendly state courts like California and New York. FLSA stipulates minimum wage and overtime payment norms among others. Technology giant Hewlett Packard (HP), for instance, is currently facing a class action lawsuit that charges the company with denying overtime work pay to employees.
While Sawhney does not think Indian tech companies will be targeted, there is a body of experts who feel that as these companies hire more locals in foreign markets and grow larger in size, exposure to such lawsuits will only increase. Following and interpreting labour laws in the US has been the Achilles' heel for many IT companies, say analysts.
"About 10 years back, Indian companies used to take people from India to the US and give them lower salaries. Many did not comply with minimum salary norms. Now that the companies are larger and more visible, they have to ensure laws are complied with to the dot," says Pradeep Mukherji, President and Managing Partner of management consulting company Avasant. Indian companies have to be wary of harassment laws, according to Mukherji. "If Indian managers are not sensitive to local issues, it can result in lawsuits.
Racial, sex, colour-creed discrimination could lead to problems. The language used for running operations should be well defined," he says.
Some smaller Indian companies are seen to be not complying with local labour laws. It is denting the image of the big Indian companies as well.
For instance, in February, six executives working for a tiny company started by people of Indian origin, Dibon Solutions, were indicted in Texas on charges of visa fraud. The company marketed itself as an IT consulting company and sponsored H-1B visas for those willing to work in its Texas office. However, employees were then subcontracted to other technology companies.
So, how do India's large corporates guard against class action suits? Companies hold that while they do business ethically, they have little to be concerned about.
"The US is a litigious country. We should be ready for something like this (lawsuits). As long as business practices are good, we don't have to worry about it," says V. Balakrishnan, former CFO and a board member at India's thirdlargest IT services company Infosys.
The best defence in employment law matters is to have robust policies that are clearly articulated, a strong human resources team that ensures the implementation of policies, a process of dissemination of information to managers and employees and an Ombudsman process to timely address employee issues, says Wipro's Sawhney. "A strong legal team is key to ensuring that compliance policies are in place. An employer should be in a good place to defend itself if a class action is brought against the company," she added.
While the TCS settlement has not unduly bothered analysts yet, its repercussions need to be watched nevertheless. If a body of stakeholders win a class action suit, others may be encouraged to file a similar suit quoting the previous win as a precedent, points out Sajai Singh, Partner with law firm J. Sagar Associates.
The website of Lieff Cabraser Heimann & Bernstein, the law firm that represented Vedachalam against TCS, has an ominous message posted already: "Lieff Cabraser is investigating other Indian and American companies that may have also breached employment agreements and violated state labour laws for Indian employees sent or transferred to the US."
Attorneys in a class action lawsuit can pocket as much as 30 per cent of the value of the settlement fund ($8.92 million in the TCS case), besides litigation expenses. That is good enough reason for them to be interested in Indian companies.
Gopi Vedachalam, an Indian sent by TCS to work on a client project in the US, alleged that the company was violating local employment laws. His suit, filed on behalf of 13,000 employees, stressed that TCS had "unjustly enriched" itself by asking all non-US citizen employees to pay federal and state tax refunds to the company. TCS, he alleged, was also making unauthorised deductions from pay cheques.
$29.7mn The amount TCS paid to settle a class action suit in the US
"We decided to end this case so we can focus our energies entirely on continuing to provide world-class service to our clients," the company said in a statement.
Class action lawsuits such as this, where a group of people join hands to fight a large corporation for a common cause, is a rare event for Indian companies operating in the US. While many multinational technology companies have been at the receiving end of class action suits, Indian companies have been largely insulated thus far.
The only other prominent example is that of Mahindra Satyam's $125-million settlement in 2011 - a group of investors sued the company for damages in the aftermath of the Satyam scam in 2009.
"The last year has seen an overall increase in the number of employment related class action lawsuits being filed in the US and it is expected that this trend will continue. However, we do not see any reason for an increase in class action lawsuits that are targeted at Indian technology companies," says Inderpreet Sawhney, General Counsel at IT firm Wipro.
While Sawhney does not think Indian tech companies will be targeted, there is a body of experts who feel that as these companies hire more locals in foreign markets and grow larger in size, exposure to such lawsuits will only increase. Following and interpreting labour laws in the US has been the Achilles' heel for many IT companies, say analysts.
"About 10 years back, Indian companies used to take people from India to the US and give them lower salaries. Many did not comply with minimum salary norms. Now that the companies are larger and more visible, they have to ensure laws are complied with to the dot," says Pradeep Mukherji, President and Managing Partner of management consulting company Avasant. Indian companies have to be wary of harassment laws, according to Mukherji. "If Indian managers are not sensitive to local issues, it can result in lawsuits.
Experts say that as Indian IT companies hire more locals and grow larger in size, exposure to such lawsuits will only increase
Some smaller Indian companies are seen to be not complying with local labour laws. It is denting the image of the big Indian companies as well.
For instance, in February, six executives working for a tiny company started by people of Indian origin, Dibon Solutions, were indicted in Texas on charges of visa fraud. The company marketed itself as an IT consulting company and sponsored H-1B visas for those willing to work in its Texas office. However, employees were then subcontracted to other technology companies.
"The US is a litigious country. We should be ready for something like this (lawsuits). As long as business practices are good, we don't have to worry about it," says V. Balakrishnan, former CFO and a board member at India's thirdlargest IT services company Infosys.
The best defence in employment law matters is to have robust policies that are clearly articulated, a strong human resources team that ensures the implementation of policies, a process of dissemination of information to managers and employees and an Ombudsman process to timely address employee issues, says Wipro's Sawhney. "A strong legal team is key to ensuring that compliance policies are in place. An employer should be in a good place to defend itself if a class action is brought against the company," she added.
The US is a litigious country. We should be ready for something like this (lawsuits): V. Balakrishnan
The website of Lieff Cabraser Heimann & Bernstein, the law firm that represented Vedachalam against TCS, has an ominous message posted already: "Lieff Cabraser is investigating other Indian and American companies that may have also breached employment agreements and violated state labour laws for Indian employees sent or transferred to the US."
Attorneys in a class action lawsuit can pocket as much as 30 per cent of the value of the settlement fund ($8.92 million in the TCS case), besides litigation expenses. That is good enough reason for them to be interested in Indian companies.
