Monday, October 20, 2014

USA - What You Need to Know About Supplier ("Sweatshop") Codes of Conduct

By Donald C. Dowling, Jr.
Partner, White & Case LLP, New York

With renewed attention on supply chain ethics after the 2012 California the Supply Chain Transparency Act, the 2013 Bangladesh factory collapse, and construction workers’ conditions in the Middle East, organizations that source products and services from the developing world need a clear strategy as to supplier or “sweatshop” codes of conduct.

Global supplier conduct codes first got traction in the 1990s when American human rights activists championed them as a weapon to fight perceived overseas labor abuses and to promote workers’ rights in the developing world. U.S. labor union activists interested in job security for American workers—“protecting American jobs”—jumped on this bandwagon and promoted supplier codes, too. Then California the Supply Chain Transparency Act, effective since 2012, that required companies to confirm they are not complicit in human trafficking or slavery. More recently, the 2013 Rana Plaza factory collapse in Bangladesh actually reinvigorated the supplier code of conduct movement, even though a building collapse has nothing to do with labor standards and everything to do with real estate construction code standards.

Today, human rights activists and U.S. organized labor continue to urge those multinationals that resell third-world-sourced product in rich first-world markets to impose supplier codes of conduct and to police the labor conditions of the overseas workers working for companies that sell goods to multinationals. (See W. Martucci, et al., “International Workers, Companies and Consumers,” Law360, Aug. 19, 2013) That said, trade unions in developing countries tend to oppose overzealous American attempts to protect third world workers—too much protection threatens the jobs of the very workers ostensibly protected. (See Thomas Friedman, Don’t Punish Africa, N.Y. TIMES, Mar. 7, 2000)

The multinationals that issue robust supplier codes of conduct tend to be businesses that source low-cost manufactured product from the developing world—technology hardware marketers like Apple and Samsung, athletic shoe companies like Nike and Adidas, mass-market retailers like Wal-Mart and Target, mid-market fashion marketers like Liz Claiborne and Donna Karan, sports equipment and toy makers like Mattel and Reebok. Some oil and mining companies and some global manufacturing conglomerates (General Electric, for example) also impose supplier codes. And supplier codes pop up in unexpected sectors, like the Starbucks “fair trade” sourcing protocols and New York University’s Statement of Labor Values (which made headlines in May 2014). But supplier codes of conduct are far from ubiquitous. They remain relatively rare in industries from food and restaurants to finance, professional services, industrial supply, business-to-business sectors and most all services industries. In fact, supplier codes of conduct are not even much of an issue among high-end luxury goods brands that source product from rich countries.

Before drafting, updating or adopting any supplier “sweatshop” code of conduct, consider five issues:

External focus: Unlike internal codes of conduct and business ethics, supplier “sweatshop” conduct codes are external, neither addressed to nor meant to protect the multinational issuer’s in-house staff on its own payroll. Rather, supplier codes protect workers on the payrolls of the multinationals’ unaffiliated suppliers. While some codes purport to reach both supplier employees and the multinational code issuer’s own staff, internal compliance rarely matters to anyone, because any multinational that goes to the trouble of issuing a supplier code thinks of itself as a conscientious employer not operating “sweatshops” of its own. Indeed, even the activists and labor unions that complain about foreign sweatshops rarely accuse multinationals themselves of shoddy labor practices in their own in-house operations (but there are a few exceptions, like discount retailers).

Poor-country focus: External supplier codes of conduct almost always purport to reach a multinational’s suppliers worldwide, across rich and poor countries alike. But as a practical matter, these codes only concern suppliers in the developing world. While labor abuses occur everywhere, no activist who decries sweatshops sees domestic labor abuses as a pressing social issue in, say, Canada, Denmark or Japan. So while multinationals nominally extend their sweatshop codes to suppliers in rich countries, rich-country suppliers often ignore them. No one seems to complain.

Supplier code content: Supplier codes of conduct require the multinational’s sellers to meet whatever minimum labor protections the code spells out. The specific minimum labor standards covered differ widely from code to code. Some supplier codes focus on just a single issue or two—child labor, slave labor or human trafficking, for example. But most supplier codes cover a range of potential workplace abuses, like these topics plus rest periods, bathroom breaks, anti-discrimination, health/safety, unionization, work hours, pay rates and payroll. An emerging additional issue, especially in the Arab world, is recruitment fees and withholding immigrant workers’ passports.

Not surprisingly, when organized labor champions supplier codes, the most vital provision becomes the code clause on union organization (“right to organize”). Thus one must be strategic in addressing unionization within a supplier code. Consider merely committing to follow applicable labor unionization laws. Indeed, a conservative but viable approach to drafting an entire supplier conduct code is to anchor it in a commitment to follow applicable law without second-guessing local legislatures by adding too many additional rights.

While some supplier conduct codes list core labor protections specifically, others incorporate by reference model industry code templates, local employee-protection laws or International Labour Organisation (ILO) conventions. Many of the industries in which supplier conduct codes are common have issued sample codes—forms, models and examples setting out recommended content, or entire codes meant to be incorporated by reference.

Be careful adopting some interest group’s or industry group’s model code; it may contain provisions unworkable in your operations. In particular, the too-common practice of incorporating ILO conventions into a global supplier conduct code can cause unintended consequences. ILO standards are a bad fit for a multinational’s supplier code of conduct because the ILO addresses its conventions to nation-states, not corporations. Just as no U.S. domestic employee handbook would ever incorporate the U.S. Constitution’s bill of rights, to incorporate ILO standards into a supplier conduct code misconstrues what ILO standards are meant to do. (In 2006, the ILO did issue a “Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy,” but this declaration merely offers broad suggestions and is directed only to multinationals, not to their overseas suppliers.) Incorporating the core ILO right to freedom of association opens the door to the argument that the multinational code issuer estopped itself and its suppliers from opposing union drives and resisting certain union initiatives worldwide. “Freedom of association” has widely divergent meanings around the world, and academic literature within the labor movement interprets the free association concept expansively. Never incorporate ILO standards, particularly not the “free association” right, into a supplier code of conduct without embracing the significant ramifications.

Implementation and monitoring: Multinationals usually impose supplier conduct codes as appendices to the supply contracts and sourcing agreements they enter into with the “business partners” around the world that sell them goods. This structure is a lot more awkward and a lot less effective than proponents of supplier conduct codes ever seem to admit. The lurking legal challenge here is privity of employment contract: Multinationals that buy product in arm’s-length sales transactions from unaffiliated foreign sellers are mere customers in cross-border sales of goods transactions. In the normal course of business, a customer—especially one overseas—has little information about and zero say over the seller’s internal terms and conditions of employment. Legally as opposed to economically, customers tend to be powerless to dictate and monitor day-to-day human resources conditions and operations inside the businesses that sell them goods. Indeed, in most all other contexts, business partners are careful to avoid setting terms and conditions of workers they do not employ, as a precaution against findings of co-/dual-/joint-employer liability.

Supplier codes of conduct try to change all this by usurping human resources powers from sellers and bestowing them on customers. But even a customer empowered to set a seller’s labor terms has a tough time establishing and then policing them. The Wall Street Journal has acknowledged “the difficulties Western companies sometimes face in assessing working conditions at the foreign plants that manufacture their products.” (M. Bustillo, Sex Abuse Alleged at Apparel Maker, June 20, 2011). According to “an extensive investigation by The New York Times,” many “Western companies’” supplier code of conduct “inspection systems intended to protect [suppliers’] workers and ensure manufacturing quality [are] riddled with flaws.” (S. Clifford, “Fast and Flawed Inspections of Factories Abroad, September 1, 2013).

After a multinational customer drafts a supplier code of conduct and gets its overseas sellers to agree to it, then what happens? How does the customer (or its agents) access the foreign seller’s premises to monitor their work conditions? What does a customer do if it finds minor violations at a seller’s overseas factories that otherwise are better than industry standards, or if it finds violations that do not justify cutting the seller off? These questions get asked a lot, but there are no easy answers.

Supplier codes rarely ever—and certainly should never—require the multinational customer to monitor sellers’ code compliance. Some class action lawsuits filed in U.S. courts, albeit almost uniformly unsuccessful ones, have sought to enforce supplier codes against multinational customers on behalf of overseas supplier factory workers by asserting a third-party-beneficiary theory, arguing the multinational failed to monitor. (See Doe v. Wal-Mart, 572 F. 3d 677 (9th Cir. 2009)) The best defense to these lawsuits is to be able to show the monitoring provision in the operative code was voluntary, not mandatory.

Service sector codes: Until now the supplier code of conduct movement has targeted institutional buyers of tangible goods, even though most all of the social, compliance, public relations and business-case arguments for supplier conduct codes apply equally powerfully to sellers of services. Will the next frontier be imposing supplier codes on outsourced call centers and other low-wage, back-office services operations from India to the Philippines and beyond?