Historians later will benchmark April 2013’s Rana Plaza factory collapse in Bangladesh as the beginning. This accident triggered global attention to supply chains, especially those supplying brand-names. With global trade unions beating the drum, the Accord on Building and Fire Safety in Bangladesh was signed by over 40 brands, transforming the ground rules for thinking about supply chain.
The Accord is not merely a litany of pious platitudes but is a private regulatory code imposing significant penalties and liability for labor and safety violations in the supply chain. Clause 5 of the Accord, which outlines the arbitration process for enforcement, adopts the framework in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly referred to as The New York Convention.
But, this Accord was merely the beginning. In the U.S., both regulatory initiatives and innovative litigation tactics seek to similarly impose greater accountability on the brand name for all the employment sins of any of the businesses in its supply chain. Post-Rana Plaza, the chorus grows louder and broader on multiple fronts:
The Federal Acquisition Regulatory Council published a proposed rule on September 26, 2013 requiring government contractors and subcontractors to act affirmatively in preventing human trafficking and forced labor. It also further obligates subcontractors to oversee their subcontractors’ conduct.
The U.S. Department of Defense also published a proposed rule on the same date amending the Defense Acquisition Regulations System. This rule replaces prior language requiring that contractors include anti-trafficking language in all subcontracts with new self-reporting, audit, investigation and certification requirements.
California Labor Code § 2810 exposes businesses to liability for employment law violations of subcontractors whenever a business “knows or should know” that its service contractors do not have sufficient funds under the contracting arrangement to comply with “local, state and federal labor [employment] laws.” There is now a litigation boomlet with class actions being filed because no proof that the company exercised any control over the working conditions of those service contractors is needed.
In January 2014, Good Jobs Nation – an advocacy group — filed a complaint with the Department of Labor on behalf of food court workers at Washington D.C.’s Union Station demanding that DOL hold all Union Station stakeholders accountable for alleged underpayments in wages to those workers: the building owner; the corporation which operates the food court under a lease from the owner; and the real estate company that licenses individual vendors for that corporation.
Other litigation is increasingly being used to redefine the relationship between corporations and their supply chains. On January 12, 2014, a federal court held that Wal-Mart must face trial to determine if it is a “joint employer” with its warehouse operator (Schneider Logistics) and thus liable for Schneider’s alleged violations of federal and state wage and hour laws. Carrillo v. Schneider Logistics Trans-Loading and Distribution, Inc., No. 2:11-cv-08557 (C.D. Calif. 2014).
Historical paradigms have changed. The model where each silo in the supply chain was responsible for its own violations is gone. What can and should an upstream corporation do? First, include indemnification provisions that hold downstream suppliers responsible for any damages or liability suffered by the corporation. Second, investigate the reliability (to pay that indemnity) and credibility (as good corporate citizens who can be counted on to obey rather than flout laws) of those entities that you do business with. Finally, where required by specific legal rules (but be careful of walking into a level of micromanagement that makes you a co-employer with every entity in your supply chain), incorporate contractual provisions into all supplier contracts granting broad audit rights into supplier labor practices.