Unfashionable: Garment Retailers May Be Liable for Manufacturers’ Wage Violations

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Seyfarth Synopsis: Proposed California legislation, SB 62, would hold certain garment retailers known as “brand guarantors” (i.e. those that license their brand or name for manufacturing) responsible for labor violations occurring down the supply chain. We discuss the proposed bill’s provisions below, and its implications for companies operating in this area.

“Abe Lincoln wanted to abolish slavery, right? Well, who do you think made the silk stockings and powdered wigs worn by our early leaders? Mugatu!” (Derek Zoolander and J.P. Prewitt in Zoolander)

The early 2000s spawned various sardonic comedic narratives focused on specific industries. So it was with Anchorman (the news industry), Wedding Crashers (the hospitality industry), and Elf (the Christmas industry). Zoolander—a cult classic in that genre—was another comedic romp, but one that also publicized the tragic issues that sometimes exist in supply chains producing high fashion garments. Indeed, the film’s entire “plot” surrounds a secret cabal of fashion insiders intent on preventing the Prime Minister of Malaysia from enacting legislation that would outlaw forced labor that the fashion industry, and Mugatu in particular, relied on to produce its garments. And, while the movie itself is fiction, some of the issues it raised are very real indeed.

Curbing labor violations in the garment industry, like those highlighted in Zoolander, has been a regular subject of legislative reform in California. Senator Elena Durazo recently re-introduced legislation, SB 62, intended to prevent wage theft within the various layers of garment manufacturing by expanding the definitions of “brand guarantor” and “garment manufacturing,” and making each layer in the process jointly and severally liable for wage violations of employees elsewhere in the supply chain. This bill is an almost precise replica of SB 1399, which rode to the precipice of enactment last year, but failed to pass due to time limitations.

SB 62 would provide that those sitting at the top of the supply chain could be on the hook for the wage violations of garment manufacturing vendors, even where the ultimate seller was completely unaware of the violation. So, if this bill passes, big retail must choose vendors wisely.

So Hot Right Now—Reported Wage Violations In the Garment Industry

According to legislative findings, “[s]o-called retailers contract with a network of manufacturers and contractors to produce their garments and dictate the pricing structure that causes wage violations. This leads to a vicious price competition, resulting in garment workers being paid an average of $5.15 per hour, well below minimum wage.”

The bill intends to address this sub-minimum wage problem by imposing liability on retailers contracting to have garments made, for unpaid minimum wage and overtime pay to the workers who manufacture those garments, regardless of how many layers of contracting involved. The bill notes that it is the “intent of the Legislature to restore the purpose of AB 633, “which sought to ensure that persons who contracted to have garments manufactured were liable as guarantors for unpaid wages by establishing a process through which garment workers could file claims against the contractor who hired them.”

They’re *In* The Supply Chain— SB 62 Would Hold Each Entity Responsible

To address this problem, SB 62 seeks to clarify that persons or entities contracting to have garments made are liable for unpaid wages, damages, penalties, and other compensation owed to the workers who manufacture those garments regardless of how many layers of contracting are used.  In other words, the bill would make clothing “brands” and holding companies jointly liable as wage guarantors alongside garment manufacturer contractors for all civil legal responsibility for all workers employed by the contractor. This, according to the Legislature, would prevent the retail industry from end-running AB 633 by subcontracting layer upon layer to produce garments, then proclaiming ignorance of any wage violation.

This would mean, for instance, if Joe’s Retail Clothing contracted with Manufacturer X, who subcontracted with Manufacturer Y, who had Company Z sew labels onto the manufactured clothing—Joe’s Retail Clothing, Manufacturer X, and Manufacturer Y may all have independent liability to cover the unpaid or underpaid wages of Company Z’s employees if Company Z doesn’t pay them properly.

I Feel Like I’m Taking Crazy Pills With This Upstream Liability For Wage Violations

SB 62 provides that a retailer who contracts with another person or entity to perform garment manufacturing operations will be jointly and severally liable with any entity that performs those operations, no matter how far down the manufacturing chain that entity may be. This means that the retailer who sells the final garment could therefore be found liable for wage violations of a subcontractor even where the ultimate vendor did not even know that subcontractor was part of the supply chain. While Section 2673.1(a)(2) would maintain any entity’s right to seek indemnity and contribution from those found jointly and severally liable, litigation on something like this can be expensive and possibly fruitless if companies in the chain can’t pay.

To include all entities involved in the production of a garment into one liability stream, SB 62 expands the definition of “brand guarantor” —typically your larger retail stores—to include any entity that, before selling a garment, contracts for its assembly, “including sewing, cutting, making, processing, repairing, finishing, assembling, dyeing, altering a garment’s design, causing another person to alter a garment’s design, affixing a label on a garment, or otherwise preparing any garment or any article of wearing apparel or accessories designed or intended to be worn by any individual.”

In addition to opening up certain avenues of liability, SB 62 would also give the Labor Commissioner’s Bureau of Field Enforcement the right to actively and explicitly “investigate and cite brand guarantors,” keeping corporate actors from self-regulating.

“I’m Not an Ambi-turner. I Can’t Turn Left”: SB 62 Would Eliminate Piece Rate Compensation

Derek Zoolander’s inability to turn left likely resulted in a dangerous catwalk, or workplace. Similarly, the author of SB 62 was concerned with unsafe working conditions that may result from paying per garment completed, otherwise known as piece-rate compensation, since garment workers may attempt to work as quickly as possible to complete as many items as possible (and thus earn more money) in a workday.

To alleviate this potential problem, SB 62 would eliminate “piece rate” work in California’s garment manufacturing industry entirely, and would prohibit garment manufacturers in the state from choosing to pay their workers a set rate per piece or article of clothing produced. The measure provides a penalty of $200 for each pay period in which the employee is paid by the piece.

“What Is This? A Center for Ants?”: A More Efficient Process For Filing Wage Claims

Section 2673.1(c)(1)-(5) lays out a detailed procedure for garment workers filing Labor Commissioner claims for unpaid wages, if the bill passes. The bill lays out the timing of the presentation of evidence as well as what remedies may be available.

What Say We Settle This On The Runway—No Private Right of Action

California employers should breathe one sigh of relief: the bill would not create a private right of action: “Employees may enforce this section solely by filing a claim with the Labor Commissioner against the contractor, the manufacturer, and the brand guarantor … .”

Blue Steel Yourself For These Potential Changes Now

With this legislation pending for a second time, companies, and particularly companies in the retail industry, should immediately begin auditing their vendors to ensure compliance with all California wage and hour laws, regulations, and wage orders.

Companies selecting vendors thus might consider measures such as these: (1) checking for membership in the Fair Labor Association, (2) third-party audit certifications, (3) posting of bonds, (4) enhanced financial strength screening, and (5) review of any prior wage violations.

Workplace Solutions

Employers should brace for this measure—which was nearly enacted last year—crossing the finish line this legislative session. Your Seyfarth counselors are here to help you with negotiating contracts, checking your supply chain, and looking at labor and employment compliance as needed in your supply chain both domestically and globally.

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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