Child labor and other human rights violations occur around the world, and completely eliminating them from corporate supply chains is a daunting task.  However, companies can take several steps to mitigate the risk of violations in their supply chains while demonstrating a firm commitment to responsible sourcing.  A recent British documentary highlights both the importance of these steps as well as the limits of even the most aggressive measures.

Britain’s Channel 4 Dispatches recently aired an episode that flagged two coffee companies for allegedly sourcing from coffee farms in Guatemala that use child labor.  The children (some as young as eight years of age) were filmed working 40-hour weeks in poor conditions, carrying heavy sacks of coffee beans in exchange for small daily wages.  The episode focused on just two companies from one industry – both of which have demonstrated commitments to eliminating child labor from their supply chains – but offers some valuable takeaways for any company operating within a global supply chain.  Specifically: (1) child labor remains a global issue that companies must be prepared to confront now more than ever; and (2) adopting internal policies or a zero-tolerance stance against child labor might not be enough to protect a company from PR consequences or potential legal liability.

The United Nation’s International Labor Organization (ILO) describes underage labor as “work that deprives children of their childhood, their potential and their dignity, and that is harmful to physical and mental development.”  More specifically, the ILO refers to underage labor as work that is mentally, physically, and socially harmful to children, and work that interferes with their schooling by depriving them of the opportunity to attend school.  The Dispatches episode caught the attention of labor and human rights advocates worldwide who claim the coffee companies were in breach of the ILO’s standards and regulations.  As one human rights lawyer suggested, the “conventions are very clear in that they don’t want children’s education to be comprised . . . If children are working 40 hours a week, there is no way they can also be having a proper education.  These are all unsafe conditions for children essentially, and in those conditions children simply shouldn’t be working.” 

Since the episode aired, the coffee companies at issue have investigated the allegations raised and re-examined their labor standards.  One company confirmed that it has not purchased coffee from the farms in question during its most recent harvest season.  Notably, before the episode aired, both companies (i) had a zero-tolerance stance against child labor in place, (ii) made public pledges and commitments to responsible sourcing, and (iii) sourced from farms that have been verified against ethical sourcing standards set by reputable organizations, such as the Rainforest Alliance.  With safeguards like these in place, companies may be left wondering what more they can do to mitigate labor abuses in their supply chain and avoid the PR (and possibly legal) consequences that inevitably follow from such events.  Identifying and managing underage labor in supply chains is further complicated by the fact that what legally constitutes “underage labor” differs from country to country, and international legal standards can differ from local standards.

Practical Steps to Strike the Right Balance

When labor abuses (and other breaches) are discovered in supply chains, companies may respond by becoming more involved in their suppliers’ activities and closely monitoring their compliance with company standards and applicable laws and regulations.  While this may seem like a logical response to prevent future breaches from occurring, the more involved a company is in its supply chain activity (e.g., by actively training suppliers, funding or financing specific supplier activities, directing or supervising supplier employees, or establishing specific workplace rules to be followed in supplier facilities), the more likely it could be seen as directing or controlling supplier activity and the more likely it could be held liable for the acts or omissions of its suppliers under applicable legal regimes that recognize joint-employer theories of liability, such as the Trafficking Victims Protection Act and the Alien Tort Statute.

Striking the right balance between keeping suppliers at an arms’ length distance to avoid legal liability for their acts or omissions, and taking proactive steps to ensure the company and its supply chain partners are acting in accordance with applicable laws, can be difficult.  This is especially true at a time when companies are facing increased pressure from stakeholders to be more committed to social governance initiatives and to report more active involvement in supply chain compliance activities.  There is no perfect solution where competing legal and PR risks lurk on both sides of the balance, but companies may consider taking the following steps to specifically identify and monitor for labor abuses, including child labor:

  1. Outsource audits and inspections of supplier facilities to reputable third-party audit firms.  These audit firms should acknowledge and certify their compliance with the company’s labor standards; possess knowledge of the local labor laws and cultural nuances within which they operate; and commit to conducting thorough, periodic inspections that do not provide facilities with advanced notice such that they can hide or mitigate existing labor abuses.
  2. Require first-tier suppliers to flow down responsible sourcing requirements to sub-suppliers, including audit requirements and obligations to promptly report suspected or actual labor and other human rights violations.
  3. Offer training resources to suppliers that are tailored to their business and to local laws and regulations.  While this training does not have to be mandatory (and mandatory training could be viewed as evidence a company is directing or controlling supplier activity), successful completion of the training could be one of the factors a company considers when determining whether to extend its business relationship with a supplier. 
  4. Include in every contract with supply chain business partners a clause that requires strict adherence to the company’s zero-tolerance stance against labor and other human rights abuses in its supply chain.  Any substantiated breach of that clause may constitute a material breach of the agreement and result in financial penalties and/or possible termination of the business relationship.

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Information travels fast in our interconnected global economy, and consumers are becoming more cognizant and demanding about where and how their products are sourced.  Simply put, consumers want companies to make commitments on sustainability activities and deliver on those promises (e.g., sustainably or responsibly-sourced), and the failure to deliver on commitments can have detrimental reputational and legal consequences for a company.

There is no guarantee that implementing the steps set forth above will eliminate child or other forced labor or human rights abuses in corporate supply chains.  Human rights violations occur around the world, and guaranteeing to stakeholders that no such violations ever take place is difficult (if not impossible) given the size and scope of corporate supply chains today.  However, the above steps can help companies strike an appropriate balance between demonstrating a proactive stance against human rights violations and protecting the company from unintended and potentially damaging legal exposure in the event violations do transpire.

Author

Aleesha Fowler is an associate in Baker McKenzie’s North American Litigation Practice Group in New York, New York. She has experience in the areas of white collar criminal defense, internal investigations, regulatory compliance matters, and complex civil litigation. Aleesha focuses her practice on white collar criminal defense, internal investigations, regulatory and compliance matters, and complex civil litigation. She has significant experience representing financial institutions under investigation by the US Department of Justice, the US Securities and Exchange Commission, FINRA, and the OCC. She also has experience advising companies (both domestic and foreign) on their compliance with the US Foreign Corrupt Practices Act.

Photo of Reagan Demas
Author

Reagan Demas has significant experience working on behalf of companies and investors in emerging markets and high risk jurisdictions. He has managed major legal compliance investigations for a variety of Fortune 500 companies and negotiated settlements before the US Department of Justice, US Securities and Exchange Commission, and other federal and state regulatory entities, obtaining declinations in a number of matters. He has also conducted risk assessments and due diligence in a variety of legal compliance matters for companies across industries, and has worked on the ground evaluating partnerships, investments and other business opportunities worldwide. Reagan has written and spoken extensively on corruption, business ethics, human rights-related legal obligations and emerging regulatory regimes.