“Slavery? In my factory? There’s no way…I know who all my employees are, and I make sure they work under great conditions.”
While this used to be sufficient, countries around the world are starting to hold large companies accountable for labor conditions not just in their own business but also for the conditions in their supply chains. For companies in manufacturing, this means being able to affirmatively say that your suppliers of raw materials, parts, and equipment are not using any forced labor.
It’s one thing to walk down to your own factory floor and be able to certify it, but it’s an entirely different matter to know about the conditions of your supplier on another continent. How can you comply with legal requirements mandating you report on conditions in your supply chain, while also being able to honestly say that you know forced labor is not occurring?
This article serves as a best practices guide for manufacturing companies looking to unshackle themselves from the chains of modern slavery.
What is Modern Slavery?
The first question any manufacturing company needs to ask is if they even know what constitutes human trafficking in today’s world. While “modern slavery” includes traditional notions of slavery like forced labor and human trafficking, it also can include the removal of laborer passports, exorbitant recruiting fees for third-party contractors, refusal to allow laborers to leave, lack of a written contract, and lack of labor documents in the employee’s native language. The prevalence of modern slavery in your supply chain is a matter of degree.
Manufacturers in the U.S. government contracting space that permit these conditions in their supply chains risk losing their U.S. government contracts. This is because FAR 22.17 (“FAR”) prohibits U.S. government contractors from engaging in or passively permitting a laundry list of modern slavery activities in their supply chains. Taking it even further, those contractors whose contract value exceeds $500,000 must annually prepare a compliance plan stating the steps they are taking to address the conditions in their supply chains.
The bottom line is that if you’re a U.S. government contractor, it’s not enough for you to rely on the word of your subcontractors or suppliers that they don’t have modern slavery conditions. You need to develop an auditing system whereby you can show that high-risk areas of your supply chain receive a routine check. Failure to do so could result in loss of your U.S. government contract. Even worse, if you have attested that you do audit, but you actually don’t, you may even open yourself up to civil or criminal liability.
While the enforcement mechanism of FAR is the loss of a U.S. government contract, non-government contractors must comply with the 2016 Trade Facilitation and Trade Enforcement Act (TFTEA). For many years, the U.S. government was not as engaged on the issues as it is today.
In fact, forced labor goods were permitted into the supply chain for U.S. import if the goods were “needed”. The rationale was that the U.S. had such a high demand for many goods that it justified the need to import these goods regardless of the conditions in which they were made – the so-called “consumptive demand exemption.” But TFTEA has changed all that. TFTEA effectively repealed the consumptive demand exemption, and now U.S. customs is actively confiscating goods that enter U.S. ports under the suspicion that they were produced with any sort of modern slavery labor. If your manufacturing process relies on such goods, you may get shut down waiting for product while your supplier is trying to prove the nature of the goods. Make sure your suppliers are attuned to this so that you don’t get delayed because of their improper sourcing.
What can a company do to prevent its goods from ending up in a US government warehouse? No longer can a company plead ignorance. No longer can a company attest that it has representations and warranties from its suppliers about the conditions of laborers all along the supply chain. Both TFTEA and FAR put the onus on companies to check on labor conditions and to make them better. As a part of this process, manufacturers must ensure that supply chain factory workers are paid a living wage, have their own passports, have sanitary conditions, and are not forced to work so as to pay back a recruitment fee. The laborers need to have the means and capability of terminating their employment.
The government has made public comment that it will apply this differently to a small business compared to a multinational corporation with greater global resources, but until those parameters are better defined by initial test cases, you need to be able to demonstrate effort that is more than a paper program.
But not all of the anti-human trafficking laws emerging operate by government enforcement. The UK Modern Slavery Act 2015 (“UK Act”) requires businesses doing £36 million turnover in the UK to publish a statement on their website indicating the steps they are taking to combat modern slavery throughout their supply chains. The statement must be signed by the board of directors. For the UK Act, the thinking is that market forces will push companies towards eradicating modern slavery conditions.
Is the board of directors for your manufacturing company prepared to sign a statement saying your company is effectively weeding out slavery conditions from the overseas factories making your raw materials? Imagine the hit to your brand if you were to sign such a statement and then an investigative journalism report exposed conditions in one of your factories or your suppliers’ factories. This is the goal of the UK Act: force companies to put their anti-human trafficking cards on the table and then let increasingly progressive consumers decide where they want to take their business. Failure to comply with the UK Act can result in an injunction against your company.
Notably, the queen of England, who typically remains silent on policy issues, was recently reported to be advocating for legislation similar to the UK Act to take hold throughout the entire Commonwealth. Australia on its own accord has already begun exploring how it can pass legislation modeled on the UK Act.
California’s Supply Chain Transparency Act (“California Act”), a precursor to the UK Act, works very similarly to the UK Act. It requires retailers and manufacturers doing business in California and having at least $100 million in annual worldwide gross receipts, to disclose the efforts they are making to eliminate modern slavery from their supply chains. Failure to make a statement can result in an injunction from the attorney general. Even though the California Act only requires this notice-type provision, the AG published guidance talks about proactive unannounced supplier audits and the many other things that a robust program would entail. While the AG enforcement mechanism is limited, they are clearly sending signals that they will be pushing for more than the law demands.
How Can Companies Tackle the Issue?
A modern slavery compliance plan should fit within any company’s existing commitment to corporate social responsibility. Manufacturers with large supply chains need to first identify where in their supply chains (either because of the geographic location or the nature of the type of work) they are most exposed to a risk of modern slavery. Then they should develop both a training curriculum to help employees spot modern slavery and a vetting process to help ensure third parties operating within the supply chain comply with international standards for labor conditions.
Once these initial steps are in place, companies need to consider whether they will make the affirmative effort of onsite auditing at a random sampling of their suppliers. Keeping your head in the sand was an effective strategy only as long as the law allowed you to do so, and plausible deniability is not enough for FAR or TFTEA. Moreover, to comply with the UK Act and the California Act, companies can publish a statement saying they do not actively monitor their suppliers, but is this the kind of image you want to portray for your consumers?
There’s no going back. Governments, consumers, and your competitors are committed to eradicating modern slavery. NGOs, the plaintiffs trial bar, and government agencies are working hand in hand to bring suit and force change. The longer your manufacturing company waits to take initiative, the more likely your company is to face an enforcement action or negative news report that ties your company name to the word slavery. No one wants that.
William Shepherd is a partner with Holland & Knight LLP. Jeff Schacknow is an associate with the firm.