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Should brands be liable when factories close? Adidas faces an Indonesian impasse

September 5, 2012

Should adidas be held accountable when a factory that produced its apparel closes and the owner flees the country without providing workers their legal severance pay? Labour rights groups say yes. Adidas says no. Yet surprisingly, in a controversial closure in Indonesia, two other notable brands have broken ranks and contributed to paying the displaced workers.

The PT Kizone factory in Indonesia shut down in the beginning of 2011 and its owner fled the country, leaving 2,686 workers without jobs and short $3.4 million in legally mandated severance pay. Since then, both Nike and Dallas Cowboys Merchandising, for whom the factory was producing apparel, have provided funds for the workers, leaving $1.8 million still owing. Adidas, however, has refused to join the other PT Kizone customers in providing funds to the displaced workers.

In a statement released to media in February 2012, adidas said: "We cannot assume, or accept, the liability for the severance owed by the former owner of PT Kizone who violated Indonesian law and fled. Enforcing the rule of law is core to sustainable business and we cannot be held responsible for someone else breaking the law."

Labour rights advocates disagree. The Clean Clothes Campaign (CCC) and the Worker Rights Consortium (WRC) both point out that under its numerous licensing contracts with US universities adidas accepts responsibility for ensuring that local laws and international labour standards are respected by their suppliers.

As the WRC says, those agreements "make no distinction between violations that can be remedied at little or no financial cost and those, like the violations at PT Kizone, where a remedy requires that someone pay. We understand why adidas wants to distinguish between violations that it can correct at no cost to itself and violations where remediation may carry a price tag, but university codes of conduct do not embrace this dichotomy."

Adidas responds that it has provided workers with food vouchers, lobbied the government to prevent foreign owners from evading the law, and is discussing the possibility of an employee benefit fund to address these kinds of cases in the future. It has also taken steps to help PT Kizone workers find new employment. Even where this has been successful, however, many positions were far away from where workers live, and took the form of short-term contracts instead of the open-ended employment the workers had at PT Kizone.

Further, as the WRC notes, "hiring programs, while they may be of significant benefit to workers, do not, even if they are successful, constitute a remedy for severance violations - because they do nothing to secure for workers any of the funds they are legally owed for the labor they have already performed."

An ongoing debate

The debate over brand liability has arisen repeatedly in the wake of irresponsible factory closures. Initially, brands were uniformly reluctant to step in when their suppliers failed to meet their legal obligations for severance payments and back wages.

Agreeing to assume a supplier's financial obligations to workers, companies argue, would create a "moral hazard," leading to owners absconding with the knowledge that brands would pay their bills.

Labour rights advocates respond that brands should not be able to profit from low factory prices while financial obligations to workers are insufficiently funded. Requiring shared responsibility would motivate brands to carry out proper due diligence to ensure that suppliers make their legally-mandated contributions for severance and other benefits.

A crack in the wall

With sufficient pressure brand reluctance to accept shared responsibility when factories close has been overcome in few specific cases.

In 2010, facing a growing student-led campaign in the USA, Nike signed an agreement with the General Workers' Central of Honduras (CGT) to provide a relief fund of $1.5 million to a group of Honduran workers displaced after closures of two Nike supplier factories in that country.

Although the company took pains to say that Nike was not "compensating" the workers, the money had the effect of covering 80% of what workers were owed after the closures.
In more recent cases, Nike did not emphasize that distinction. In 2011, Nike offered to partially compensate workers for severance payments owing at another Indonesian factory named PT Dong One (although the factory was subsequently re-opened and the workers re-employed).

Nike's payment to PT Kizone workers was explicitly based on calculations of severance owing and Nike's share of production.

Degrees of responsibility

Although all parties agree that workers should receive at least what they are entitled to by national law in the event of factory closures, differences arise about the degree of responsibility of different buyers sourcing from the same factories.

While welcoming Nike's contributions in the Indonesian cases, the WRC criticized the idea of paying only a percentage of severance based on the company's share of factory production.
"In a case where a factory had illegally fired ten workers," the WRC says, "we would not accept a licensee's claim that because it represented 40% of the factory's sales, it was only responsible for securing the reinstatement of four of the ten workers."

In the PT Kizone case, adidas makes much of the fact that its last order was placed more than six months before the factory closed. The CCC responds that production for adidas continued up until November 2010, at which point non-payment of severance had already occurred at the factory.

Moreover severance payments are earned over years of service, not just on the last day of work. Adidas, they say, had a duty to ensure these obligations were fully funded while they were present in the factory.

Also, to allow a brand to avoid responsibility for severance payments because they left the factory a few months before it closed would encourage brands to leave struggling factories at the first sign of trouble, avoiding responsibility for workers severance but also, perversely, making closure all the more likely.

Keeping the focus on workers

Ultimately, the focus has to be on ensuring that workers receive what they are legally entitled to, every penny owing, regardless of who has to foot the bill. To accept less is to penalize those at the bottom end of the supply chain, those who are least able to bear the risk of non-payment.

That's a message that companies like adidas are increasingly hearing from their customers - and, recently, from universities with whom they have lucrative licensing arrangements. In July, the University of Wisconsin filed a lawsuit against adidas, arguing that failure to provide workers severance pay was a breach of the conditions of its licensing contract with the university, which includes agreement to ensure that workers making U of W-branded apparel are paid all legally-mandated benefits.

While the case has not yet been heard, it is an indication that brand arguments against joint liability may no longer shield them from assuming their responsibilities to workers when supplier factories are closed.

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