Imagine the horror most people feel when they find out their company has engaged a supplier that has been using forced labor, child labor, or indentured servants to create the product. The corporate “zero tolerance” statements come out, the lawyers are corralled, and the letter terminating the contract is signed. Done, right?
Well….is it? The people who were involved in the forced labor now likely don’t have work or a place to live and the company must scramble to find a new supplier which may cause significant delays and costs. Is there another way? Is it moral to even consider another way? Well, the American Bar Association thinks so and anecdotal evidence shows that, at least some of the time, remediation may be better than termination.
How would this work?
At Spark Compliance Consulting, a company we work with found that one of its key suppliers had experienced a labor shortage in an Asian country. During an audit, it was discovered that to solve this problem, the supplier hired an employment agency that forced workers from a lower-cost country to pay back their travel costs through unpaid wages. Instead of exercising their termination clause, the company chose to work with the supplier to have all earned wages paid to the exploited workers and to terminate the relationship with the third-party employment agency. The workers were paid in full and the client didn’t need to find another supplier. Win/win.
The new model contract clauses from the ABA
The American Bar Association (ABA) recently updated its model contract clauses for modern slavery (super helpful – download them here). The ABA describes them as “a major shift in contract design” that “reflect(s) both recent research and evolving thought about effective organizational strategies and legal developments.”
The ABA clauses are very interesting in their approach. For instance, they put the burden on both the supplier and the buyer to help resolve concerning situations. They also avoid a mechanistic “reps and warranties” approach which, as stated in the associated material, may encourage “the parties to turn a blind eye to reality while taking on theoretical strict liability.” The drafters say that human rights due diligence is a “more realistic process that assumes parties will need to set priorities, addressing the most pressing issues first, without a fictional representation that everything is perfect.” In essence, these contract clauses represent taking a straightforward risk-based approach at odds with the check-the-box liability approach.
We’ve all heard about ESG trends and upcoming associated regulations in the U.S. and Europe. Preventing and remediating modern slavery is going to become even more important than it is now. Consumers are squarely focused on modern slavery issues, and the stench of a scandal may last for decades.
In December 2021, U.S. President Biden signed the Uyghur Forced Labor Prevention Act that outlaws the importation of products made in the Xinjiang province unless the importer can overcome a presumption that the products were made by forced labor. This novel requirement may become one used in the future to pressure companies that source materials from areas with known concerns. Having good contract clauses will give you room to maneuver if an area from which you are sourcing comes under a similar law.
Having a clear strategy for remediation, along with termination, is critical. Companies need to plan ahead about how they will respond if a supplier has issues.
What to do now
If your company doesn’t currently have modern-slavery-related terms standard in their contracts, incorporate them as soon as possible. The ABA did a great job of creating such terms, so there’s no reason not to.
Next, look at your supplier contracts and determine whether additional modern slavery-related language needs to be added. Key terms include:
- Adherence to all local labor laws
- Paying at least the minimum wage
- No use of child labor
- No use of prison labor
- No use of forced labor
- Audit rights for key or high-risk suppliers
- Termination rights for violations
Your company should consider adopting a Supplier Code of Conduct that is clear that the use of slaves or trafficked persons are totally unacceptable. These Codes should be referenced in contracts and POs as binding. Ideally, a copy of the Supplier Code of Conduct will be included as part of the contract and require its own signature.
Modern slavery shouldn’t exist, and it is important that our companies do their part in stopping it. Good contract clauses, along with a plan to remediate any issue that comes up, are key to helping solve the problem.
I’m excited to announce that I’m going to be partnering with NAVEX to present a webinar about performing human rights impact assessments that will go deep into managing modern slavery risk and remediation planning on April 18, 2023.
Join me, Carrie Penman, chief risk and compliance officer at NAVEX, and Robert Smith, director of business compliance and ethics at Serco as we discuss what you need to know to conduct a human rights impact assessment.