Responsible Downsizing and Factory Closures: Protecting Workers’ Rights in the Economic Crisis

Overview
Workforce Retrenchment
Obligations of Employers
International and Domestic Standards
Upholding Workers’ Rights
Guidelines and Resources

Overview

One of the most critical issues facing businesses, communities, individuals and organizations concerned with good labor practices in today’s global economy is the circumstances and responses surrounding supply chain consolidation and closure of factories.

Following the 2005 expiration of the Multi-Fibre Arrangement (MFA), a country-specific quota system that governed patterns of trade and investment in the textile and clothing (T&C) industry for three decades, there were marked shifts in production and sourcing to China and other countries with low production costs that impacted workers on a large scale.

In 2008 and continuing into 2009, the global economic crisis has been causing a new wave of reductions in factory workforces and closures because of declining product orders. Consistent with media coverage all over the world, there has been a substantial impact on employment levels everywhere, particularly in the apparel and footwear sectors.

Many countries that depend of the T&C industry to provide jobs to thousands of workers are seeing massive unemployment – perhaps for the second time – as a result of the global economic downturn. This is even more dramatic for those who are heavily dependent on exports to the United States. Even China, which was initially seen to be less vulnerable to the economic shocks, is seeing a dramatic shutdown of factories and exports fall more than 17.5 percent (17.4% to the EU, its largest market, and 9.8% to the US) in January 2009 from a year earlier, representing according to various business news sources the biggest drop in 13 years.

In addition to the loss of jobs, there also are reports of substantial negative impacts on workers’ rights. The news carries stories every day of workers being “abandoned” without notice, not getting paid wages and other legal entitlements, and being discriminated against in retrenchment practices. Union leaders and supporters are being blamed for closures, and facing harassment and threats as a result.

The current economic crisis is likely to test the commitment of companies to corporate social responsibility, including labor compliance processes. While resources may be shrinking, our resolve to improve workers’ rights cannot because the economic crisis will increase the risk of noncompliance in global supply chains.

Workforce Retrenchment

Factory retrenchment – also referred to as redundancy or downsizing – or even closure has become almost an everyday occurrence in the T&C sector. In a declining economy, suppliers are being forced to close factories or reduce capacity through the retrenchment of workers in response to diminishing product orders from apparel companies caused by dwindling consumer demand for certain products and bulging inventories. In some cases, companies that procure goods domestically or internationally shift sources of supply from one factory to another to stay competitive on quality, delivery and price. These changes are generally driven by economic considerations that include such factors as the financial status of the enterprise and major changes in market conditions such as we’re seeing now. In too many instances, the retrenchment is complete, meaning that the factory is closed and all workers are dislocated.

Obligations of the Employer

The employment relationship in factories should be governed by a set of written policies on equality of opportunity and treatment, as well as written procedures for implementation backed by the necessary training, communication and appropriate controls. As part of this, a factory should have specific policies and procedures to guide any retrenchment process.

Retrenchments are "no fault" terminations – in other words, the worker is not responsible for the termination of employment. The effective cause of the retrenchment is one or more external or internal factors related to the employer's business situation.

The FLA Retrenchment Guidelines provide greater detail regarding retrenchment. It outlines the following obligations of employers in a retrenchment situation:

The employer must be able to provide sufficient documentation showing that redundancy was the real reason for retrenchment.
The employer may not recruit and hire personnel to work in the same positions as the workers who are being retrenched or for positions they may be capable of filling.
If and when it becomes possible to hire new workers, the jobs should be offered first to the retrenched workers before posting announcements.
The requirement of fairness places particular procedural and substantive obligations on the employer:
- To provide written notice to workers at the earliest possible opportunity.
- To consult with workers or their representatives before a final decision to dismiss is taken.
- To explore all possible alternatives to retrenchment.
- To be objective in the selection of workers to be retrenched.
- To allow retrenched workers time off during the notice period to apply for other job
The employer should also ensure that severance pay and other benefits are paid according to law.

International and Domestic Standards

International labor standards on termination of employment can be found in a convention adopted by the International Labor Organization (ILO) in 1982 and the accompanying Termination of Employment Recommendation. These documents guide international and local laws and regulations regarding reductions in the workforce.

Some governments assist workers who are adversely affected by the loss of jobs associated with closures, consolidations and other shifts in sourcing, through employment services such as retraining, job search assistance, and relocation allowances. In a limited number of countries, unemployed workers are eligible to draw unemployment insurance benefits for a set period of time. It is more common, however, that local laws mandate employers to provide severance payments and benefits, scaled in some way to the length of service of the worker in the enterprise.

Domestic legislation in many countries also mandates that employers give notice to workers when their plants, factories, or mines may be closed or employment severely reduced; that employers consult with workers and their representatives on potential changes; and that certain payments be made to workers when they become unemployed because of production shifts. Domestic legislation often also prohibits retrenchment based on discriminatory criteria, including membership in a trade union.

Upholding Workers’ Rights

The FLA is calling on Participating Companies, Participating Suppliers and all licensees to commit to upholding and protecting workers’ rights during retrenchment and shut-down procedures.

The FLA will continue to engage with retailers and brands, trade unions, NGOs, national and multilateral public institutions, and multistakeholder initiatives such as the MFA Forum, to identify and promote collaborative strategies to support vulnerable suppliers and communities, as well as greater respect for workers’ rights.

The FLA also urges affiliated companies whose suppliers or facilities may be involved in retrenchment and closures for operational reasons to abide by the retrenchment guidance we have developed. Our goal is to ensure that companies operate in a manner consistent with international labor standards, domestic law and the practices of company leaders in the labor compliance field, as well as to ensure that communities are not unnecessarily weakened by economic changes.

The FLA cannot stress enough the importance of establishing these policies and working with suppliers well in advance of any conditions that could require a reduction in the workforce. Such policies and procedures should be developed, when possible, in consultation with worker representatives to ensure a transparent and cooperative process for all parties.

Below is a list of resources that companies can access to guide the development of their retrenchment policies and procedures, as well as other papers and articles pertaining to this subject. Also available to FLA-affiliated companies at the FLA training portal are training materials regarding retrenchment.

Retrenchment Guidelines

Papers and Articles

"After the MFA: Early Trade Results and Challenges from Production Shifts"
Read the paper

“The Expiration of the Multi-Fibre Arrangement (MFA) and Its Consequences for Global Labor Standards”
Read the paper

“Impact of financial crisis on garment workers”
Maquila Solidarity – Feb. 25, 2009
Read the paper

“North America: Retrenchment – Responsible downsizing”
Ethical Corporation – Feb. 3, 2009
Read the article

"China's National and Local Labor Market Response to the Crisis"
Compiled by the FLA
Read the policies