On October 5, 2021 GRI launched their revised Universal Standards to help companies report on their impacts on the economy, planet and people. Shift’s President Caroline Rees joined Matthias Thorns (IOE) and Jyrki Raina for a conversation on what the update means for companies.
Archives: Resources
Statement of Cooperation between EFRAG and Shift
The PTF-ESRS announced the signing of a Statement of Cooperation with Shift. Both organizations will put together their experience and expertise to encourage the swift development of European sustainability reporting standards in the social domain and at the same time the progress of converged standards at international level. Each organization will contribute to key technical projects of its counterpartin the social domain.
Red Flag 24. Aggressive tax-minimization strategies
RED FLAG # 24
Aggressive strategies to minimize taxation, particularly with respect to operations in developing countries.
For Example
Undue use of the following such that governments may be deprived of the resources needed to address poverty and to finance programs seeking to protect and fulfil rights:
- transfer (mis-)pricing
- negotiation of tax holidays
- (non-)taxation of natural resources
- offshore investment accounts
Higher-Risk Sectors
- Tech industry and other highly digitized business models
- Extractive industry in the context of natural resource acquisition and use
- Various industries with operations in countries that are particularly vulnerable to the consequences of low revenue from taxes
Questions for Leaders
- How does the company assess whether its taxation strategy is aligned with, and not undermining, its responsibilities and commitments to respect human rights?
- Does the company publish a tax strategy? Does it disclose the entities it owns, its overall tax rate and the taxes paid where it does business?
- Has the company endorsed the B Team’s Responsible Tax Principles?
How to use this resource. ( Click on the “+” sign to expand each section. You can use the side menu to return to the full list of red flags, download this Red Flag as a PDF or share this resource. )
Understanding Risks and Opportunities
Risks to People
- The International Bar Association’s Human Rights Institute (IBA-HRI) found that in the context of the developing world, tax practices considered most relevant to potential human rights impacts include transfer-pricing and other cross-border intra-group transactions (see Lipsett). Multi-national enterprises may “take advantage of gaps in the interaction of different tax systems to artificially reduce taxable income or shift profits to low-tax jurisdictions in which little or no economic activity is performed” (see OECD). The Task Force also identified the following as areas of greatest concern: the negotiation of tax holidays and incentives, the taxation of natural resources, the use of offshore investment accounts and, finally, secrecy jurisdictions due to their role in facilitating tax abuses. (See Lipsett).
- Highly digitized business models have been associated with challenges to existing taxation frameworks, including where the business is highly involved in the economic life of a jurisdiction without any significant physical presence, as well as where a high number of assets are intangible (such as algorithms and software). (See OECD).
- Aggressive taxation practices such as those identified above can “deprive governments of the resources required to provide the programmes that give effect to economic, social and cultural rights, and to create and strengthen the institutions that uphold civil and political rights.” (See Lipsett). Lost revenue from taxation can lead to decreased funds available for spending on “services such as health, education, housing, access to water and other human rights.” It has been noted that countries in the global south lose much more money to tax evasion and illicit financial flows than they receive in international aid.
- The connection between tax and inequality has been explored by the IBA-HRI, which has noted that “the global shadow economy is contributing to a growth in global inequality, which is also having a major impact on democracy.”
Risks to the Business
- Reputational Risks: “Over recent years, the tax affairs of major businesses have been subject to unprecedented levels of scrutiny, debate and controversy.” The FT, has noted that despite the “dry, complex nature of corporate tax planning,” campaigners have begun to focus on the issues with “zeal.”
- Regulatory Risks: Concerns over the facilitation of base erosion and profit shifting through uneven legislation has led to a multilateral international tax policy initiative under the OECD, resulting in a multilateral convention, the sharing of information between tax administrations, disclosure of previously secret tax rulings and “legislative changes made to amend/abolish 110+ [‘harmful preferential tax regimes’].”
- Operational Risks: Public outcry over taxation inequality has “contributed to significant political instability in many developing countries” which has also been to the detriment of companies operating in these areas. Such outcry has not been limited to developing countries: in the UK several companies have appeared before the Public Accounts Committee or had their high street stores occupied by protestors, and US companies have been the subject of major news investigations.
- Legal, Financial and Operational: Risks also arise where public outcry leads to a re-examination of tax settlements. Calvert Investments, referencing the International Accounting Standards Board, has noted: “Reputational damage [from a perception that a company is not paying its fair share of tax to a host country] may lead to liabilities for external costs associated with a company’s operations, greater difficulty in permitting that could lead to project delays or cancellation or the loss of favourable tax status or other forms of government financial assistance.”
What the UN Guiding Principles say
*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.
- The “corporate responsibility to respect,” the second pillar of the UNGPs, “exists independently of States’ abilities and/or willingness to fulfil their own human rights obligations, and … exists over and above compliance with national laws and regulations protecting human rights.” (Principle 11, Commentary). In other words, “all business enterprises have the same responsibility to respect human rights wherever they operate” (Principle 23, Commentary), whether or not they have a domestic legal obligation to do so. As such, undue or aggressive use of taxation strategies may infringe companies’ responsibility even where actions are legal under local taxation laws.
- The UNGPs note that companies should “strive for coherence between their responsibility to respect human rights and policies and procedures that govern their wider business activities …” (Principle 16, Commentary), which would be relevant where aggressive tax strategies undermine efforts to respect rights in jurisdictions of operation.
- Where a company is benefiting from an unduly aggressive tax strategy or unusually generous taxation deal in a particular location, it may be directly linked to impacts that result from a lack of public services for local populations. Where it is aware of this situation and does nothing, it may be judged to contribute to such impacts. This may be a contribution in parallel with other companies benefiting from similar tax arrangements, such that they collectively deplete state revenues needed to fulfil people’s human rights. If the company lobbies in favor of tax deals that undercut state revenues with similar results, it may be seen as contributing by incentivizing the government to favor corporate benefits over the human rights of the population.
- The connection between taxation planning and human rights is complex, but receiving increased attention. Mauricio Lazala, Deputy Director of the Business and Human Rights Resource Centre has noted that “[t]he State duty to protect human rights in its corporate tax policies, the business responsibility to respect human rights and carry out due diligence in their tax practices, and the need for effective remedy for tax abuse are all relevant, yet still emerging dimensions of the UN Guiding Principles on Business and Human Rights.”
Possiblr Contributions to the SDGs
Taxation policy is a key element in facilitating the achievement of the SDGs. As such, this red flag indicator is relevant for a range of SDGs, including:
SDG 1: No Poverty, including Target 1.2: By 2030, reduce at least by half the proportion of men, women and children of all ages living in poverty in all its dimensions according to national definitions. The IBA-HRI has noted that “greater tax revenues have the potential to reduce poverty, provided that they are properly spent on programmes that contribute to infrastructure, development and human rights.” (See IBA-HRI p.89).
SDG 10: Reduced Inequalities, in particular Target 10.4: Adopt policies, especially fiscal, wage and social protection policies, and progressively achieve greater equality. Income redistribution through taxation can contribute to reducing inequality and promoting inclusive growth.
SDG 17: Partnerships for the Goals, in particular Target 17.1: Strengthen domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection.
Taking Action
Due Diligence Lines of Inquiry
- Do we have a policy on tax planning that includes a human rights perspective? Do we have a considered and disclosed position on use of “tax havens”?
- How transparent are we about our taxation strategy including as regards our operations in developing countries? Do we disclose how our approach to taxation planning aligns with our business purpose and sustainability strategy?
- To what extent do we review the structures and practices of tax planning through the lens of our responsibility respect human rights, (rather than merely the amount of tax paid, which is an outcome of these practices).
- Are we involved in projects for which tax rules are being created? Is our approach to these negotiations aligned with our sustainability commitments/ responsibilities?
- How meaningful is the interaction between our departments and external advisors responsible for taxation strategy and our corporate responsibility/ sustainability/ human rights teams, with a view to internal alignment?
Mitigation Examples
*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.
- Allianz states that it “seeks to be a responsible tax payer… Our attitude is that tax planning is not a goal in itself, but should be undertaken to support the business strategy while being both tax-efficient and legally compliant.” (Ralf Chalupnik, Director of Tax Policy, Allianz, in B Team: “A New Bar for Responsible Tax”). The company reports that it does “not engage in aggressive tax planning or artificial structuring that lacks business purpose or economic substance,” does not use tax havens and “refrain[s] from discretionary tax arrangements.” Allianz has a comprehensive “Standard for Tax Management” which requires that tax planning be based on valid business reasons.
- Unilever reports on its “total tax rate” in its annual report “which they see as a key indicator that they pay tax on 100% of their profits aligned to the countries where they do business.” Vodafone has published an annual tax report setting out their total contribution to public finances, country- by-country, on an actual cash-paid basis, since 2013; Maersk began to include taxation in their sustainability report in 2016 and have conducted a gap analysis against the B Team Responsible Tax Principles, aiming for implementation in 2020. (From B Team: “A New Bar for Responsible Tax”).
- The Extractive Industries Transparency Initiative (EITI) is a coalition of governments, companies and civil society working “to improve openness and accountable management of revenues from natural resources.”
Alternative Models
In 2012 Starbucks announced that following “loud and clear” messages from customers, the company would make “changes which will result in Starbucks paying higher corporation tax in the UK – above what is currently required by law.”
Other Tools and Resources
- The B Team’s Responsible Tax Principles were developed through dialogue with a group of leading companies, convened by The B Team with contributions from civil society, institutional investors and international institution representatives.
- The International Bar Association’s Human Rights Institute released a 2013 report entitled Tax Abuses, Poverty and Human Rights. The Report addresses tax abuses from the novel perspective of human rights law and policy. It is based on extensive consultation from diverse perspectives and offers insight into the links between tax abuses, poverty and human rights.
- The Business and Human Rights Resource Centre portal on Tax Avoidance.
- Oxfam (2017) Making Tax Vanish: How the practices of consumer goods MNC RB show that the international tax system is broken. Contains an in-depth analysis and critique of the taxation planning practices of one company as well as the company’s response.
- M Lazala, Business & Human Rights Resource Centre (2015) Tax avoidance: the missing link in business & human rights?
- Tax Justice Network is a UK-based international research and advocacy network focusing on the link between taxation and, inter alia, human rights. It publishes the Corporate Tax Haven Index.
- OECD (2019) Tax and Digitalization discusses the tax challenges that arise from digitalization in furtherance of a work program to culminate in 2020 with an agreed global, long-term solution.
- The OECD’s Tax portal includes its Action Plan on Base Erosion and Profit Shifting and Inclusive Framework.
Red Flag 23. Markets where regulations fall below human rights standards
RED FLAG # 23
Operating or expanding into markets where laws or regulations fall below international human rights standards.
For Example
- Tobacco companies with growth strategies for markets without laws requiring warnings on packaging
- F&B companies with growth strategies for high salt/ sugar products for markets without laws requiring nutritional information on packaging
- Alcoholic beverage companies engaging in sponsorship activities in geographies without laws on exposure of children to alcohol-related marketing
- Collecting or holding sensitive personal information in geographies with underdeveloped privacy laws
- Lobbying against laws that protect workers or communities from corporate human rights impacts (e.g. lobbying against minimum wage laws)
Higher-Risk Sectors
Various, depending on subject of regulation, including: food, drink and tobacco sector; basic metal production sector; oil and gas production and oil refining sector; mining sector; mechanical and electrical engineering sector; textiles, clothing, leather and footwear sector; and professional services sector, including law firms.
In particular, when operating or expanding into: geographies with less developed legislative and regulatory frameworks, including least developed and developing countries; geographies in which corruption affects the effective enforcement of laws (see, e.g. Transparency International’s annual Corruption Perception Index).
Questions for Leaders
- Has the company assessed whether it could succeed without any reliance on these gaps in legal frameworks?
- How does the company explain applying different standards related to human rights in different jurisdictions?
- How does the company know whether its lobbying activities on regulation are aligned with human rights principles, policies and commitments and consistent across functions and locations?
- Has the company ever supported new regulation relevant to human rights or health protections in its sector or operations?
- How has the company assessed whether the regulations it has opposed would have helped improve informed choice and/ or human rights, and how and to whom does it explain its conclusions?
How to use this resource. ( Click on the “+” sign to expand each section. You can use the side menu to return to the full list of red flags, download this Red Flag as a PDF or share this resource. )
Understanding Risks and Opportunities
Risks to People
Where the business model is substantially dependent on gaps in legal frameworks, the company may engage in:
- Practices associated with maintaining this business model feature risk perpetuating a “race to the bottom,” as countries compete with lower regulatory standards to attract corporate investment.
- Lobbying against measures or laws that protect people from human rights impacts, for example lobbying against:
- (increased) minimum wage laws, affecting, inter alia, the right to just and favorable conditions of work, including decent remuneration;
- Indigenous title to land affecting, inter alia, Indigenous people’s rights;
- restrictions on emissions into land, sea and air, affecting the right to an adequate standard of living;
- laws that support informed choice, affecting the right to health.
- Legal strategies that prevent the state from protecting people from human rights impacts (potentially various), for example:
- seeking to use investment treaties (including stabilization clauses) to limit states’ abilities to enact or amend legislation or regulations that increase human rights protection;
- seeking to enforce intellectual property rights against public health imperatives.
Risks to the business
- Reputational and Operational: risks arise due to inconsistencies between what the company says in public and in private regarding regulatory protections, and in what it does in different parts of the world based on different levels of regulatory protection. Reputations may also be open to attack where the company invests considerable resources in weakening human rights protections.
- Legal and Financial Risk: where a company mounts an unsuccessful legal challenge to government regulation aimed at public protection, it may face financial penalties. For example, tobacco company Philip Morris was ordered to pay the Australian government millions of dollars after unsuccessfully suing the nation over its plain-packaging laws.
- Financial Risks: can arise where investors consider companies’ attempts to influence public policy in their investment decisions. For example, US-based Trillium Asset Management reportedly monitors the levels and recipients of corporate giving, corporate policies on political contributions and membership of industry (lobbying) associations as part of their background research for stock selection in their socially responsible investment funds.
- Business Continuity Risks: where business contributes to the degradation of resources or people on which the business relies, e.g. by lobbying against laws that protect consumers or the community or limit environmental degradation.
What the UN Guiding principles say
*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.
- Under the UN Guiding Principles on Business and Human Rights, the corporate responsibility to respect human rights “exists independently of States’ abilities and/or willingness to fulfil their own human rights obligations, and … exists over and above compliance with national laws and regulations protecting human rights.” (Principle 11, Commentary) In other words, “all business enterprises have the same responsibility to respect human rights wherever they operate” (Principle 23, Commentary), whether or not they have a domestic legal obligation to do so. As such, adopting an inherently uneven, compliance-based approach risks breaching the company’s responsibility in places where laws do not meet internationally accepted human rights standards.
- The UNGPs note that companies should, “strive for coherence between their responsibility to respect human rights and policies and procedures that govern their wider business activities and relationships [including] …. lobbying activities where human rights are at stake.” (Principle 16, Commentary).
- Where the company actively lobbies against or takes action to constrain laws that have the practical effect of furthering respect for human rights, it risks contributing to human rights impacts, whether as a sole contributor or as a result of the aggregate contribution of several actors.
- Where a company is benefiting from an absence of protection of rights in the countries where it operates, it may be directly linked to impacts; where it is aware of this and does nothing, it may, depending on a number of factors, be considered to be contributing to the impacts.
Possible Contributions to the SDGs
Addressing impacts on people associated with this red flag indicator can contribute to a range of SDGs depending on the impact concerned, for example:
SDG 3: Good Health and Well Being, in particular Target 3.5: strengthen the prevention and treatment of substance abuse, including narcotic drug abuse and harmful use of alcohol; and Target 3.10: strengthen the implementation of the World Health Organization Framework Convention on Tobacco Control in all countries, as appropriate.
SDG 8: Decent Work and Economic Growth, in particular Target 8.5: by 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value.
SDG 16: Peace, justice and strong institutions, in particular Target 16.7: ensure responsive, inclusive, participatory and representative decision-making at all levels; and Target 16.10: ensure public access to information and protect fundamental freedoms, in accordance with national legislation and international agreements.
Taking Action
Due Diligence Lines of Inquiry
- What legal frameworks are we actively seeking, supporting or opposing in order to execute our strategy? E.g. what regulatory drivers determine our entry into or exit from a sourcing location or sales market? How do these legal frameworks (or relevant elements) map against gaps in human rights protections?
- Do we have a policy on when and how we will lobby against regulatory initiatives that include provisions aimed at increasing consumer access to information about their health choices or at protecting other human rights?
- Have we assessed whether and to what extent our engagements with governments on regulatory developments are in line with our responsibility to respect human rights and enable governments to introduce human rights protections? Have we examined our lobbying activities in light of our own human rights commitments and strategies?
- Do our government affairs team engage routinely with our corporate responsibility/ sustainability/ human rights teams, with a view to internal alignment?
- Where we use external lobbying organizations, are our corporate responsibility/ sustainability/ human rights team consulted on the terms of their mandate?
- Do we disclose our position on key public policy issues? Do we reveal our external memberships, donations and methods of influence? If not, why not?
Mitigation Examples
*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.
Applying purpose and principles to lobbying activities:
- In 2017 Campbell’s Soup withdrew from the Grocery Manufacturers Association citing “our purpose and principles,” including positions on food labelling. When the United States Food and Drug Administration agreed to extend a deadline for food and beverage companies’ to introduce a “Nutrition Facts Panel,” the company announced it was “continuing to strive to meet the original deadline.”
- The CEO Water Mandate’s Guide to Responsible Business Engagement with Water Policy (2010) contains “Principles for Responsible Water Policy Engagement.” Principles 1 and 2 provide that “responsible corporate engagement in water policy must be motivated by a genuine interest in furthering efficient, equitable, and ecologically sustainable water management” and that companies should ensure “that activities do not infringe upon, but rather support, the government’s mandate and responsibilities to develop and implement water policy…”.
Contributing to a regulatory environment that enables respect for rights:
- Oil and gas companies have jointly pressed a government to improve transparency requirements before proceeding with bids for concessions, in order to level the playing field and avoid human rights performance becoming a competitive issue. (See Shift’s Using Leverage guide at p. 22).
- In 2014, eight apparel brands wrote to the Cambodian deputy prime minister and the chairman of the local Garment Manufacturers Association to say they were “ready to factor higher wages” into their pricing.
Alternative Models
Companies striving to ensure a living wage across their operations and supply chain seek to mitigate the effects of operations in countries in which there is no, or an inadequate, minimum wage. ACT (Action, Collaboration, Transformation) is an “agreement between global brands and retailers and trade unions to transform garment, textile and footwear industry and achieve living wages for workers through collective bargaining at industry level linked to purchasing practices.” Through industry-level collective bargaining in sourcing countries, companies seek to avoid competing with each other based on lower wages (and regulations that enable this), but rather on other factors.
Other tools and Resources
- Business for Social Responsibility (2019) Human Rights Policy Engagement: The Role of Companies: a BSR report on a human rights-supportive approach to public policy engagement.
Red Flag 22. Sales-maximizing incentives that put consumers at risk
RED FLAG # 22
Incentive structures designed to maximize sales that create risk to the health and welfare of customers or patients.
For Example
- Excessive sales targets in banking leading to sale of financial products that are not appropriate for customer circumstances
- Excessive sales targets or third-party benefits in the pharmaceutical sector, leading to over-prescription of potentially addictive medications
- Sales incentives based on profits on essential medications, leading to higher prices and reducing access to medicines for vulnerable persons
Higher-Risk Sectors
- Pharmaceutical sector, particularly in regards to operations in developing countries
- Retail banks
- Finance industry, e.g. lender commissions to mortgage brokers
- Baby formula manufacturers
Questions for Leaders
- How does the company know whether the incentives and benefits structures it has in place to maximize sales do not, in practice, risk sales practices that conflict with consumers’ or patients’ best interests?
- Pharmaceutical-specific: If the company uses incentive schemes that reward salespeople for profits on products, rather than revenue, how does it ensure that resultant higher drug prices do not compromise access to essential medicines for vulnerable people?
How to use this resource. ( Click on the “+” sign to expand each section. You can use the side menu to return to the full list of red flags, download this Red Flag as a PDF or share this resource. )
Understanding Risks and Opportunities
Risks to People
Incentive and benefit structures, a key component of the sales promotion strategy of many companies, are designed to reward salespeople for revenue generated for the business. However, such structures can lead to negative outcomes for people where targets are excessively high, practices are subject to inadequate oversight, promotion activities towards third parties lead to over – or inaccurate prescription or recommendations, and, in some cases, where incentives are profit-based.
- Excessive sales targets and inadequate oversight can lead to predatory sales behavior. In the retail banking industry, this has included:
- Unauthorized transactions on client accounts;
- Sale of insurance products to clients who do not meet eligibility requirements (and therefore cannot take advantage of them);
- Targeting the elderly or people conversing in their second language;
- Sale of loans to people who cannot meet repayment obligations. (Privacy and Information rights; Economic security rights; Right to an adequate standard of living; Right to housing).
- Heightened risks arise where salespeople are required to use discretion in evaluating customer fitness for access to a product and/or have the ability to access/ modify private customer information without adequate oversight.
- Influencing third parties leading to excessive or inappropriate prescription or recommendation of products: Where incentive structures influence a professional’s exercise of discretion, people may be given advice or products that are not appropriate for their personal circumstances, affecting their health and/or finances:
- Provision of baby formula to mothers in poverty by hospitals/ doctors receiving samples from companies, with subsequent impact on child health as mothers abandoned breastfeeding but could not afford an adequate amount of formula (see OHCHR) (Right to life; Right to health);
- Sale of “sub-prime” loans by mortgage brokers receiving commissions from lenders, at interest rates above market and/or to borrowers who could not afford repayments (see CESR) (Right to an adequate standard of living, including Right to Housing); and
- Over-prescription of potentially addictive painkillers facilitating or leading to addiction (Right to life; right to health).
- In the context of essential medicines, sales incentives that reward based on profits on products (rather than revenue) can drive up the price of essential medicines, reducing access to medicines for vulnerable persons (Right to life; Right to health).
Risks to the Business
- Reputational, Financial and Business Opportunity Risks: Scrutiny from governments, investors and civil society is becoming increasingly sophisticated and granular, including to the level of the existence and effect of sales targets. One example is the well-known Access to Medicine Index for the pharmaceutical industry, which includes Market Influence within its measurement areas, including “sales-based performance incentives and bonuses for sales agents.” Consequently, companies are unable to claim ignorance of expectations and best practices; to do so risks loss of investment, reputational risks and loss of access to business partners applying such standards in their criteria for engagement.
- Regulatory Risks: The impacts flowing from excessive sales targets and inadequate oversight can affect the reputation of an entire industry and potentially lead to increased regulation. The Banking Royal Commission in Australia was established in 2017 to inquire into and report on misconduct in the banking, superannuation and financial services industry, including fraudulent lending to elderly customers and the widespread provision of inappropriate and predatory financial planning advice. It was reported in 2020 that “about 40 pieces of … legislation sit on [the government’s] parliamentary agenda.”
- Reputational, Financial, Business Continuity, Regulatory and Legal Risks: As the impacts associated with this red flag tend to accumulate over time and exacerbate exiting social vulnerabilities, when impacts reach public consciousness, they tend to do so explosively, in the form of scandals, exposés and the partial collapse of industries. Companies face resulting litigation, increased scrutiny and regulation and reputational damage. For example, in the context of aggressive sales tactics and over-prescription in the opioid crisis, drug companies faced lawsuits, saw their reputation damaged and stock lose value. Reportedly 70% of Americans support “making drug companies pay the cost of addiction treatment services and cover the cost of naloxone, used to revive people who’ve overdosed.”
What the UN guiding principles say
*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.
The UNGPs note that companies should “strive for coherence between their responsibility to respect human rights and policies and procedures that govern their wider business activities and relationships. This should include, for example, policies and procedures that set financial or other performance incentives for personnel…”. (Principle 16, Commentary).
- Where salespeople undertake predatory or unethical behavior on behalf of the company, the company may cause any human rights impacts suffered by customers as a result.
- Where companies offer certain kinds of incentives in higher risk contexts, they risk contributing to impacts, e.g. if a pharmaceutical company operating in countries where access to medicine is a salient risk does not take steps to decouple incentive schemes from the cost of essential medicines.
- Companies that offer incentives to third parties in order to sway their advice to customers/patients may contribute to impacts suffered by those that receive inappropriate advice or products.
Possible contributions to the SDGs
Addressing risks to people associated with this red flag indicator can contribute to, inter alia:
SDG 1: No Poverty, in particular Target 1.4: By 2030, ensure that all men and women, in particular the poor and the vulnerable, have equal rights to economic resources, as well as access to basic services, ownership and control over land and other forms of property, inheritance, natural resources, appropriate new technology and financial services, including microfinance.
SDG 3: Good Health and Well-Being, in particular Target 3.5: Strengthen the prevention and treatment of substance abuse, including narcotic drug abuse and harmful use of alcohol. Target 3.8: Achieve universal health coverage, including financial risk protection, access to quality essential health-care services and access to safe, effective, quality and affordable essential medicines and vaccines for all.
SDG 8: Decent Work and Economic Growth, in particular Target 8.10: Strengthen the capacity of domestic financial institutions to encourage and expand access to banking, insurance and financial services for all.
Taking Action
Due diligence Lines of Inquiry
Promotional practices influencing third parties
- Do we have a policy in our marketing practices with regard to potential human rights impacts, and do we include our marketing practices as part of our human rights due diligence?
- What evidence do we have as to whether our salespeople are acting in practice in line with our marketing policies and prescribed processes?
- What are the different contexts in which our products/services will be sold/recommended to individuals? How might poverty, a lack of information or other vulnerabilities affect potential impacts from our products? What strategies do we have in place to ensure that our products are not sold/recommended in circumstances where the products might lead to harm to our customers?
- Do we provide adequate training to our sales professionals to enable them to make decisions guided by our human rights responsibilities?
- How might our salespeople, or the professionals they influence, be incentivized to act otherwise than in accordance with our policies?
- Do we have sufficient oversight over our salespeoples’ activities? How do we internally/ externally audit our practices?
- What grievance mechanisms do we have, who can access them and how do we act on results?
Sales targets and predatory sales behavior
- Who are our most vulnerable potential customers? How can our products/ services potentially be connected to negative impacts on people?
- Do our salespeople exercise discretion in evaluating the appropriateness of a product for customer? How is this guided or constrained?
- How can we track any increases in sales to potentially vulnerable people?
- In practice, how do our salespeople experience the relative pressures to both deliver on sales targets and protect vulnerable people from potential impacts associated with our products/services? Do they find the two to be in tension and do they know how to address those tensions in practice?
- Do our salespeople have the ability to access/modify private customer information? What protections/ oversight is in place?
Profit-based incentives and access to medicine
- How do we incentivize our sales teams across geographies in which we operate? Do our incentive structures reward for profits on products (as opposed to revenue)?
- Could our incentives structures be playing a role in high/ rising drug prices?
- If so, do we whether higher prices could exacerbate existing vulnerabilities among potential consumers and limit access to essential medicines?
- Can we find a way to decouple sales agents’ incentives from sales targets?
Sales incentives and over-prescription in pharmaceuticals
- Do we offer sales bonuses based on sales volume in the context of drugs prone to over-prescription?
- Could we avoid deploying sales agents for such medicines, or decouple sales bonuses from volumes?
Mitigation Examples
*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.
Removing sales-based incentives:
- According to the 2018 Access to Medicines Index, GSK’s sales agents’ rewards are not solely based on sales targets. Instead, it “rewards other qualities such as technical knowledge and quality of service” (p.134). Novartis also “rewards other aspects such as performance, innovation, collaboration, courage and integrity” (p.138).
- In order to “help our customers out rather than catch them out with unexpected charges, short-term offers and products they do not need,” Natwest and Royal Bank of Scotland “remove[d] sales-based incentives from customer-facing employees in Personal and Business Banking, ensuring that staff are completely focused on meeting the needs of customers rather than selling products.” To mitigate the impact on salespeople, the banks “gave every eligible employee an increase to their guaranteed pay.”
- To address over prescription, pharmaceutical companies Cipla and Shionogi have “minimised the incentive to oversell by decoupling their sales agents’ financial rewards from the volume of antibacterial and antifungal medicines they sell.”
Alternative Models
Avoiding sales agents altogether: Johnson & Johnson, Otsuka and Teva do not deploy sales agents for at least some antibacterial and antifungal medicines.
Other tools and Resources
- Sales Incentives and Over Prescription: The Access to Medicine Foundation’s Antimicrobial resistance benchmark “evaluates how 30 pharmaceutical companies are responding to the global threat of antimicrobial resistance” including their sales promotion practices.
- Profit-based Incentives and Access to Medicine: Information on pharmaceutical companies’ performance on “Market Influence,” including sales incentives, can be found in the Access to Medicine Index.
- Financial Services Misconduct: e.g., Submission of Dr. Kym Sheehan and Prof. David Kinley of Sydney Law School to the Australian Royal Commission into Misconduct in the Banking and Financial Services Sector.
- Misleading marketing practices of infant formula in developing countries: OHCHR (2015) Breastfeeding a matter of human rights, say UN experts, urging action on formula milk.
Red Flag 21. Automation at speed or scale that leaves workers little chance to adapt
RED FLAG # 21
Rapid automation of processes such that planning or support for upskilling or redeployment of displaced workers is challenging to achieve.
For Example
Businesses that employ workers in routine physical roles that can be substituted with robots, or in roles where robots can work alongside people across sectors such as:
- Manufacturing
- Transport and logistics
- Agriculture
- Extractives
Higher-Risk Sectors
Automation – understood as the replacement of people with robots – is driven by increasing labor costs, changing workforce demographics (ageing and labor scarcity) and decreasing technology costs.
Automation is currently most prevalent in:
- Manufacturing: predominantly in the automotive, apparel and electronic industries, but increasingly in the manufacturing of fast-moving consumer goods and garments
- Transport and logistics: picking, stowing, moving stock in warehouses
Automation is likely to grow in:
- Agriculture: to replace repetitive tasks in operations that employ a steady year-round workforce, or to perform detailed tasks
- Extractives: to remove people from underground environments or using unmanned vehicles for transporting materials to reduce costs, achieve longer operating hours and improve health & safety
- Small and medium enterprises: the advent of cheaper and more standardized robots is turning small companies into the next frontier for automation
Questions for Leaders
- Does the company foresee automating roles? How does the company plan for automation?
- Have we considered scenarios in which we automate at a pace and scale that will be less disruptive to the lives and livelihoods of our workforce?
- Are we providing employees training to build their skills to take on new types of work as we increasingly automate?
- Do we engage with workers whose jobs may be affected by automation to understand their concerns and needs?
How to use this resource. ( Click on the “+” sign to expand each section. You can use the side menu to return to the full list of red flags, download this Red Flag as a PDF or share this resource. )
Understanding Risks and Opportunities
Risks to People
The replacement of people with robots is estimated to displace 400 million workers and automate 15% of worked hours across all sectors between 2016 and 2030. While very few jobs are fully replaceable with robots, research shows that many jobs have a significant percentage of automatable activities. Automation’s greatest impact is forecast to be on jobs that consist of routine activities in predictable environments.
Automation of processes through robots can have a number of positive impacts.
In the short term, it can:
- Remove unsafe jobs: in mining, robots can help remove people from dangerous underground jobs, for instance, in Resolute’s Syama mine in Mali.
- Help people with restricted physical ability work.
- Make jobs more accessible for local workers: in mining, robots can provide a simpler visual interface which makes it easier for companies to train local workers, rather than rely on highly- skilled workers from outside the area.
- Increase the number of jobs: in fulfilment centers, robots can increase throughput thus enabling the center to hire more workers to deliver more orders.
- Help manage labor shortages: for example, labor shortages exacerbated by Covid-19 are incentivizing investment in agricultural robots.
In the long term, the history of labor market shifts shows that the overall effects of roboticization can be positive, as the new jobs created outpace the jobs lost and create greater economic prosperity. McKinsey estimates that automation could create between 555 and 980 million jobs by 2030, primarily by virtue of raising incomes through higher productivity, higher wages and lower consumer costs.
At the same time, McKinsey estimates that by 2030, 400 million workers will be displaced by automation and 75 million will need to change occupational category. This shift will put enormous pressure on workers around the world.
Automation will more negatively affect people who are already vulnerable: low paid and precarious workers and minorities that are over-represented in automatable jobs or under-represented in sectors that are likely to experience job growth. For example:
- In the US, African American and Latino workers are projected to be disproportionately affected by automation because they are over-represented in sectors such as transportation, food service and office clerks.
- In Bangladesh, automation in the ready-made garment (RMG) industry is forecast to disproportionately affect women, who comprise 80% of the workforce in the sector.
The negative impacts of automation on people are a result of the way in which companies introduce and use robots. The common denominator in cases of roboticization going wrong (where workers are dehumanized and seen as another input or cost in the production process) is lack of empathy: the ability to put oneself in someone else’s shoes.
When companies introduce automation without empathy with workers, the risks to people can be:
- Loss of Livelihood: Workers who lose their job because they are unable to relocate, retrain or redeploy. IMF research shows women and young workers aged 16-19 will be more negatively affected.
- Lower Wages: Research shows that displaced workers in the US earn 30% less in their next job, and that technology which replaces workers without increasing productivity tends to depress wages of low-skilled workers.
- Deterioration of Working Conditions: Workers in warehouses where robot use has increased, have complained of a faster pace of work and limited time to think. This can lead to an increase in accidents and have negative mental health impacts on workers caused by the pressure to work faster.
- Workplace Accidents: An investigation of health & safety records of warehouses that introduced robots showed a significant increase in workplace accidents.
- Mental Health Problems: Research of economic contractors shows that adverse economic transitions (job loss, transition to inadequate employment or reliance on social safety net) increases the prevalence of depression, suicide and substance abuse.
Risks to the Business
- Operational Disruption and Reputation Risk due to Worker Concerns and Insecurity: Where companies make decisions to automate – and this is done in ways that leave workers uncertain or insecure about their livelihoods – those companies can face public protests, union action, strikes and calls for boycotts. Examples of this include: Australian retailer Coles announcing the automation of warehouses (2020); Automation in Las Vegas casinos (2018) and automation at a Vancouver port (2019).
- Potential Loss of Social License and “Local Content” Incentives: In cases where governments have offered incentives for businesses, in particular, in the extractive industry, to set up operations and employ local people, it may be that large-scale layoffs due to rapid automation will undermine the support of the local government and the population. This possibility is already being raised and explored by civil society and research organizations.
What the UN guiding principles say
*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.
A company may contribute to negative human rights impacts when it lays off workers as a result of rapid automation without first trying to offer re skilling or upskilling opportunities.
For example, in contexts where there is a weak social safety net or where workers lack alternative employment options or sources of income, rapid automation can result in job losses that leave workers without ways to secure an adequate standard of living. Compounded by the socio-economic context, this can negatively affect workers’ right to health, adequate housing and nutrition.
Buyers and investors may also contribute to negative human rights impacts if they require, respectively, their suppliers or investee companies to automate with no time to support workers in contexts where there are weak social safety nets.
Possible contributions to the SDGs
Technological progress is crucial to the fulfillment of the SDGs. However, to be true to the purpose of the SDGs, the use of technology needs to be underpinned by an understanding of how the loss of jobs due to automation can affect people’s basic dignity and rights.
The introduction of robots with empathy and with support for workers to re-train or upskill can help companies fulfill the following SDGs:
SDG 9: Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation, in particular Target 9.2: Promote inclusive and sustainable industrialization.
SDG 8: Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all, in particular Target 8.5: Achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities.
Taking Action
Due Diligence Lines of Inquiry
While the scale of automation’s impacts on people is undeniable, the nature and gravity of those impacts will depend on the way in which companies apply technology. This includes the due diligence companies carry out to identify and address negative impacts on people. Important questions to consider are:
- Does the company have a culture of empathy that looks not just at the benefits but also the human impacts of automation?
- Do we seek to understand what workers expect from their jobs in terms of progression and development?
- Do we ask how workers feel about the technology that surrounds them at work?
- Do workers have alternative employment options? (Are we the only significant employer in the local area?)
- How robust is the social safety net for workers who are displaced from their jobs?
- Does the business have in place processes to minimize the harm to workers of introducing and using robots?
- Do we have a process to assess impacts on people of new technology or automation in our operations?
- Do we look for unintended negative consequences from technology meant to make work “faster and easier”?
- Do we provide workers with opportunities for continuous learning? Do we recognize and reward that learning?
- Are our governance and internal processes and controls able to manage the additional complexity that comes with automation and technology?
- How do we engage with other stakeholders – including governments and trade unions – to identify ways to prepare workers for a changing landscape of work?
Mitigation Examples
*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.
Mitigation examples fall into four categories:
- Engaging with Workers: Giving workers early notice that their jobs will be affected and engaging with them to understand their needs and expectations. Examples are:
- Research and forecasting: The European Centre for the Development of Vocational Training provides skills forecasts showing changes in the labor force and types of job openings, which enable workers, employers and governments to prepare in advance.
- Long-term talent pipelines: Caterpillar instituted a talent pipeline management system which enables the company to assess the volume of candidates for six core positions with a 10 year horizon, facilitating the creation of development plans to help workers progress their careers.
- A UK retailer engages with the trade union to set targets for pickers in their highly automated grocery home delivery fulfilment center.
- Supporting Redeployment or Relocation of Existing Workers: Companies can redeploy workers through upskilling or retraining. 62% of executives recently surveyed believed they would need to upskill more than a quarter of their workforce before 2023. Examples are:
- Large companies such as Orange, Verizon and Amazon have announced programs to retrain workers to help them move from positions vulnerable to automation to other jobs.
- Pilot projects in Bangladesh to increase workers’ digital literacy and use of computer-based design to adapt to the increased use of automation in garment factories, at the same time addressing gender imbalances by focusing the training on women.
- Support for workers to relocate to other places where they can access jobs: research in the US shows that the percentage of workers that relocate to access jobs has decreased since 1985; however, more than two-fifths of workers surveyed said they would be willing to relocate for work. Helping workers and their families consider and navigate the relocation process is therefore an alternative to bridging the skills gap.
- Supporting Future Workers to Access the Labor Market: OECD have seen a continued decrease in public spending on labor force training as a percentage of GDP since 1992. Examples of companies helping future workers develop skills abound, including:
- Collaborating to help unemployed youth enter the labor market: in the UK, Movement to Work works with employers to help them implement programs to tackle youth unemployment.
- Implementing employer-led skills development programs with credentials and certifications that workers can take with them as they move jobs.
- Supporting and providing vocational training. For example, JPMorgan Chase funds vocational training in the US through a variety of programs and partnership.
- Using Leverage to Advocate for Public Policies: e.g. wage insurance, universal basic income, smart taxation, closing the gender gap in STEM degrees (only 27% are women).
- Businesses can use their leverage to signal to governments changes needed in education curricula: for example, the Confederation of British Industry has commissioned research to better understand the curriculum changes needed to prepare young people to access the labor market.
- The Social and Economic Council of the Netherlands is a multi-stakeholder body composed of trade unions and employers’ organizations which makes recommendations to the government on how to mitigate the negative impacts of robotization in the labor market. This type of dialogue can help governments drive education and social policy to better prepare future workers and to prevent the dislocation associated with an increase in automation.
- France, Italy and Singapore have created personal training accounts, which allow workers to accrue credit which they can use towards training and upskilling and is transferable between employers. This provides workers with training opportunities that are not tied to their current employer.
- Countries are also creating “skills ecosystems” that enable workers to chart their career path and access lifelong learning, such as Singapore’s Skills Future Movement.
Alternative Models
Alternative models are examples of companies that retain workers instead of replacing them with robots. This does not mean the companies are not automating. It means they are integrating robots with their existing workforce in ways that benefit both workers and the business.
- One emerging trend is to have robots and workers collaborating side-by-side. Research in the automotive sector shows that assembly lines where workers and robots (“co-bots”) worked together were more efficient than lines where workers or robots worked alone.
- Another trend is using automation as an opportunity to provide workers with new skills, particularly to workers who are generally disempowered such as women or ethnic minorities.
Other tools and resources
General:
- OECD (2019) OECD Employment Outlook 2019: The Future of Work.
- International Labour Office (2019) Work for a brighter future: Global Commission on the Future of Work.
Sector specific Examples:
- ILO, David Kucera and Fernanda Bárcia de Mattos (2020) Automation, employment and reshoring: Case studies of the apparel and electronics industries: a study of automation in the apparel and electronics industries.
Red Flag 20. Shifting inventory risk to suppliers with knock-on effects to workers
RED FLAG # 20
Minimizing inventory risk, including through just-in-time delivery, such that the risk from changes in demand is shifted to the supply chain and vulnerable workers.
For Example
Companies operating in various industries, including electronics, fast moving consumer goods and apparel:
- taking a position that the company will not warehouse goods
- withdrawing orders from suppliers with limited lead time when demand drops
Higher-Risk Sectors
- Online and “bricks and mortar” retail
- Apparel
- Consumer products companies, particularly fast moving consumer goods
Questions for Leaders
- Where is the risk associated with excess inventory absorbed in the company’s business model: is it absorbed by the company or is this risk externalized, through purchasing practices, on suppliers?
- How does the company know whether its purchasing practices affect suppliers’ ability to ensure respect for workers’ rights, including providing fair wages and decent working conditions?
- How does the company know whether its buyers understand (and are incentivized to consider) the human rights implications of lead times and other purchasing decisions?
- How does the company mitigate the risks to people when withdrawing orders or severing supply chain relationships?
How to use this resource. ( Click on the “+” sign to expand each section. You can use the side menu to return to the full list of red flags, download this Red Flag as a PDF or share this resource. )
Understanding Risks and Opportunities
Risks to People
- Some business models support commercial viability by externalizing the risks associated with changing levels of consumer demand on suppliers, rather than absorbing it in the business model.
- Companies may do this by way of:
- Making last minute demands, changes or cancellation of orders;
- Using contracts by which the supplier assumes the cost and risk of the product until delivered;
- Avoiding warehousing goods by utilizing a “just in time” inventory/sourcing model.
- As a result:
- When demand spikes, and the purchasing company places large volume orders with short lead times, suppliers may see no alternative but to demand excessive overtime. (Right to just and favorable conditions of work; Right to a family life; Right to Health).
- A joint ETI/ILO survey on purchasing practices in 2017, to which responses were received from over 1,400 suppliers in 87 countries, found that only 17% of suppliers surveyed considered their orders to have enough lead time.
- When demand drops, the purchasing company may cancel orders on short notice and/or refuse to take responsibility for goods that have already been produced. IndustriALL has noted that such cancellations leave factories holding the goods, unable to sell them to the customer that ordered them, and in many cases unable to pay the wages of the workers who made them.
- When demand spikes, and the purchasing company places large volume orders with short lead times, suppliers may see no alternative but to demand excessive overtime. (Right to just and favorable conditions of work; Right to a family life; Right to Health).
- Purchasing practices such as this may, without appropriate mitigation measures, place heavy pressure on suppliers working on narrow margins. Risk and its associated costs are pushed up the supply chain and absorbed by the most vulnerable people – such as factory workers, including migrant workers, women workers, producers and small-holder farmers – affecting their livelihoods and those of their families. Suppliers under excessive pressure may not pay wages or overtime, or not provide safe working conditions; they may pregnancy test workers pursuant to a view that pregnant workers are not financially viable. Risks are exacerbated when the purchasing company(ies) provide little or no commitment to long-term sourcing, disincentivizing investment in improving working conditions (Right to just and favorable conditions of work; Right to Health).
Risks to the Business
- Operational Risks:
- Purchasing practices that situate inventory risk with suppliers can leave suppliers with cash flow challenges and unpredictability that disincentivizes them from investing in compliance with codes of conduct. Such practices can also cause suppliers to outsource (including illegally) to subcontractors, increasing the complexity of the supply chain and reducing visibility and control on the part of the buying company.
- Where the company does not keep an inventory of its products and relies on a small number of suppliers, it can be vulnerable to inventory shortages: in 2019, German-based Adidas’s sales growth declined due to “supply chain shortages” when “the company’s suppliers—nearly all of whom are based outside Germany—did not keep up with customer demand.”
- The Covid-19 situation in 2020 further demonstrated the risks to the company of relying on, inter alia, just in time models and the detrimental impact of this practice on supply chain resilience.
- Reputational and Financial Risks:
- Companies with purchasing practices that lag behind leading practices may receive poor results in the Better Buying review, a growing online platform that allows suppliers to anonymously rank the buying practices of brands and retailers.
- During the 2020 Covid-19 pandemic, companies leaving overseas suppliers with excess inventory received negative publicity, including through Workers’ Rights Consortium’s “Brand Tracker” which listed apparel labels and retailers that were and were not paying their suppliers for orders in production or completed. From an investment perspective, research on the link between public sentiment on corporate responses to the pandemic and financial flows found that companies with labor and supply chain practices that were seen as taking action to secure their supply chain experienced higher institutional money flows and less negative returns.
What the UN guiding principles say
*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.
The UNGPs note that companies should “strive for coherence between their responsibility to respect human rights and policies and procedures that govern their wider business activities and relationships [including] …. procurement practices.” (Principle 16, Commentary).
If a company engages in purchasing practices that place undue time and/or financial pressure on suppliers, incentivizing or facilitating them to cause human rights impacts on workers, they contribute to impacts.
Possible Contributions to the SDGs
Addressing risks to people associated with this red flag indicator can contribute to, inter alia:
SDG 10: Reducing inequalities within and between countries.
This goal becomes relevant as profit margins and returns are concentrated at the buyer/investor level, with less and less value making it into the pockets of the poorest in the supply chain.
SDG 8: Decent Work and Economic Growth, in particular Target 8.8 on protecting “labor rights and promot[ing] safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment.
SDG 1: End Poverty in All its Forms Everywhere, in particular Targets 1.1 and 1.2 on eradicating extreme poverty and reducing by half the number of people living in poverty (according to national definitions).
Taking Action
Due Diligence Lines of Inquiry
- Do we have sufficient budget allocated to warehousing products? If not, how are we ensuring that factories can produce in advance and keep overtime within acceptable limits?
- Do buyers have sufficient knowledge, incentives and support to assess how and when their decisions will place human rights at risk, and to know from whom to seek assistance when they do?
- How do we know whether our buyers follow our processes, rules or guidelines in practice when engaging or contracting with suppliers?
- Do we engage with our suppliers in ways that help us understand how far they can go to meet our demands while still respecting the rights of their workers? Do we work with suppliers in countries of production to increase worker protections?
- Do we take a short term, transactional approach to supply chains or do we develop supply chain partnerships? For example, do we see high turnover among suppliers?
Mitigation Examples
*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.
- “Kellogg undertakes a ‘joint business planning process’ with its key suppliers that includes the evaluation of its responsible sourcing practices. Issues such as purchasing practices, ordering, lead-time expectations, production schedule changes, and complicated specifications for ingredients and sizes are discussed with suppliers and that responsible sourcing is also embedded in global sourcing events and category development. In addition, Kellogg discloses that procurement leadership and category managers are responsible for the execution of the Global Sustainability Commitments, including social accountability, which is reflected in their annual performance plans and annual incentives.” (Know the Chain).
- ACT (Action, Collaboration, Transformation) is an “agreement between global brands and retailers and trade unions to transform garment, textile and footwear industry and achieve living wages for workers through collective bargaining at industry level linked to purchasing practices.” In September 2019, ACT adopted a joint due diligence framework including Global Purchasing Practices Commitments, a Responsible Exit Policy and Check List and a Purchasing Practices Self-Assessment tool (covering64 different aspects of purchasing practices in 16 areas), including a commitment to “fair terms of payment” and “better planning and forecasting.” The ACT Accountability and Monitoring framework provides ACT member brands with an agreed set of indicators and monitoring instruments to implement their purchasing practices commitments.
- At a time of decreased sales during the 2020 Covid-19 pandemic, UK supermarket Morrisons committed to advancing payments to its smaller foodmakers, farmers and businesses that stock its shelves; H&M announced that it would take delivery of already produced garments, as well as goods in production, and that the goods would be paid for under previously agreed payment terms and prices; L’Oréal prioritized immediate payments to and shortening payment terms with suppliers who were at risk of going out of business; and Unilever offered early payment to its most vulnerable small and medium-sized suppliers to help them with financial liquidity. (See Triponel and Sherman (2020)). Primark created the Primark Wage Fund, Asia to help pay the wages of garment workers affected by Primark’s decision to cancel clothing orders.
Alternative Models
Spanish fashion company Alohas’ “business model revolve[s] around an on-demand production process.” The company previews upcoming designs to customers early in the season and makes them available at a discount rate. Once it calculates how many units of each new style should be produced it commences manufacturing. Alohas notes that “on-demand reverts the sales cycle by applying a discount for early purchases and offering the product at full price only once stock has been made available. Meaning we don’t adhere to the traditional sales calendar anymore.”
Other Tools and Resources
- ACT (Action, Collaboration, Transformation), including the ACT Global Purchasing Practices Commitments.
- ILO (2017) Purchasing practices and working conditions in global supply chains: Global Survey results: provides the results of an ILO/ETI global survey on purchasing practices and working conditions, to which over 1,400 suppliers from 87 countries responded, with the sample covering nearly 1.5 million workers.
- ETI (2017) Guide to Buying Responsibly: The guide includes best practice examples and outlines the five key business practices that influence wages and working conditions.
- Better Buying has created a tool for suppliers to anonymously rate their buyers against 7 purchasing practices, developed through consultation with suppliers. Buttle (2018) Can there be fair rules for the ‘purchasing practices’ game?: a ETI blog post from ETI’s Apparel and Textiles Lead summarizes standards for company purchasing practices and offers recommendations for improvements in practice.
- Workers’ Rights Consortium’s “Brand Tracker” lists apparel labels and retailers that were and were not paying their suppliers for orders in production or completed during the 2020 Covid-19 pandemic.
- A. Triponel and C Bader (2020) Coronavirus is shining the spotlight on unhealthy supply chains: cleaning them up will help both business resilience and worker wellbeing.
- A. Triponel and J. F. Sherman (2020) Moral bankruptcy during times of crisis: H&M just thought twice before triggering force majeure clauses with suppliers, and here’s why you should too.
Red Flag 19. Sourcing commodities that are priced independent of farmer income
RED FLAG # 19
The business’s commercial success substantially depends upon trading or sourcing agricultural commodities that are priced independently of production costs, such that farmers are unlikely to be able to sustain a living income.
For Example
Food and beverage, pharmaceutical and cosmetics companies sourcing, and traders trading:
- Price volatile agricultural commodities supplied by small-holder farmers (cocoa, coffee, palm oil)
- Price volatile labor-intensive commodities (bananas, cotton)
- Capital-intensive commodities for which price does not reflect the cost of production and that require large agricultural land area (soy, wheat, corn)
Higher-Risk Sectors
- Food and beverage companies sourcing from developing/ emerging markets
- Agricultural trading companies
Questions for Leaders
- How does the company understand the relationship between the price of the commodity and living incomes/wages for farmers and agricultural workers in source countries?
- To what extent does the company’s value proposition rely on the price of an agricultural commodity being depressed below levels deemed too sufficient to sustain living incomes/ wages? Does the business model rely on substantial market power to drive down pricing?
- Does the company’s business model help or hinder long-term sourcing commitments to farmers?
- Does the company view any increase in farmer incomes primarily as a problematic cost to the company or as a justified redistribution of value in its supply chain?
How to use this resource. ( Click on the “+” sign to expand each section. You can use the side menu to return to the full list of red flags, download this Red Flag as a PDF or share this resource. )
Understanding Risks and Opportunities
Risks to People
- Of the estimated 500 million small-holder farmers worldwide, 200 million are producing food within global supply chains. Fifty percent of the world’s undernourished people are smallholders and their families.
- Farmers and smallholders have limited influence in negotiating terms of trade and receive an ever-diminishing share of the fruits of their labor.
- A range of structural barriers underlie this disadvantage, at the levels of the supply chain, commodity sector and public policy. ETI notes that business models intersect with these barriers in many ways, including:
- Consolidation of the market into a limited number of food retailers with substantial market power, that is often used to drive down prices and leave farmers unable to negotiate higher pricing.
- The effect of lowest cost or “discounter models” in the food retail sector, driving price competition and increased pressure on prices in the supply chain.
- Price squeezes on suppliers increase the risk of human and labor rights violations in food and farming supply chains, often affecting the most vulnerable in rural communities, including small-holder farmers, particularly women and migrant workers. The inability of a farmer to provide for his or her family leads to a considerable loss of dignity in some rural communities, increasing marginalization and compounding the risk of human rights impacts.
- With respect to some commodities, farmers and their families find themselves in a poverty trap: without funds or investment to grow high-quality produce or plan ahead, they face low prices and/or harvest early, reinforcing the poverty cycle. Farmers also face theft and are increasingly vulnerable to extreme weather events.
- Where lowest cost is the largest business driver, e.g. in the commodities market, farmers, fishermen and smallholders have limited influence in negotiating terms of trade and receive an ever-diminishing share of the fruits of their labor. [See also Red Flag 14]
- Poverty erodes or nullifies economic and social rights such as Right to health, adequate housing, food and safe water, and the Right to education (OHCHR).
Risks to The Business
Business Continuity Risks:
- Extreme price pressure on farmers can undermine availability of product and stability of supply in the near term and lead to an exodus from farming over time.
Reputational Risks:
- Undue price pressure on supply chains in certain geographies can lead to civil society exposés, resulting in damage and damage to reputation, brand and customer loyalty.
Business Opportunity:
- Focusing on improved livelihoods for people within the supply chain helps to bring them into the consumer base; failure to do so foregoes this opportunity.
What the UN guiding principles say
*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.
The UNGPs note that companies should “strive for coherence between their responsibility to respect human rights and policies and procedures that govern their wider business activities and relationships [including] ….procurement practices.” (Principle 16, Commentary)
- Companies sourcing commodities through their supply chain from farmers who receive less than a living income may be directly linked to impacts on the adequacy of the farmers’ standard of living.
- If a company’s purchasing practices push costs upstream in the supply chain – whether alone or as part of an industry-wide behavior – in ways that prevent farmers from achieving a living income, they contribute to the impacts experienced by farmers.
Possible Contributions to the SDGs
Addressing impacts on people associated with this red flag indicator can contribute to, inter alia:
SDG 1: Eradication of poverty in all its forms.
SDG 10: Reduce inequality within and among countries.
Oxfam has noted that, “perpetually low income levels are one of the key reasons why farmers remain stuck in poverty… For many small- scale farmers, significant 2 exist between their actual income and income levels sufficient to ensure a decent standard of living…”. Oxfam cites structural barriers, including at the level of individual supply chains, which reinforce the “significant imbalance between the risks of agriculture shouldered by farmers and their power to shape their own market participation.”
By addressing the impacts on living income from corporate sourcing practices and price influencing, companies can contribute to lifting the poorest people in agriculture into more sustainable livelihoods, and in turn help them to escape poverty and realize their rights, from better health to nutrition to education.
Taking Action
Due Diligence Lines of Inquiry
- Are our purchasing practices designed to drive down pricing, or do they have the effect of doing so? How do we know?
- Are the length of our supply chain commitments/ contracts helping or hindering our ability to use our leverage to secure better prices for farmers?
- Have we explored increasing dialogue with, or forming partnerships with, farmers in our supply chain? Have we sought to understand the real costs associated with production of the commodity, based on their experience?
- Are we engaging in multi-stakeholder initiatives (MSIs) aimed at addressing human rights impacts with respect to the commodity on which we rely? Where a relevant MSI doesn’t exist, can we learn from analogous efforts and explore opportunities to create one?
- Have we explored how to engage and educate our customers if they must absorb some price increase to protect farmer living standards?
- Are we prepared to experiment – and learn from failures or missteps – in tackling the difficult challenge of livelihoods in supply chains? Can we explore opportunities to promote and facilitate the growth of new forms of business in our supply chain that can channel more resources to farmers (e.g. cooperatives, women- owned enterprises, social enterprises)?
Mitigation Examples
*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness
- The Farmer Income Lab, launched by Mars, with Dalberg and Wageningen universities and Oxfam USA, is a collaborative effort to identify ways to increase smallholder farmers’ incomes – beginning with Mars’ supply chains in developing countries – and to understand how to create positive outcomes for farmers at scale.
- Companies participating in the voluntary Sustainable Vanilla Initiative commit to pre-competitive projects to improve quality, product traceability, good market governance and the livelihoods of smallholder farmers who form the foundation of the global vanilla bean trade.
- ABI has set a goal that by 2025, 100% of its direct farmers will be skilled, connected and financially empowered. Their SmartBarley platform leverages data, technology and insights to help more than 5,000 enrolled farmers improve their profitability, as well as their efficient use of natural resources.
Alternative Models
- Oxfam has highlighted several examples of alternative models, including:
- UK company Sainsbury’s Dairy Development Group: farmers have full membership within the group and equal votes in decision making on milk price. In 2012, Sainsbury’s “removed itself from this volatile milk market and introduced a Cost of Production (COP) model which was voted in by the farmers themselves.”
- Private company Apicultura Lilian, in Honduras: the company has a sourcing strategy focused on establishing a direct link with honey producers; it distributes 10% of its profits to supplier network and provides technical support and inputs to increase yields.
- Some initiatives appear to aim at “de-commoditization”: An impact investing fund created by Danone, Firmenich, Mars and Veolia with respect to vanilla, offers a 10-year commitment, cooperative and a minimum price, through an “innovative model where formers and industry players share both the benefits and risks.” The project estimates that 60% of cured vanilla’s value will go back to farmers (compared to initially observed shares of 5% to 20%).
- Research in Progress: The Farmer Income Lab is conducting research and stakeholder dialogue to identify, inter alia, “models that unlock opportunities for women and lead to increased business value, as well as how to integrate these models into business strategies and measure progress in doing so.”
Other tools and Resources
- Oxfam (2018) A Living Income for Small-Scale Farmers: Tackling unequal risks and market power discusses the barriers to raising small- scale former incomes and entry points for change.
- Oxfam (2018) Fair value: Case studies of business structures for a more equitable distribution of value in food supply chains explores 12 case studies to demonstrate that equitable business structures, such as farmer-owned cooperatives, and business arrangements including long-term and transparent contracts, profit sharing and producer participation in pricing committees, can result in farmers receiving a greater share of the value of the food they produce.
- FAO (2015) Inclusive Business Models Guidelines for improving linkages between producer groups and buyers of agricultural produce. FAO has developed guidelines that contain, inter alia, useful methodologies for buyers seeking to organize farmers into suppliers, which includes contract farming or outgrower schemes.
- OECD-FAO Guidance for Responsible Agricultural Supply Chains provides guidance for enterprises across the agricultural supply chain, from the farm to the consumer, anchored by a “framework on risk-based due diligence.”
- On cocoa specifically, Peter Stanbury and Toby Webb’s How to deliver real sustainability in the cocoa sector? Collaborative development governance puts the case for cross-cutting, long-term action.
Red Flag 18. Sourcing low-paid labor from labor providers
RED FLAG # 18
Sourcing low-paid labor from labor providers, where there is little visibility into or control over the protection of worker rights
For Example
Sourcing labor for construction, manufacturing, hospitality, call centres, agriculture and horticulture, social care and domestic work and other areas, where there is a risk that:
- Workers face low wages, salary delays, excessive deductions and uncompensated overtime
- Workers suffer discrimination and physical, verbal and sexual abuse
- Workers are unable to join trade unions
- Workers are housed in poor quality accommodation or subject to curfews
- Especially in the case of migrant workers, workers are trafficked, charged fees for recruitment services, or their identity documents are retained
Higher-Risk Sectors
- Hospitality and food industry (e.g. cleaning, maintenance, security, entertainment, kitchen staff)
- Construction
- Manufacturing (e.g. apparel and electronics)
- Call centres
- Agriculture and horticulture
- Social care and domestic work (e.g. elderly care, youth homes, private maid and child care services)
Questions for Leaders
- What percentage of the company’s labor force is sourced from labor providers and what is the rationale?
- To what extent does the company have transparency into the conditions under which workers arrive and remain in our labor pool?
- How do we know that workers are not paying recruitment fees in order to work for the company?
How to use this resource. ( Click on the “+” sign to expand each section. You can use the side menu to return to the full list of red flags, download this Red Flag as a PDF or share this resource. )
Understanding Risks and Opportunities
Risks to People
- People are the core business of employment and recruitment agencies. As such, labor providers can positively or negatively impact the direct hire employees they recruit for client companies and the agency workers they place, as well as their families, and local communities in the migrant worker’s home state.
- Negative impacts can occur at all stages of the recruitment and employment process and affect workers’ rights, including their freedom from all forms of forced or compulsory labor; their right to just and favorable conditions of work; their right to privacy, women’s and migrant workers’ rights; the right to non-discrimination; the right to form and join a trade union and the right to collective bargaining; and the right to an adequate standard of living.
- Cross-border recruitment of migrant workers intersects with heightened vulnerability where individuals experiencing extreme poverty may feel their choices are limited and/or lack knowledge about their rights in the host state. Moreover, regulation that ties a worker’s immigration status to a particular employer (who acts as a sponsor), or which requires the worker to gain employer permission to exit the country, places the worker in a position of particular vulnerability: if the worker experiences abuse or exploitation, or sees his/her personal documents retained, it can be difficult to seek redress out of fear of losing a job and immigration status.
- Recent investigations into the practices of unscrupulous recruitment and employment agencies have revealed serious abuses in a variety of sectors:
- Key findings from a recent report into the hotel industry inn the United Arab Emirates and Qatar highlighted testimonies by some workers (mainly housekeepers, restaurant staff, security guards, drivers and stewards) who reported receiving half of the salary they were initially promised; ATM cards and other valuable documents were kept from them, deductions were frequently made from salaries for illegitimate reasons and their freedom of movement was severely curtailed.
- There have been numerous reports of debt bondage and forced labor with respect to migrant workers in the electronics sector in Malaysia which supplies major brands in the Global North. There have been reports that workers, primarily from Nepal, Bangladesh, Indonesia and Myanmar, have not received the wages and accommodation promised by agencies, and moreover were forced to pay high sums (over $4,000 USD) to become employed in Malaysia. Workers claim their passports were confiscated, they received violent threats and were deceived about major elements of their work agreements.
- In Italy and Spain, it has been reported that labor exploitation of low-paid migrant workers occurs more frequently in the agricultural sector due to the higher numbers of low-paid migrant workers. Investigations found that migrant workers were paid significantly below minimum levels stipulated by law and worked excessive hours to harvest fruits and vegetables with no protection and under unsanitary living conditions. Middlemen acting as recruiting intermediaries between landowners and workers deducted fees from the workers’ already low wages. The same report found that Romanian female workers in the Ragusa region of Sicily were also subjected to sexual assault and exploitation, in addition to working 12-hour days in extreme heat with no water and substandard accommodation.
Risks to The Business
Operational, Reputational and Financial Risks: Companies are increasingly subject to scrutiny for their own labor practices and practices in their supply chains, including around fair recruitment. For example:
- Europe’s largest hotel group, Accor, has been the subject of reports linking it to the plight of its workers in the United Arab Emirates during the COVID-19 pandemic. While the group notes that it respects all local laws by continuing to provide workers with food and accommodation during furlough, it was reported that migrant workers are “trapped” in the country with no pay, making it impossible for them to reimburse the money owed to cover recruitment fees.
- UK apparel brands ASOS and John Lewis were criticized after a supplier factory closed down in Mauritius, leaving the Bangladeshi migrant workers stranded, with no severance pay, or proper accommodation and food after the factory cut their supplies and electricity. ASOS had to intervene by working with the local government to restore basic necessities, and with a local labor union to facilitate wage payouts.
Legal and Regulatory Risks: Companies sourcing low-paid labor from labor providers in circumstances in which they do not have oversight over treatment of workers may also expose themselves to lawsuits and formal complaints. For example:
- Criminal groups behind recruitment agencies in the UK supplying Sports Direct and major supermarkets were convicted of modern slavery after exploiting Polish migrant workers. The individuals convicted had sent migrants to work through agencies to pack shoes and clothes in warehouses, while they retained over half of their weekly wages.
- Woolworths in Australia agreed to conduct independent audits of cleaning contractors on an annual basis and rectify underpayment of cleaners after a Fair Work Ombudsman investigation uncovered rampant exploitation referred to as workers being “systematically ripped off.” The company accepted that “in the past” its governance of contract cleaning had not “fully prevented an environment where employees have been vulnerable to exploitation.” The company has committed to ensuring contract prices going forward are sufficient to meet minimum employee entitlements.
What the UN guiding Principles say
*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.
- A company that sources workers from a labor provider may cause negative impacts where, for example, it does not fulfill its part of the responsibility to ensure safe working conditions, or where it otherwise mistreats the workers on site, such as through discriminating practices, or limits the opportunity to join a legitimate trade union. In that case, the company should take the necessary steps to cease the impact, prevent its recurrence and provide any necessary remedy to the affected workers.
- A company that sources workers from a labor provider may contribute to impacts where it is aware of and tolerates the poor treatment of workers by the labor provider, or where it does not conduct proper due diligence to ensure that the workers sourced from the labor provider are not mistreated or otherwise negatively impacted. A company may also contribute to negative impacts where it makes last minute requests of or for workers, pushing the labor provider to breach labor standards in order to deliver. In cases of contribution, a company should cease its contribution to the impact and contribute to remedy for the affected workers to the extent of its own contribution to the situation.
- A company that sources workers from a labor provider may be linked to negative impacts, such as those associated with the payment of recruitment fees, if such practices occur despite proper due diligence and credible attempts at using leverage over the labor provider to prevent or mitigate the impacts.
Possible Contributions to the SDGs
Addressing impacts to people associated with this red flag can contribute to, inter alia:
SDG 5: Achieve gender equality and empower all women and girls, in particular: Target 5.1 End all forms of discrimination against all women and girls everywhere. Target 5.2 Eliminate all forms of violence against all women and girls in the public and private spheres, including trafficking and sexual and other types of exploitation.
SDG 8: Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all, in particular: Target 8.5 By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value. Target 8.7 Take immediate and effective measures to eradicate forced labor, end modern slavery and human trafficking and secure the prohibition and elimination of the worst forms of child labor, including recruitment and use of child soldiers, and by 2025 end child labor in all its forms; Target 8.8 Protect labor rights and promote safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment.
Taking Action
Due Diligence Lines of Inquiry
- How does the company ensure protection of workers’ rights for outsourced labor? To what extent do policies and protections apply to temporary/agency workers?
- Have we reviewed the labor provider’s Code of Conduct and other relevant policies to check whether they include commitments not to charge recruitment fees to workers and not to retain their identity documents? Are there any “red flags” present, e.g. where the labor provider is unwilling to provide details about their processes or where there are historical complaints or negative findings against the provider?
- Is the labor provider offering “too good to be true” rates that would not allow it to meet minimum total wage costs. (including sick pay and statutory holidays), business overheads, management costs, etc.?
- Do we have a clear service agreement with the labor provider, including clauses on social compliance (no recruitment fees, no unlawful retention of documents and valuables) as well as detailed charge rates, a confirmation that workers will be paid, a clear agreement to ensure the health and safety of all workers as a shared responsibility between the labor user and provider?
- Do we conduct checks or audits of our labor provider to check that proper recruitment and contractual arrangements are in place; wages paid are correct, on time and without improper deductions; there is no debt bondage, harsh treatment or intimidation; workers’ accommodation is of an acceptable standard, etc.?Are the auditors and our staff equipped to detect the potentially complex pressures, abuses and exploitation of workers by labor providers?
- Are the workers on our site who work for labor providers aware of who to report problems to and are they likely to feel safe doing so? Are we sending the message that we take these issues seriously and are available to the workers who would want to raise issues? What is our process to handle any concerns or problems raised?
Below is a set of questions to consider asking in interviews of labor providers (and workers, where applicable) especially in higher risks contexts:
- Did the worker pay any money to the labor provider for the job?
- Did the worker travel from abroad for the job? Did he/she pay transport costs? Is the worker charged for transport to work; how much?
- Was the worker given a copy of the worker contract? Did he/she understand the content and expectations?
- Has the worker retained his/her own identity documents?
- How many hours a week does the worker work?
- What hourly rate does the worker receive? Are there any deductions, other than standard ones?
- Does the worker get paid regularly? Has the labor provider ever failed to pay the worker?
- Where does the worker live? Is the accommodation provided by the labor provider? How many people is it shared with? How much rent does he/she pay?
- Does the worker seem uncomfortable and are they willing to share any issues?
- Do all the workers interviewed indicate they are happy and contented but do not seem so? Do they glance at anybody when answering questions?
Mitigation Examples
*Mitigation examples are current or historical examples for reference, but do not offer insight into their relative maturity or effectiveness.
Given the complex nature of the problem, often mitigation efforts take the form of sector-wide or cross-sectoral initiatives.
- The Responsible Labor Initiative of the Responsible Business Alliance is a multi-industry, multi-stakeholder initiative focused on the rights of workers vulnerable to forced labor in global supply chains. Activities include engagement with recruitment agencies with respect to fees charged to workers, including capacity building and preferential treatment for responsible agencies, and the repayment of recruitment fees by manufacturers and buyers where fees have been charged to workers.
- The Consumer Goods Forum’s Human Rights Coalition — Working to End Forced Labour is a is a CEO-led initiative working to “achieve decent working conditions across the consumer goods industry and worldwide” by establishing voluntary industry commitments, such as its resolution on the eradication of forced labor, and through its Priority Industry Principles, which highlight the three key standards the industry must adopt to respect the rights of workers. Coalition members commit to, amongst other things, establishing and deploying HRDD systems in their own operations, with an aim of “reaching 100% coverage by 2025.” At the time of publication, the coalition was finalizing strategies focused on creating frameworks for implementing forced labor-focused Human Rights Due Diligence systems in Coalition members’ own operations, and implementing a forced labor-focused Palm Oil Roadmap to address forced labor in the sector.
- Food Industry: The Gangmasters and Labour Abuse Authority (GLAA) is the foremost investigative agency for labour. exploitation in the UK. The “Supermarkets and Suppliers Protocol” aims to establish strong links between the regulatory body (the GLAA), the retailers (supermarkets), suppliers (food processing plants and agriculture and horticulture suppliers) and employment and recruitment agencies. It works to link up all the relevant actors within the food supply chain in order to strengthen respect for relevant standards at each step. See the latest Best Practice Guide. In 2020, UK retailers united to drive the responsible recruitment of workers in global supply chain by sponsoring the Responsible Recruitment Toolkit, a package of support for suppliers and recruitment businesses to better embed ethical and professional recruitment and labor supply practices.
- Hospitality Industry: Several labor rights initiatives are starting to take shape to tackle modern slavery and forced labor in the hospitality industry. The International Tourism Partnership’s (ITP) Principles on Forced Labour brings the world’s leading hotel groups together to tackle the three most problematic yet common employment practices that can lead to forced labor, especially amongst vulnerable workers: unlawful retention of passport and valuable possessions, recruitment fees and being indebted or coerced to work. The Shiva Foundation’s Stop Slavery Blueprint is a toolkit intended to address risk of modern slavery for the internal use of hotels and other stakeholders in the industry.
-
Apparel Industry: Fast Retailing and the International Organization for Migration launched an initiative to study the recruitment and employment conditions of migrant workers in Fast Retailing’s supply chains, especially in Japan, Thailand and Malaysia. Fast Retailing has pledged to address these issues as a participant in the Industry Commitment to Responsible Recruitment by the Fair Labour Association and the American Apparel Footwear Association, which has been signed on by more than 123 apparel and footwear companies.
Alternative Models
Alternative models generally involve avoiding third party labor providers in circumstances of higher risk, in favor of direct employment relationships, to ensure greater visibility and control over hiring practices and working conditions.
- In response to reports of forced labor linked to migrant recruitment practices in the electronics industry supply chain in Malaysia, HP released its Foreign Migrant Worker Standard in 2014. The standard goes beyond general industry practice in addressing forced labor – which primarily focuses on implementing policies banning recruitment fees – to require that the company’s suppliers directly employ any foreign migrant workers in their workforce. See Shift’s analysis here.
- One example of producer-led practices aimed at tackling forced labor in the form of Sumangali schemes in Southern India, is Penguin Apparel’s Program. The garment manufacturer has eliminated labor brokers and recruitment fees from its hiring processes, ensures local language translation of employment documents, provides training to workers on their rights, conducts audits of its own suppliers and contractors in the search for Sumangali schemes and educates its partners on social management systems. See Shift’s analysis here.
- Unilever is continuing to review the employment of temporary workers within its operations and extended supply chain. Through the Joint Commitment on Sustainable Employment in Unilever Factories with the International Union of Food, Agricultural,
Hotel, Restaurant, Catering, Tobacco and Allied Workers’ Associations (IUF), the company agreed to strictly limit the use of non- permanent manufacturing employment to non-recurring tasks. Moreover, the use of “zero-hours contracts” is excluded. The rights- based commitment affirms that “temporary contracts and third-party agency employment relationships can potentially deprive workers of the protections and worker rights outlined in the ILO’s Declaration on Fundamental Principles and Rights at Work and the OECD Guidelines for Multinational Enterprise.”
Other tools and Resources
- Employment & Recruitment Agencies: Sector Guide on Implementing the UN Guiding Principles on Business and Human Rights, published by European Commission, developed by Shift and Institute for Human Rights and Business (2013).
- Responsible Recruitment Gateway.
- Responsible Labor Initiative of the Responsible Labor Alliance.
- Vérité, Fair Hiring Tool.
- Temporary agency work in the electronics sector: SOMO (2012) Discriminatory practices against agency workers.
- Business and Human Rights Resource Center (2019) Inhospitable: How hotels in Qatar & the UAE are failing migrant workers.
- Löning (2018) How Companies can deal with Labour Exploitation in the Agricultural Sector.
- Dhaka Principles for Migration with Dignity.
- International Labour Organization (2016) Regulating International Labour Recruitment in the Domestic Work Sector: A Review of key issues, challenges and opportunities.
Red Flag 17. Using gig workers or other forms of precarious labor
RED FLAG # 17
Labor Relationships that are structured to avoid costs that come with formal employment arrangements
For Example
- Online and offline gig workers
- Contingent labor
- Unpaid internships
- Incorrect categorization of workers as “independent contractors”
- Reliance on labor provided by third parties (see Red Flag 18)
Higher-Risk Sectors
- Technology sector, in particular digital platforms for services, including transportation and grocery delivery
- Companies reliant on independent contractors and/or workers at third-party contract firms
- Client services firms or international organizations relying on unpaid internships
Questions for Leaders
- How does the company make decisions about moving people or positions out of employment and into contingent or other bases, and on what criteria does it assess the justification for doing so, when considering the insecurity it creates for the worker?
- How does the company know whether non-employed workers associated with the company are provided with conditions and protections necessary to work with dignity, such as the ability to earn a living wage or access benefits (leave, healthcare, insurance etc)?
- How does the company know that workers associated with the organization are provided equal remuneration for the same work, whether employed or contract employees?
How to use this resource. ( Click on the “+” sign to expand each section. You can use the side menu to return to the full list of red flags, download this Red Flag as a PDF or share this resource. )
Understanding Risks and Opportunities
Risks to People
Gig economy
According to McKinsey, 20-30% of the workforce in the US and EU-15 countries is involved in the gig economy (although estimates vary).
Classifying an employee as an independent contractor can reduce costs to the company – like payroll taxes and premiums for workers’ compensation – by as much as 30%.
Non-traditional employment can have benefits for some workers, allowing them flexibility in choosing where, when and for whom they work.
However, where these relationships are exploited, it can exacerbate the vulnerability of already vulnerable individuals by shifting costs and risk to workers (without commensurate increase in financial compensation).
Some groups have referred to excessive use of non-traditional employment relationships as a “misclassification business model,” whereby the company “engages the people who actually carry out the core business, and over whose work significant control is exerted, as independent contractors instead of employees.”
When used inappropriately or in geographies without regulatory protections for non-traditional workers, the structure can deny workers access to the benefits that are tied by domestic law to a traditional employment relationship, including:
- Access to anti-harassment and discrimination protections (Right to non-discrimination; Right to just and favorable conditions of work).
- Minimum wage and overtime protections (Right to equal pay for equal work; Right to fair/living wage).
- Right to organize and bargain collectively (Freedom of association) Access to unemployment insurance and workers’ compensation (Right to an adequate standard of living; Right to just and favorable conditions of work).
Internships
When used appropriately, internships can provide a valuable entry or insight into a company or industry. When used inappropriately, they can amount to individuals undertaking “real work of real value with no economic support.” Where independent contractors or interns undertake jobs similar to regular workers in an organization, but for less pay or access to benefits, issues of equal pay and non discrimination arise. (Right to non-discrimination; Right to just and favorable conditions of work) Moreover, internships that are unpaid can “limit access to opportunity for ‘non-privileged’ people (particularly from the global South) who do not have the financial resources to work for free, exacerbating economic and global inequalities” (See PSI). (Right to just and favorable conditions of work; Right to fair/living wage; Right to equal pay for equal work).
Risks to the business
Financial risks
In December 2019, it was reported that,“venture capitalists are pulling back from [gig economy] start-ups … as the companies face pushback from workers and policymakers critical of their business models.” The Covid-19 outbreak of 2020 exposed inequalities experienced by those in non-employed positions and “moved the issue to the top of the agenda.” In April 2020 the FT noted that Jim Chanos, the US investor, had warned in March that “he was shorting the stock of companies that relied on “gig workers,” on the basis that the crisis would change social and political attitudes to businesses relying on this precarious workforce.”
Operational risks
Commentators have noted that notwithstanding business advantages, some companies also consider “major drawbacks” related to the gig economy, particularly “for employers who need a reliable, collaborative work force.” Moreover, the structure can make it difficult for companies to undertake interventions to increase hourly compensation of workers: research by economists employed by Uber found that when Uber raised the rates drivers are paid, the higher prices to riders led to a drop in demand for rides and therefore left hourly earnings little changed.
Staff recruitment/ Retention risks
Organizations that rely heavily on unpaid or temporary labor, especially where it replaces entry-level jobs, face risks associated with lack of retention of staff with progressively increasing knowledge/skills. Further, the may miss opportunities associated with a more diverse workforce (age, family responsibilities, socio- economic status) by only drawing on a pool of talent with the means to remain unpaid for the period of work.
Reputational and business continuity risks
Companies exploiting non-traditional labor may find themselves fighting for consumer acceptance and defending their reputation. Campaigns to support non-employed workers have gathered attention. Drivers for ride sharing platforms staged a driving protest in Boston in April 2020 demanding recognition as employees and paid sick leave. Employees at Google campaigned for better conditions for colleagues on contracts amid the coronavirus crisis in May 2020.
Legal and regulatory risks
- Concerns about worker welfare in non-traditional employment has led to court cases and new law. “Judges and regulators in France, the UK and New Jersey have rejected claims that [gig] workers are really self-employed.” In the United States, the California Supreme Court found in 2018 that a delivery driver was an employee of the courier and delivery company he drove for, despite the fact that the company had previously shifted its workers to independent contracts. Following this decision, the Californian legislature passed a bill requiring certain contract workers to be treated as regular employees, covered by minimum wage, overtime, unemployment insurance and other protections. Other US states are reportedly considering similar legislation. In Boston in early 2020, drivers for ride sharing platforms won the right to pursue wage claims in court, rather than in private arbitration.
- The legality of unpaid internships remains in a legal grey zone, with conflicting case law and a number of lawsuits filed by interns asserting they undertook the work of employees, for free.
What the UN guiding principles say
*For an explanation of how companies can be involved in human rights impacts, and their related responsibilities, see here.
Where a company routinely offers poorer pay and conditions to workers of a particular employment status undertaking similar work to employees, especially where this intersects with ethnicity or immigration status, age or other factors, they risk causing a negative impact.
Where a company’s remuneration of contract workers (or the hours of work it makes available to them) renders it difficult for a worker to maintain a living wage as they juggle multiple jobs, they risk contributing to an impact.
Possible Contributions to the SDGs
SGD 8: Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all, in particular Target 8.8 Protect labour rights and promote safe and secure working environments for all workers, including migrant workers, in particular women migrants, and those in precarious employment.
SDG 10: Reduce inequality within and among countries, in particular: Target 10.4 Adopt policies, especially fiscal, wage and social protection policies, and progressively achieve greater equality
Taking Action
Due Diligence lines of Inquiry
- Do we or our supply chain partner(s) use substantial numbers of non-employed workers (e.g. gig workers, contract workers)?
- Does we have clear guidance to managers on the appropriate use of non-employed workers?
- Do contract workers have the same protections under the law and regulations as our own employees?
- Consider: Access to anti-harassment and discrimination protections, Minimum wage and overtime protections, Access to unemployment insurance and workers’ compensation
- If not, do we apply its policies to contract workers in order to bridge this gap?
- Do contract workers have the same opportunities to organize as our own employees?
- Do we or a supplier have a deliberate strategy to use contract laborers in order to limit union organization?
- Do we use paid or unpaid interns?
- Can the primary beneficiary of the internship be considered to be the intern? Or is it rather is it us?
- Are interns undertaking similar work to paid employees?
Mitigation Examples
*Moreover, some examples listed below are proposals for mitigating actions that have come from data science and engineering research institutes.
- Fair compensation is integral to Unilever’s Sustainability Plan. The company conducted an internal review of the use of temporary and contract labor in all manufacturing operations in 2011. It has prepared guidance for managers on the circumstances in which temporary work is acceptable. It also widened the scope of its audit program under its Supplier Code to include third-party labor providers of temporary or contract workers at its factory operations. Unilever partnered with Oxfam in 2013 and 2016, including to understand and assess the use of contract labor in its Viet Nam operations and supply chain.
- Since 2015 Microsoft has required that its vendors provide contract employees with at least 15 days of paid holiday and sick leave and since 2018, paid family leave.
- During the Coronavirus pandemic of 2020, several companies decided to set up compensation funds for contractors impacted by the virus. The question has been asked as to whether “corporate generosity around the outbreak is a one-off event or the start of something bigger” for contract workers.
- We Pay Our Interns is an organization of NGOs in Geneva who “joined forces on the common understanding that promoting human rights worldwide must first be applied to basic human rights in their own structures” and committed to promoting a basic pay (stipend) for their interns.
Alternative Models
In a groundbreaking step for the gig economy, logistics provider Hermes Parcelnet engaged in a recognition deal with GMB Union under which self-employed workers can choose to become “self-employed plus” and receive benefits such as holiday pay, negotiated pay rates and union representation. In exchange, workers agreed to follow delivery routes specified by Hermes Parcelnet rather than delivering parcels in any order. (See IHRB 2019 for more information).
Other tools and resources
On gig workers
- Business and Human Rights Resource Centre (2019), “The Future of Work: Litigating Labour Relationships in the Gig Economy”, Corporate Legal Accountability Annual Briefing 2019: Briefing focuses on the “misclassification of workers as “independent contractors” in the gig economy – and the resulting erosion of labour rights.”
- Gig Workers Collective (a non-profit organization of gig worker activists).
On internships
On contract workers
- Shift/Mondiaal’s “Respecting Trade Union Rights in Global Value Chains: Practical Approaches for Business” (2019) contains diagnostic questions on outsourcing and contract Labor.
- Company example: Oxfam reports on Unilever operations in Viet Nam analyzed Unilever’s efforts to address precarious labor in Unilever’s operations and supply chain in 2013 and again in 2016.
- ITUC Report: Living with economic insecurity: women in precarious work also references submissions by IMF and IUF to SRSG John Ruggie on precarious work.