I heard a great story this week.
A close friend’s company found out that a key supplier had a labor shortage in an Asian country.
During an audit, it was discovered that to solve this problem, the supplier had hired an employment agency that forced workers from a lower-cost country to pay back their travel costs through unpaid wages.
Instead of exercising their termination clause, the company chose to work with the supplier to have all earned wages paid to the exploited workers and to terminate the relationship with the third-party employment agency.
The workers were paid in full, and the client didn’t need to find another supplier.
Canceling verses Remediation
No one wants to believe that their company or its suppliers could be involved in modern slavery.
Common wisdom has been to terminate a contract if something as awful as modern slavery or human trafficking is found, but that is changing.
The New Model Contract Clauses from the ABA
The American Bar Association (ABA) recently updated its model contract clauses for modern slavery (super helpful – download them here).
The ABA describes them as “a major shift in contract design” that “reflect(s) both recent research and evolving thought about effective organizational strategies and legal developments.”
The ABA clauses are very interesting in their approach.
For instance, they put the burden on both the supplier and the buyer to help resolve concerning situations. They also avoid a mechanistic “reps and warranties” approach which, as stated in the associated material, may encourage “the parties to turn a blind eye to reality while taking on theoretical strict liability.”
The drafters say that human rights due diligence is a “more realistic process that assumes parties will need to set priorities, addressing the most pressing issues first, without a fictional representation that everything is perfect.”
In essence, these contract clauses represent taking a straightforward risk-based approach at odds with the check-the-box liability approach.
We’ve all heard about ESG trends and upcoming associated regulations in the US and Europe.
Preventing and remediating modern slavery is going to become even more important than it is now. Consumers are squarely focused on modern slavery issues, and the stench of a scandal may last for decades.
In December of last year, U.S. President Biden signed the Uyghur Forced Labor Prevention Act. It outlaws the importation of products made in the Xinjiang province, unless the importer can overcome a presumption that the products were made by forced labor.
This novel requirement may become one used in the future to pressure companies that source materials from areas with known concerns. Having good contract clauses will give you room to maneuver if an area from which you are sourcing comes under a similar law.
Having a clear strategy for remediation, along with termination, is critical. Companies need to plan ahead about how they will respond if a supplier has issues.
What to Do Now
If your company doesn’t currently have modern-slavery-related terms standard in their contracts, incorporate them as soon as possible. The ABA did a great job of creating such terms, so there’s no reason not to.
Next, look at your supplier contracts and determine whether additional modern slavery-related language needs to be added. Key terms include:
- Adherence to all local labor laws
- Paying at least the minimum wage
- No use of child labor
- No use of prison labor
- No use of forced labor
- Audit rights for key or high-risk suppliers
- Termination rights for violations
Your company should consider adopting a Supplier Code of Conduct that is clear that the use of slaves or trafficked persons are totally unacceptable. These Codes should be referenced in contracts and P.O.s as binding.
Modern slavery shouldn’t exist, and it is important that our companies do their part in stopping it. Good contract clauses, along with a plan to remediate any issue that comes up, are key to helping solve the problem.
Here’s Spark Compliance’s latest update on what’s happening in modern slavery prevention: