Sunday, October 4, 2015

Trade unionists, employers, HR professionals, risk officers and anti-corruption activists should unite to end the protection contract system in Mexico

On September 22, 2015, eight multi-national clothing and sportswear companies - including Adidas, American Eagle, New Balance, Nike, Patagonia, Puma, PVH and The Walt Disney Company - sent a letter to Mexican President Enrique Peña Nieto calling on him to outlaw the practice of labor protection contracts in Mexican labor relations because the practice violates international labor norms.

As a practice that intersects the fields of labor rights, human resources management, corporate social responsibility and corporate compliance (including anti-bribery compliance), eradicating the protection contract system will require a multi-pronged, multi-sectoral approach.  Trade unions, worker rights activists and CSR advocates must appeal not only to international labor norms but also to anti-bribery laws and norms.  They must ally themselves with company risk officers, HR professionals and anti-corruption activists to rid Mexico of the invidious practice of protection contracts.

The problem of labor protection contracts in Mexico

Labor protection contracts are part of a decades old practice in Mexico whereby companies enter into "collective bargaining agreements" with individuals claiming to represent trade unions prior to the commencement of operations.  These so-called collective bargaining agreements are registered with state labor boards before employees are hired and without their inscription or agreement.  As outlined in the letter from the Brands to the President of Mexico and discussed in the press release issued by global union INDUSTRIALL, the International Labor Organization (ILO - a UN organization) found in 2012 that labor protection contracts violate international norms on Freedom of Association.  Frequently when workers unite to organize their own union in Mexico, they find that there is already a collective bargaining agreement in place which serves as an obstacle to organizing a truly representative trade union.  In March 2015, the Fair Labor Association published an issue brief on labor protection contracts to educate its constituency.

The link between labor protection contracts and risk of illegal bribery of government officials

Not only do labor protection contracts vitiate employment relationships and distort the collective bargaining process, however.  Surely labor protection contracts do not come for free.  Companies doing business in Mexico must ask themselves to whom are payments for labor protection contracts made, and where does the money end up?  Labor boards in Mexico - where all collective and individual labor disputes are mediated and adjudicated - are tripartite, meaning that they consist of a government representative, an employer representative and a trade union representative.  More frequently than not, the trade union representative sitting on the local labor board is a leader in the "official" trade union with which the company entered into a protection contract.  There is a high possibility that some or all the funds paid in consideration for the protection contract will end up in the pockets of the trade union representative acting in his or her official capacity as a government official on the labor board - creating risk of violating anti-bribery laws for the multi-national company doing business in Mexico.

Bribery of foreign government officials is prohibited by the U.S. Foreign Corrupt Practices Act (FCPA), the Canadian Corruption of Public Officials Act (CFPOA) and anti-bribery laws passed by every OECD member state (including Mexico) in compliance with the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions.  To better understand the international anti-bribery framework, see this 2010 web resource produced by the Association of Corporate Counsel as well as this guide to the CFPOA produced on the Business Anti-Corruption Portal.  It should be highlighted that the Canadian government now has wider powers to take legal action against Canadian companies for violations of the CFPOA, as discussed in this April 22, 2014 article in the National Law Review.

Multi-national companies that subcontract work to manufacturers in Mexico may assert that their risk of violating foreign bribery laws is mitigated by the fact that they may not themselves enter into labor protection contracts or make payments to trade union officials sitting on labor boards.  Yet, as discussed in this October 2013 article in Bloomberg Law by FCPA experts on mitigating third party risk in anti-corruption compliance, companies can be held liable for bribes paid by third party agents and contractors.  Companies that invest directly in Mexico and participate directly in payments as a quid pro quo for a protection contract may find themselves in direct violation of anti-bribery laws and truthfulness in books and records requirements.

With the possibility of tens of millions of dollars in legal fees and fines, as well as the risk to reputation and company brand, is taking the risk that a subcontractor may be directly or indirectly paying bribes to government officials sitting on labor boards really worth it?

A path to a solution - partnering with the Mexican anti-corruption movement

Eradicating a protection contract system which has been embedded in HR practice and labor law administration in Mexico for decades will not be an easy task.  Worker rights activists and CSR advocates should not consider themselves alone in the struggle, however.

As discussed by Mauricio Merino Huerta in his June 2015 paper published by the Wilson Center Mexico:  The Fight Against Corruption, the anti-corruption movement in Mexico has been gaining strength in the wake of scandals and tragedies in the last few years.  Merino highlights the work of the Accountability Network, an alliance of a variety of academics and organizations dedicated to the eradication of public corruption in Mexico.  This network has had a number of successes - in particular the passage of national legislation by the Mexican Congress creating a National Anticorruption System that was signed into law on May 27, 2015 (Merino, p. 16).

Joining or partnering with the Accountability Network to raise the profile of the protection contract system in Mexico is just the first step to passing laws and implementing policies to eradicate protection contracts in Mexico.  Worker rights and CSR advocates should also pursue partnerships at the regional and international level.

The next stop should be the OECD itself, where INDUSTRIALL and other international trade unions and worker rights advocates can partner with the OECD's Trade Union Advisory Committee (TUAC) and conscientious employers like the Brands that signed the letter to the President of Mexico can partner with the Business and Industry Advisory Committee (BIAC)  to table text explicitly prohibiting the practice of protection contracts with consequences for companies, manufacturers and employers alike.'

Don't be a rube!  Training of human resources professionals, financial auditors and CSR auditors is needed

It is critical - in fact an absolute necessity - that human resources practitioners both within and outside Mexico be sensitized to the risks protection contracts pose not only from an HR perspective but from a corporate compliance / anti-corruption perspective.  In Mexico, it may simply be that it has been "done this way" for so long that the practice is accepted without conscious thought.  For companies that subcontract or invest in Mexico, it may be simply a matter of HR managers being ignorant of human resources practice in Mexico and relying too heavily on their in-country counterparts.  Human resources management professionals cannot accept at face value assertions that making payments to an "official trade union" before ground has broken on the factory and employees have been hired "is just the way we do things in Mexico."

Two organizations that might be good partners for implementation of this type of training and sensitization program would be the North American Human Resource Management Association (NAHRMA) and the Society for Human Resources Management (SHRM) which offers periodic Global Human Resources Management certification courses and recently established international membership fora outside the United States.  Organizations of financial and CSR auditors can also be partners in the fight to eradicate the protection contract from Mexico's labor relations system by developing methodologies for matching payments to trade unions with dues deducted from workers' pay - or not as the case may be.  The presence of payments to trade unions without matching deductions from workers' pay could be an indicator of the existence of a protection contract - or if union dues are deducted without workers' assent or knowledge.

The protection contract system in Mexico violates international labor norms, decreases the credibility of Mexican legal institutions empowered to enforce labor law, creates financial and compliance risk for international companies doing business in Mexico and diverts resources from the pockets of workers.  It is a relic of a bygone era that has no place in a transparent, modern Mexico.  It is time for everyone at the table to unite and bring an end to it.