Poverty, working conditions and wages: legal and reputational risks

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Poverty and Social Development Committee 2019 – Annual Conference Scholarship

Varun Mansinghka
Judicial Law Clerk, Supreme Court of India
varun.mansinghka@gmail.com

Background

The 21st century marks the lowest level of poverty in recorded history.^[1] Presently, only 9.9 per cent of the global population falls below the Global Poverty Line.^[2] In this setting, the World Bank rightly cautions that it would be easy to become complacent and overlook challenges.^[3]

The 9.9 per cent figure still leaves around 731 million people languishing below the Global Poverty Line.^[4] While unemployment is naturally a leading cause of poverty,^[5] working class poverty is still a widespread issue. Setting minimum wage rates is a commonly used legislative tool which has been shown to effectively combat working class poverty.^[6] However, a minimum wage rate is just that; the bare minimum amount of remuneration that an employer is required to pay wage earners.^[7] Today, the agenda of governments across the world is much broader in scope and focuses on ensuring decent work and improvement in working conditions and quality of life.^[8]

Ensuring availability of ‘decent work’ is also the International Labour Organization’s (ILO) stated goal.^[9] The ILO gives an all-encompassing meaning to ‘decent work’ by including within its ambit: (i) opportunities for work that is productive and delivers a fair income; (ii) workplace security and social protection for families; (iii) better prospects for personal development and social integration; (iv) freedom for people to express their concerns, organise and participate in the decisions that affect their lives; and (v) equality of opportunity and treatment for all women and men.^[10] However, ‘decent work’ is not just a desirable social objective. Studies have shown direct positive correlation between the ideals of decent work and work force productivity.^[11] Thus, in an ideal world, even bottom-line focused businesses should concentrate their efforts towards providing ‘decent work’.

Unfortunately, businesses tend to focus on profitability and may not necessarily exhibit the patience to wait for the potential long-term benefits of ensuring ‘decent work’. In developing countries, especially in South Asia where poverty is rampant and unskilled workers are available in abundance, frequently this short-term profit-oriented outlook is fuelled by labour exploitation. Limited governmental resources, emphasis on rapid economic growth and unemployment (which motivates workers to accept subpar working conditions and unfairly low wages) are all factors which hinder the enforcement of labour welfare laws in developing nations.^[12] Thus, the legal risk of penal sanction for labour exploitation is relatively milder in these regions and, as a consequence, reports of worker exploitation by some of the largest multinational corporations (MNCs) are far too commonplace:

‘Unilever, Nestlé, Procter & Gamble among household names contributing to labour abuse’^[13]

‘Indian workers at Walmart, Gap factories face intensive exploitation, abuse: Report’^[14]

‘Apple: Human rights violations in supply chain double in a year, report reveals’^[15]

‘Nike finds major labor violations at Malaysian factory’^[16]

The above reports highlight the instinctive corporate urge to maximise profits at the cost of labour welfare when the risk of punitive sanction is minimal. While governmental efforts to increase the legal risk associated with such exploitative practices are underway, over time an intrinsic corporate deterrent to labour exploitation has come about in the form of reputational risk.

Bad publicity is never good for business, and the proliferation of the internet has made publicising any piece of information easier than ever. With increasingly global recognition of the concept of ‘Corporate Social Responsibility’, today businesses are also seen as a contributor to social welfare.^[17] Against this backdrop, the reputational risk associated with indulging in unfair labour practices is tremendous and arguably has made corporations more amenable to demands from workers, States and social welfare organisations for improved working conditions and wages.^[18]

This essay weighs the effectiveness of the legal risk of punitive action and the risk of loss of reputation in preventing unfair labour practices. While conditions in, and the laws of, developing countries are kept as the focal point in this essay, laws of developed jurisdictions are also discussed for comparative reference wherever appropriate.

Minimum wages

The ILO’s Minimum Wage Fixing Convention, 1970 (‘Convention No 131’) requires ratifying states to ‘establish a system of minimum wages which covers all groups of wage earners whose terms of employment are such that coverage would be appropriate’ [emphasis added]^[19] and make failure to apply minimum wages a punishable offence.^[20] However, only 54 out of ILO’s 187 Member States^[21] have ratified this Convention.^[22] Interestingly, 105 Member States^[23] of the ILO have ratified the Minimum Wage-Fixing Machinery Convention 1928, which only requires ratifying States to ‘create or maintain machinery whereby minimum rates of wages can be fixed for workers employed in certain of the trades or parts of trades…’ [emphasis added].^[24] Even states which have ratified Convention No 131 are free to determine which groups of wage earners (ie, sections of industry) would be protected by minimum wages.^[25] Thus, minimum wage laws do not necessarily guarantee protection to all workers.

For instance, under Bangladeshi law, a unique minimum wage rate is fixed in respect of each sector of industry and such rate is revised once every five years.^[26] However, no minimum wage rate is prescribed in respect of domestic workers,^[27] workers in educational institutions^[28] and workers at farms employing less than ten wage earners.^[29] Similarly, Indian law also does not provide for a universal minimum wage rate and prescribes varying rates for different sectors of industry.^[30] The minimum wage rate in India is required to be revised at least once in five years.^[31] In the European Union, 22 out of 28 Member States prescribe a uniform national minimum wage rate, as opposed to distinct rates for each sector of industry.^[32] The Fair Labor Standards Act 1938 of the United States also prescribes a uniform federal minimum wage rate for that country,^[33] a rate which has controversially not been revised since 2009.^[34]

As with any law, the intrinsic likelihood of compliance with the minimum wage rate by employers is dependent upon: (i) extent of penalty under law; and (ii) likelihood of enforcement of such penalty. In Bangladesh and India, where violations are rampant, paying below the minimum wage rate is punishable with imprisonment of up to one year or six months respectively, in addition to a payment of a fine and deficit back wages.^[35] In the US, the penalty for non-compliance with minimum wage laws is restricted to civil fines.^[36] However, despite such substantial penalties, compliance remains weak in developing regions such as India. This is owing to the fact that a large proportion of the workforce is employed in the informal sector of the economy, where enforcement of minimum wage rates is difficult.^[37] The informal sector employs temporary workers for a fixed term, depending on the availability of work.^[38] Recently, in an attempt to improve the ease of doing business in India, such fixed-term employment has been legalised,^[39] further incentivising businesses to employ fixed-term workers instead of permanent workers. Admittedly, Indian law requires that such fixed-term workers be afforded the same statutory benefits as permanent workers.^[40] However, due to the difficulty in enforcement of labour welfare laws in the informal sector, fixed-term workers remain highly susceptible to being paid unfairly low wages.^[41]

In China, over 96 per cent of workers earn wages more than, or equal to, the minimum wage rate.^[42] However, it has been argued that this high rate of compliance could be artificial, and that many businesses offset any increase in the minimum wage rate by reducing the non-wage components of compensation, such as subsidised meals and flexible work arrangements.^[43] It is extremely difficult for the state law enforcement machinery to prevent any such reduction in non-wage components of compensation.^[44]

To increase compliance with minimum wage rates, the legal risk of non-compliance has to be enhanced. This can be achieved by taking steps such as increasing the frequency of inspections of workplaces by the state, speedy enforcement of penalties in cases of non-compliance and sensitising workers about their legal rights and remedies. Workers who are well-informed of their rights are likelier to seek enforcement of such rights, which could lead to both legal and reputational implications for the employer and thus act as a deterrent against non-compliance.

Working conditions – health and safety at the workplace

The term ‘working conditions’ could cover a wide range of issues, including hours of work, work schedule, compensation, physical conditions of the workplace etc. Occupational safety and health (OSH) is a key consideration while assessing the working conditions at any workplace. The ILO has enacted several general conventions containing OSH guidelines^[45] as well as conventions to target specific workplace hazards.^[46]

In India, ensuring health and safety of workers is a constitutional duty of the State. The Constitution of India directs the State to provide for ‘… just and human conditions of work…’^[47] and ‘… endeavour to secure […] work, a living wage, conditions of work ensuring a decent standard of life and full enjoyment of leisure and social and cultural opportunities …’.^[48] For this purpose, the Factories Act 1948 (‘the Factories Act’) is the primary legislation which stipulates OSH standards for factories in India. The Factories Act regulates the standards of working conditions and lays down numerous specific OSH safeguards in relation to: (i) hazardous processes; (ii) heavy machinery; (iii) overcrowding; (iv) disposal of waste and cleanliness; (v) ventilation and lighting etc.^[49] With physical well-being and safety being the clear focus, the Factories Act unfortunately contains no provisions in relation to mental health.

The focus on physical safety under Indian OSH laws is also reflected under India’s Employees’ State Insurance Act 1948 (‘the ESI Act’). The ESI Act provides that a governmental corporation shall collect contributions from employers for insuring workers, though only against physical injuries and diseases.^[50] Similarly, the Workmen’s Compensation Act 1923 (‘the Compensation Act’) mandates employers to grant compensation only in cases of physical diseases and accidents that are contracted or occur at the workplace.^[51] Unlike India, other jurisdictions duly recognise mental well-being as a vital part of OSH. OSH laws in China require workplace facilities to meet the requirements for protecting workers' physiological as well as psychological health^[52] and the United Kingdom’s OSH laws include mental conditions within the definition of ‘personal injury’.^[53]

Protection of the ESI Act and the Compensation Act has recently been extended to workers in India’s informal cottage industries^[54] which do not meet the threshold requirements of the Factories Act.^[55] However, the substantive protections of OSH standards contained in the Factories Act are only available to workers who are employed at a ‘factory’, as restrictively defined under the Factories Act.^[56] This is a crucial issue. Cottage industries form a significant portion of the informal sector of India’s economy^[57] and this threshold requirement being employed at a ‘factory’ leaves millions of workers bereft of the protection of OSH standards. In contrast, China’s OSH laws expressly extend protection to household economic organisations.^[58]

The exploitation of workers in Indian cottage industries by MNCs has been widely reported.^[59] While the reputational damage associated with such news reports is undeniable, MNCs are unlikely to have operational control over the conditions of work and recruitment of workers once they outsource work to local recruitment agencies in India. Given the limited coverage of the Factories Act in India, there is no incentive or threat to motivate such agencies to formalise their workforce. In the absence of legal risk to these local recruitment agencies, any attempts by MNCs (intending to limit their reputational risk) to convince these agencies to improve working conditions are unlikely have any significant impact.

Child labour

ILO estimates that over 152 million children are presently victims of child labour.^[60] Half of such victims are engaged in hazardous activities.^[61] Africa and Asia are the worst affected regions,^[62] with family and community poverty appearing to be the common cause behind child labour.^[63] While there is a global thrust towards, and consensus about, eliminating the worst forms of child labour such as slavery, trafficking and prostitution,^[64] use of child labour in otherwise legal economic activities remains a complex issue.

Most national legislations seeking to prohibit child labour start with the same basic inquiry – what is child labour?^[65] India, for instance, defines a ‘child’ as a person who is less than 14 years of age.^[66] The definition of ‘labour’ for this purpose, that is, the activities that children in India are prohibited from being employed in, includes every occupation except work undertaken after school hours as an artist or in a non-hazardous family enterprise.^[67] Further, persons between the ages of 14–18 years are permitted to undertake any non-hazardous occupation.^[68] In Bangladesh, children below the age of 12 years cannot undertake any work, whereas children between the ages of 12–14 years may be employed in light work that does not endanger health or interfere with education.^[69] In comparison, South African law prohibits employment of children under the age of 15 years^[70] in all occupations except performing arts.^[71]

Permitting children to work for their family enterprises in India, has been seen as controversial.^[72] It has been argued that even while working within a family set-up, children might be exposed to significant health hazards and physical and psychological distress.^[73] Admittedly, given that poverty is at the root of child labour, attempts at its elimination must be balanced with concerns for the financial well-being of such children and their households.^[74] Here, it may be noted that ILO also acknowledges that ‘expanding decent work opportunities for youth, and particularly for vulnerable youth, is a necessary element of a strategy that addresses child labour’.^[75] However, permitting children of all ages from 0–14 years to take up employment, even within family enterprises, does not seem to strike the right balance. This is another area of concern that emanates from the Indian legislature’s laissez-faire approach towards regulating the informal sector of its economy, especially cottage industries.

As such, legal risk faced by businesses indulging in child labour can be evaded simply by resorting to the informal cottage industry setup. While there are some suggestions as to application of labour laws of the home jurisdictions of MNCs to their actions overseas,^[76] these measures are unlikely to prove to be the most efficient tools in curbing child labour.

It is more likely that corporate initiative, motivated by corporate social responsibility obligations as well as reputational risk, could go much further in curbing child labour.^[77] There are, in fact, numerous examples of such corporate initiatives.^[78] However, while such initiatives might well eliminate the use of child labour from the supply chain of selected corporations, eradicating the practice of child labour altogether will require gap-filing with legal sanctions by state legislatures.

Special case of migrant workers^[79]

Given that there are 164 million migrant workers worldwide,^[80] this essay would not be complete without a reference to their special state of vulnerability. In many cases, migrant workers fall victim to private recruitment agencies which promise overseas employment in return for payment of a fee and the ILO has specifically sought to curb this practice.^[81] Recognising the unique plight of migrant workers, both the United Nations and the ILO have promulgated conventions seeking to bring migrant workers at par with other workers.^[82] However, there has been limited political support for these UN and ILO conventions.^[83] Nonetheless, abuse of migrant workers is already considered a top reputational risk for businesses.^[84] Thus, if the reputational risk continues to outweigh the legal risk, welfare of migrant workers may well turn out to be another area where the prospect of loss of reputation is a bigger deterrent than penal laws.

Conclusions

The age of information is changing how people work, and how working people are treated. This phenomenon is perfectly demonstrated by the advent of the gig economy.[85] On one hand, the online gig market has broken down geographical barriers by creating avenues for freelance work and conferred increased independence and flexibility upon workers. On the other hand, the gig economy has enabled businesses to innovate independent contract workers out of the protective net of traditional labour welfare laws.[86] While technology has tasked inter-governmental organisations and governments across the world with finding ways to ensure ‘decent work’ in the gig economy, the internet and the proliferation of information have lessened the burden of the same governments by introducing reputational risk as a potent deterrent against labour exploitation. However, reputational risk is primarily an incentive to avoid labour exploitation and not an incentive to ensure ‘decent work’. Bringing about active improvements, especially in the informal sectors of developing economies, would still depend upon enactment and robust enforcement of labour welfare laws. Ultimately, to meet ILO’s goal of ‘decent work’ for all, a combination of prevention (due to reputational risk) and prohibition (through imposition of legal risk by domestic laws) of labour exploitation will have to be employed.

Notes

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