Subcontractor issue tops SGMA-U.S. Labor talks

As part of ongoing efforts to educate its members and assure strict compliance with federal labor laws, nearly 40 supervisors and managers from the 30 member companies of the Saipan Garment Manufacturers Association (SGMA) met this week with Wage & Hour Compliance Officer Terrence Trotter of the U.S. Department of Labor. The federal official was invited to speak to the association’s full membership on the issue of how independent subcontractors which pay their employees incorrectly could impact the primary manufacturer’s operations under the “Hot Goods” provision of the U.S. Fair Labor Standards Act.

According to SGMA acting chair Richard A. Pierce, the purpose of the presentation held at the Pacific Gardenia Hotel was for SGMA’s member factories to hear a detailed explanation of Section 776 of the U.S. Labor Code, the section which covers employees of independent contractors who meet essential needs in the manufacturing process.

“Saipan’s garment manufacturers are under a great deal of pressure to be in compliance with all applicable local and federal labor laws. New issues are coming to our attention that our members need to be educated about and this particular provision of federal labor law is very confusing,” said Mr. Pierce. “For example, we were not previously aware that if a security company our factories hired didn’t pay their employees properly, there could be sequential liability. In other words, it could be considered the manufacturer’s responsibility. We learned that U.S. Labor’s answer is yes, it is the factory’s concern if outside-contracted security guards at a factory have wage violations, but not if they are only providing security at employee housing. This could confuse anyone.”

SGMA has sought clarification from the Labor Regional Director and Regional Administrator on their interpretation of Section 776. According to Mr. Trotter, this section has not been revisited in 50 years.

SGMA has now received two separate legal opinions from labor attorneys that indicate that this is a “bad read” by US Labor, said Mr. Pierce.

Mr. Trotter elaborated on the point by explaining to the factory managers that the test of whether improperly paid employees of a subcontracted service could impact a factory is if the service they provide is “closely related and directly essential to the production of goods.”

Besides security services, other services which are frequently subcontracted to small outside firms include trimming, embroidering, printing, and laundering of the garments. If the employees of these companies hired by factories are not paid properly under the Fair Labor Standards Act, this could impede a manufacturer’s business and end up in seized goods and potential fines for the factories themselves.

“If a subcontractor is bidding their services at a very low hourly rate, for example only $3.50 per hour for a security guard when the minimum wage is $3.05, this might give you a clue,” said the labor official. “You might question how that company could really afford to operate in compliance with all labor laws.”

Mr. Trotter also reported to the SGMA members the results of field inspections done in May, which he described as a “strike force,” where U.S. Department of Labor officials tried to visit as many factories and smaller outsource shops as possible within a short period of time.

“We tended to find a greater number of violations in smaller shops and subcontractors that have just a few employees, such as launderers, trimmers, printing and security services,” said Mr. Trotter. “But the big dollar violations still come into play when a company has a lot of employees because of multipliers. Approximately 99% of the violations we’re seeing are in back wages due.
In general, the further from the manufacturing process, the more problems we found with small subcontractors.”

The labor official also gave tips to the factory managers on one type of violation that could occur in the factories themselves: sometimes employees like to work during break times in order to achieve greater productivity, which could lead to higher salaries later. Such extra time worked should be paid for under the law, even though there is no time clock record of the work. “Line leaders and supervisors need to do spot checks and say ‘no’ to workers when they try to work off the clock during break times. Supervisors should do spot checks on the manufacturing floor during break times,” recommended Mr. Trotter.

“We are trying to interpret and catch up with sophisticated human resources standards in the US that have not necessarily been enforced in the CNMI previously,” said Mr. Pierce. “This is exactly the kind of presentation we have been asking for. Rather than just coming in to the CNMI with strike forces and fines, we’d like to form a partnership with U.S. Labor Wage & Hour Compliance, just like we’ve already done with OSHA.”