United States: Retailers And Manufacturers Take Heed: California Senate Bill 657 Takes Effect January 1, 2012

Last Updated: December 14 2011
Article by Rod Pacheco and Monica Richman

California Transparency in Supply Chains Act of 2010

The 2009-2010 California Legislative Session passed legislation sponsored by Senator Darrell Steinberg highlighting what he described as "human trafficking and slavery in a company's supply chain." As the Senate pro Tem leader of California's State Senate, Senator Steinberg secured what can be described as a significant first step to regulate companies doing business in California with respect to their overseas supply chains.

Senate Bill 657, now law, was broad and deep with regard to companies and their new obligation to publicly report their efforts to eradicate human trafficking and slavery in their supply chains. Failure to comply will have serious public consequences. While the new law requires sensitive public disclosures, the true aim is to change working conditions in emerging markets that serve as supply chains to retailers and manufacturers who do business in California, one of the world's most significant marketplaces.

The new law takes effect on January 1, 2012 and applies to countless companies directly and indirectly.

Does your company qualify?

The new law applies to retail sellers and manufacturers which have $100 million in gross worldwide sales and have any of the following:

  1. the company is organized and domiciled in CA;
  2. the company's sales in CA exceed the lesser of $500,000 or 25% of the company's total sales;
  3. the company's personal property in CA exceeds the lesser of $50,000 or 25% of the company's total personal property; or
  4. the amount of the company's compensation paid in CA exceeds the lesser of $50,000 or 25% of the company's total compensation paid.

The identification process for qualified companies

The new law requires the California Franchise Tax Board to provide documentation to the California Attorney General of the companies that satisfy the above profile. Their first report is due November 30, 2012 and every November 30th thereafter. The Franchise Tax Board's analysis is based on the California tax returns of companies. To date, over 3200 companies will be on that list.

Enforcement of the law

The sole enforcement under this law is found in the Attorney General's Office and its only remedy is injunctive relief at this time. Consequently, for those companies that fail to provide proper compliance, they can be sued by the Attorney General and forced to fulfill the obligations imposed below.

Obligations imposed by the law

On whomever the law pertains, they shall provide a report which discloses to what extent, if any, the company does any of the following:

  1. whether the company verifies its product supply chains for human trafficking and slavery, and if so they shall disclose any verification that is not conducted by a third party;
  2. whether the company conducts audits of suppliers to evaluate their compliance with company standards (assuming they exist) regarding human trafficking and slavery, and if so they shall disclose any audit that is not independent and unannounced;
  3. whether the company requires direct suppliers to certify that the materials they provide to make the product comply with the human trafficking and slavery laws of the countries where they are doing business;
  4. whether the company maintains internal accountability mechanisms for employees or contractors regarding human trafficking and slavery; and
  5. whether the company provides human trafficking and slavery training for management and employees.

That report shall be public in one of two forms, either (a) posted in a "conspicuous" fashion on the company's Internet website, or if no such site, (b) provided within 30 days to any member of the public that requests it in writing.

SNR Denton's analysis of the law

The effective date for company compliance is January 1, 2012. The California government will begin identifying applicable companies during 2011-2012. The newly elected Attorney General of California has shown a great interest in pursuing matters of social justice. We expect this matter to be a priority and for her staff to proceed with identifying companies of interest at their earliest opportunity.

Uses

In the preamble to Senate Bill 657, it is clear that the law was designed to alter company supply chain practices by publishing to consumers a company's efforts, or lack thereof, to eradicate human trafficking and slavery. This very public information also can be used in litigation, collective bargaining, unionization efforts, by competitors foreign and domestic, as well as other uses limited only by one's imagination.

Definition

The US Department of State provides international definitions for "slavery and human trafficking" that serve as umbrella terms encompassing a wide range of activity. Certainly stereotypical conduct such as sex trafficking is covered, as well as the use or threat of overt physical force to compel servitude.

International standards, however, can be violated even if the worker had consented to the arrangement previously. A company may be found to be engaging in "slavery and human trafficking" if the company's actions are considered psychological manipulation of workers "...made more vulnerable by high rates of unemployment, poverty, crime, discrimination, corruption, political conflict, or even cultural acceptance of the practice [of forced labor]." These are not difficult conditions to envision.

Indirect Impact

Efforts by a retailer to comply with this law proactively will create pressure on its suppliers. Retailers may need to impose certain conditions on their suppliers to ensure that the retailers are in compliance with this new law. Suppliers who are beyond the law's reach directly now will feel its reach indirectly through their business relationships.

Media Response

For those companies that minimally satisfy the law, this law and the required disclosures could act in concert with very public media efforts by elected officials or other interested parties to create a negative media blitz. Investigative journalism on those companies who do not check their supply chains should be expected, along with descriptions of those working conditions. One need only to review the report on child labor found at the Department of Labor website to experience the powerful statement this issue can make.

For those companies that fail to comply with the law, expect the California Attorney General to sue for injunctive relief. Once again, the media storm likely would be severe. The eventual disclosures, through the company or the media, would be chronicled in countless periodicals. The negative publicity would have a synergistic and exponential effect on the Legislature, encouraging law makers to offer new bills to take advantage of the softening environment and the opportunity to be linked with a new popular public cause. The company caught in this maelstrom should expect its brand name to be significantly tarnished.

Possible Subsequent Amendments

Chances of this law being amended in a way more palatable to the business community are essentially non-existent for several reasons, including the author's status as Democrat Leader in the Senate that would allow him to foreclose any possible changes to which he did not agree. However, the chances of another legislator "adding on" to this law in the near future in a manner even more unpalatable to business is very high. The California Legislature often amends bills so that the "door is opened" wider and wider, especially on what was once a difficult bill to pass. The California bill regarding greenhouse gas emissions, Assembly Bill 32, had a similar path and now is ubiquitous in legislative efforts across the country.

The Future

This legislation is just the foundation; expect more to follow. Public disclosures are a means to an end, and that end is to significantly change the business practices of companies that do business in California and to significantly change the working conditions in their supply chains.

The federal government, primarily through the US Department of State and the US Department of Labor, has been extremely active on this issue for at least a decade. The Trafficking Victims Protection Reauthorization Act is referred to in the instant legislation and provides an international monitoring system that currently has identified 71 countries and 130 goods that are produced by human trafficking and slavery. Some of those countries include China, India, Brazil, the Philippines, Thailand, Zambia, and Ethiopia. Some of the goods identified include cotton, leather, textiles, embroidery, silk fabric, garments, and footwear. The overwhelming majority of instances are child labor.

Your company's options

For an individual company, we recommend an assessment of the costs and practices it would need to adopt (if any) to comply with the spirit of the legislation.

Wait And See Approach

A simple report that the company does not check any of the items regarding human trafficking and slavery is a red flag for the media, the Legislature, and consumers. Companies that choose this path should anticipate an inordinate amount of negative public attention and negative reactions from consumers and customers.

Modest Action

Another option is the adoption of a modest set of practices that satisfy the intent of the law on the surface. This approach has some minor benefits and should allow the company to avoid significant negative media attention. The new procedures would marry the practical financial considerations with the law's intent to combat human trafficking and slavery in the supply chains of companies. However, it is a lukewarm resolution and that depth will not escape notice, especially if another company, and particularly a competitor, chooses a more ambitious path.

Making Lemonade Out of Lemons

That other path is the creation of a more ambitious set of practices that meet the spirit of the law, and possibly even exceed them. Though cost is a factor, if balanced against the benefits that would come, companies may wish to consider this proactive option.

The benefits are several. The publicity of such an effort should be incredibly positive from the media, the Legislative leaders, and the public. Doing one's part to eradicate human trafficking and slavery should cause a company's image to shine. A public relations campaign could be integrated taking advantage of earned media that would generate additional positive treatment.

Another benefit would be the development of an ongoing positive relationship with California's legislative leaders. Company representatives could begin a positive dialogue with the leader of California's State Senate on measures that companies could take to craft internal policies on this issue. Senate pro Tem Darrell Steinberg would be receptive to such a dialogue given the right approach.

This relationship would allow the company the opportunity to be meaningfully heard when the next raft of human trafficking and slavery bills are presented. This credibility would be instrumental in shaping those future measures. If the company had done little or nothing to comply with the intent of the law, it would be disregarded and categorized as an opponent, and therefore would lack influence.

With a positive relationship with the legislature, the company should have leverage to transcend this particular issue to other unrelated legislative issues of importance to the company, or even the industry at large. Also, being first on this issue is a significant opportunity for the company and its image. The first company is new and worthy of attention.

An Industry Approach

More significant than an individual company acting proactively would be an entire industry. A collection of industry leaders would merit great attention and many benefits. For those industries that are a natural target for this law, taking control of the issue would turn the stereotype on its head and could create significant advantages.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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