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Statement regarding the supplier Hermosa in El Salvador

Herzogenaurach, 6 April 2006 - Hermosa is an apparel producer located in Apopa, El Salvador. The factory was a sewing subcontractor to an adidas main supplier from 2000 until mid 2002. In 2001, allegations on poor employment practices started to emerge. The SEA team made numerous visits to Hermosa during 2000-2002. There was an FLA audit of the factory in 2002. Corrective actions plans were constantly monitored, and maintained designated timeline targets. Stakeholders were updated personally and electronically, including statements posted to our website.

adidas production orders with Hermosa were placed during the period 2000 to mid 2002. These orders were not placed directly with Hermosa but were subcontracted from an adidas main supplier in El Salvador. There were no additional orders placed with Hermosa after Q2 2002.

In the most recent series of allegations, starting in Q3 2005, European NGOs publicised the fact that Hermosa management had not paid workers compensation, and had systematically underpaid or not paid worker benefits. They declared that adidas, as a former buyer from the factory, was responsible to pay the workers compensation for retirement, social security, and unpaid worker compensation from the period prior to the factory closing. In December 2005, the Christian Initiative Romero placed a third party complaint with the FLA, naming adidas, Nike, and Russell Athletic as former Hermosa customers.

The Social and Environmental Affairs department of the adidas Group started an investigation of these complaints on November 18, 2005. The findings indicated that there was unpaid worker compensation from Q1 and Q2 2005 and there had been a systematic underpayment of benefit contributions to government agencies.

At the end of Q1 2005, Hermosa workers, dissatisfied with the company's response to their requests for satisfying unpaid amounts for overtime, Sunday work and other pay related compensation, organised the factory with the help of a local union. The union known as STITTAS is an affiliate of the Fenastras union confederation. The Ministry of Labour approved the Hermosa workforce’s representation by STITTAS in early April 05. The unionised workers, after unsuccessful negotiations for compensation, subsequently occupied the factory building and would not let the owner on the premises. In May 2005, the owner Salvador Montalvo Machado, unable to reach an agreement with workers and their trade union closed the factory doors. While the plant was physically closed, he obtained a permit from the Ministry of Labour that allowed Hermosa to suspend the commercial activities of the company, but not liquidate it. This action left the employment contracts with the workforce in effect.

Despite allegations that adidas products were still being produced in 2004 and 2005, there have been no investigative findings to prove this. Documentary records from the main supplier, including government export records show that the last orders were produced and shipped by Hermosa in mid 2002. While the allegations of illegal subcontracting have not been borne out, we continue to review source documents for additional substantive proof.

Further developments of Hermosa after 2002

With the suspension of Hermosa factory operations in May 2005, the SEA team attempted to contact the factory owner to determine if severance compensation had been accrued for workers, continuing an activity started in mid 2004 when the first indications of Hermosa financial instability surfaced. It was learned that there had not been an accrual of moneys for severance packages.

When additional allegations arose in November 2005, SEA started a full scale investigation with the facilitation and participation of the local NGO Grupo Monitorio Independiente El Salvador and the compliance representative of the adidas main supplier who subcontracted with Hermosa. In December 2005, following the 3rd party complaint to the FLA, an expanded investigation team was formed including representatives of Nike and Russell Athletic.

From November 2005 through February 2006, almost 3 dozen engagements with stakeholders were held. This included the Minister and senior officials of the Ministry of Labour, the Ministry of Economy, the US Embassy, local NGOs and a senior prelate of the Catholic Church, the trade union confederation Fenastras and their affiliate STITTAS, the trade union FEASIES, approximately 65 Hermosa workers, the Hermosa factory owner and his legal counsel, the Labour Tribunal, officials of ISSS (Institute of Social Security), and local banks.

In late 2005, legal activities were filed against the Hermosa owner, Salvador Montalvo Machado; a criminal case for not paying worker contributions to Social Security and pension funds, numerous labour cases brought by the workers for unpaid overtime and Sunday work, and two civil cases by the banks concerning ownership of Hermosa assets.

The court documents in the criminal case show that Hermosa did not pay complete retirement and social security contributions to the government during the period 1996 - 2005. During the period 1996-2003, Hermosa did pay a substantial percentage of the required monthly contributions on time and there were negotiations between Hermosa and the ISSS to schedule re-payment of the outstanding amounts. Some of this amount was subsequently paid in 2004. Large amounts went unpaid during 2004-05. Many of the workers actions in the Labour Tribunal are suing for unpaid overtime and Sunday work during Q1 2005. A large percentage of these actions remain open.

In 2004, findings indicate that Hermosa assets of machinery and property had reverted to the lending banks which meant a large if not complete source of funds to liquidate all of the requisite workers compensation awards was no longer available. Evidence indicated that large amounts of the owner’s personal property also reverted to the banks.

Explanation of outreach to government/ministries and our requests

The key findings from these engagements revealed some ineffectiveness in the government’s regulation of Labour law and application of constitutional precedents protecting workers priority for compensation. The Ministry of Labour issued Hermosa permission to suspend commercial activities Q2 2005. Findings indicate that the permission expired in Q3 2005 but no action has been taken on the contractual employment status of more than 200 workers. Some workers have accepted employment with other companies. Some do not seek reemployment because it could be regulated as quitting the Hermosa employment contract thereby releasing claims for any future severance compensation. The lack of clarity around employment status has prevented the award of involuntary severance compensation to Hermosa workers and we have asked the Ministry of Labour to define the workers status as of September 2005.

Findings indicate that some workers have incurred uninsured medical costs and have lost homes. The El Salvadoran Social Security administration continued to issue ISSS benefit cards to workers at various times during 1996-2005, but didn’t adequately communicate the entitlement limitations to workers nor when entitlement was ended. We have asked the El Salvadoran government several times to grant unemployment medical coverage to Hermosa workers retroactive to the May 05 factory closing, and until reemployment but to date, have received no response.

There have been additional findings that the Labour Tribunal did not accept an application to establish workers priority for compensation as constitutionally stated. While most of Hermosa assets and the owner’s personal holdings have reverted to the banks, any additional holdings that are identified are not protected for the workers compensatory entitlements and awards.

There have been efforts to find jobs for unemployed Hermosa workers at other factories. Six to eight local apparel factories are working with three brands, GMIES, and the compliance manager from a local manufacturer to invite former Hermosa workers to interviews for open employment positions in the factories. The group of 64 workers who have met with the brands will be among the first invitees. Recently, GMIES has been contacted by a worker who represents another group of former workers, workers who had not been reached. These workers will be offered the same opportunity.

Our actions

We remain concerned about the Hermosa workers situation and the situation of many workers in the El Salvadoran apparel and textile sector. And these issues exist in still other factories in the sector. We will not take on the government and employer’s responsibilities to compensate their workers because we have not employed those workers. However, we will take responsibility to engage vigorously with the government and other stakeholders to press for the changes necessary to effectively regulate local labour law and the protection of workers rights.

At a meeting called by the El Salvadoran government on Tuesday April 4th, brand representatives from adidas and Nike met with officials from the Executive branch, the Ministries of Labour and Economy, and the Presidential Commission for Democratic Government. At this meeting, the government stated that they cannot pay Hermosa workers for unpaid compensation, but will continue to expedite the various legal proceedings for the Hermosa case. The Labour Tribunal is considering 73 workers cases. Approximately 30 cases have been ruled in favour of the workers (17 of those are being appealed by the Hermosa owner) but there are no Hermosa assets available to pay the compensation awards. We have asked the government to continue investigating if there are any undiscovered assets that can be used to pay the compensation awards.

The government agreed to immediately offer former Hermosa workers two types of medical coverage; basic medical coverage through the Ministry of Health, and additional coverage for serious medical issues through the national Social Security Institute. This coverage includes both workers and their families, and will be effective for one year or until re-employment. The government has agreed to send written notification to all workers on April 17.

To address the allegations of blacklisting, the government has scheduled a job fair in a central exhibition hall in San Salvador for May 12-13, and will ensure that unemployed Hermosa workers are given priority for interviews and employment opportunities during this event. Written invitations will be sent to the Hermosa workers by the Ministry of Labour.

The Ministry of Labour is in the process of hiring 69 new labour inspectors, effectively doubling the labour inspectorate. During this meeting, the government agreed to send the new inspectors to external training in the Guidelines of Best Employment Practice. This training programme was developed by the FLA’s Central America Project, and was delivered to more than 200 inspectors and officials of the Guatemalan Ministry of Labour in late 2005. The El Salvador training is to be scheduled during the first two weeks of May.

We continue to have discussions with the US Embassy and US State Department about government consultations with El Salvador in light of CAFTA provisions for effective management and regulation of labour laws. In particular, we will continue to engage the national government requesting protection of all workers rights to compensation precedence as guaranteed under the national Constitution.

We make frequent and regular reports to the FLA as part of the obligations to investigate a third party complaint, and to remediate non compliance. Regular reports have been exchanged between several other stakeholders, including the Clean Clothes Campaign and the Christian Initiative Romero.