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Updated statement on the suppliers Hermosa and Chi Fung in El Salvador

January 17, 2007

Herzogenaurach, 17 January 2007 - This is an update to the statements posted on the adidas Group website in September 2004, and April 2006.
Hermosa Manufacturing was an apparel producer located in Apopa, El Salvador. The factory was a sewing subcontractor to an adidas Group main supplier from 2000 until mid 2002. adidas Group terminated the business relationship with Hermosa in mid 2002 due to quality and delivery performance issues. However, when the factory closed in 2005, we did re-engage with Hermosa factory management to encourage them to find financial solutions for workers back pay, including the liquidation of factory assets. We believe that the workers are owed almost one million dollars in severance and back wages, and these debts were for the most part accrued during 2004 and 2005. Our Social & Environmental Affairs Team also engaged with the government, including the Ministries of Labour and Economy to ensure that the workers constitutional right to precedence in case of corporate liquidation was recognised. Unfortunately, local banks repossessed factory assets before this constitutional right was exercised and the government has not acted to enforce their rights. As a result, the adidas Group engaged with the US State Department and the US Trade Representative in mid 2006 requesting government consultations with El Salvador for breach of the Central America Free Trade Agreement (CAFTA) obligation that signatory government effectively enforce their national labour laws. We continue to engage in these discussions.
We did receive assurance in April 2006 from the El Salvadoran government that they would offer extraordinary health care coverage to former Hermosa workers for a period of one year or until re-employment. This package was to include not only the requisite basic medical coverage for individuals from the National Health Ministry but family and catastrophic health care coverage through the national Social Security Institute. The brands received this assurance from the El Salvadoran Attorney General, the Ministers and Vice Ministers of Labour and Economy, and the Director of the Presidential Commission for Democratic Government. The government invited workers for a formal presentation of this package at the San Salvador convention centre in mid May, but there was a peaceful but noisy protest that prevented the government from effectively communicating their message about this coverage. Their request that interested workers sign up for eligibility was overruled by workers representatives who claimed that this was another form of blacklisting by the government. adidas and the other brands asked the government to reschedule a meeting with the workers and their representatives but this has not come to pass. In the meantime, several key governmental players had been reassigned or their former roles reduced in primacy. We were informed that the Minister of Economy would have precedence in managing the Hermosa situation but our engagement with that agency has not had the impact we formerly established with the Ministry of Labour.
To address the allegations of blacklisting and discrimination, we commissioned the former trainer of the Fair Labor Association’s Central America project to deliver relevant training to government regulatory agents and local factory managers. By the end of May 2006, 69 newly hired labour inspectors from the MOL underwent Guidelines of Best Employment Practice training designed for regulatory agencies, and 15 senior managers from 7 apparel factories participated in a second training programme designed for employment and hiring managers. Suppliers representatives from the adidas Group and other brands attended. The Fair Labor Association commissioned an independent monitor to verify the monitoring, stakeholder engagement, and training activities in 2006.
We seriously considered the allegations that another local apparel supplier named Chi Fung was blacklisting former Hermosa workers who had been members of the STITTAS union. We did not attempt to prove or disprove the allegations in light of the fact that blacklisting exists in many national industrial sectors. What we did do was to evaluate Chi Fung’s hiring practices and identify gaps in human resource practices that would permit blacklisting or other discriminatory hiring practices. By the end of June 2006, and with the full cooperation of Chi Fung management, we developed improvements that eliminated any questionable practices in the hiring protocols. This included the elimination of the requirement for a reference from a worker’s former employer (the constancia), the development of skill based testing requirements for job applicants, documentation and records retention for workers who do not pass the qualification tests, and clear explanations of the qualification process to all job applicants. The adidas Group sent a letter to the former Hermosa workers in August 2006 explaining the complete hiring process and expectations for employment at Chi Fung, and inviting them to come to Chi Fung and apply for open employment opportunities. In September 2006, we received a response from representatives of 64 former, unionised Hermosa workers stating that this invitation was unacceptable since they expected to be offered guarenteed jobs at Hermosa. In September 2006, adidas had discussions with the Workers Rights Consortium (WRC) and a local NGO, Grupo Monitoreo Independiente El Salvador (GMIES), to facilitate an independent and objective verification of the hiring practices at Chi Fung, specifically addressing the period from May 2006 onwards. GMIES agreed to participate, the WRC did not.
In the interim, the FLA commissioned an independent external monitor to perform a verification audit at the factory Chi Fung. The independent auditors did find evidence of blacklisting prior to May 2006, but also reported on the implementation and effective application of new and non discriminatory hiring practices at Chi Fung after May. The monitor’s report can be found on the FLA’s website. We remain confident that any worker seeking employment at Chi Fung will receive an objective review of their application and qualifications for open job positions.
As for the liquidation of Hermosa assets, we would like to clarify that there are no longer assets that can be liquidated. The local banks have repossessed the factory building, the machinery, and we believe, all 6 of the owner’s personal properties. The criminal case against Hermosa’s owner found him guilty for embezzling the employees' social security and retirement contributions and the obligatory employer contributions. These moneys, approximately 353,000 USD, are in fact moneys the government has to disburse to the workers when they retire. The verdict allows the owner three months to pay this money to the government, or to serve time in prison.
We remain committed to pursuing the legal entitlements for which the former Hermosa workers have a constitutional right and we are engaged to that end with governments and civil society in El Salvador and the United States. Also, we remained concerned about the absence of a workers safety net for emergency medical, housing and food. In December 2006, the adidas Group contributed to the FLA sponsored Emergency Fund for Hermosa Workers. This fund, administered by the El Salvadoreno NGO FESPAD, ran newspapers advertisements informing former Hermosa workers that they were eligible for emergency funds. By the end of December 2006, FESPAD had disbursed moneys to approximately 60 workers.