|Employees Cannot Sue U. S. Companies Over Labor Violations by Foreign Suppliers|
The Ninth Circuit Court of Appeals held that an American company’s good faith requirement that foreign suppliers or sub-contractors follow ethical standards did not allow employees of those foreign entities to sue the American company when their own employers failed to follow those standards. Workers of manufacturing companies in China, Bangladesh, Indonesia, Swaziland and Nicaragua alleged Wal-Mart should be held liable for the failure of its suppliers to comply with local labor laws. The workers alleged that Wal-Mart was required to protect them from labor law violations due to its use of a contractual clause requiring that suppliers comply with local labor laws and industry standards to keep Wal-Mart’s business.
The court of appeals found that Wal-Mart did not have a contractual duty to ensure compliance with the company’s code of conduct even where it created a “right of inspection.” The employees were not third-party beneficiaries to the contract because the code of conduct did not create an enforceable duty upon the retailer to monitor the foreign suppliers’ labor practices. Rather, the court found the plain language simply conferred on Wal-Mart an opportunity to inspect the foreign operations and to rescind the contract if the company was not complying with the code. With no enforceable duty to owed to the foreign employer, the foreign employees had no right to sue Wal-Mart under a third party beneficiary theory.
The court also determined that Wal-Mart was not the plaintiffs’ employer under California’s Joint Employer Doctrine. The court found that Wal-Mart had no control over its suppliers’ employees and that there was no evidence of any exercise of day-to-day control over the employees. Wal-Mart’s right to monitor the suppliers’ compliance with the code of conduct by itself did not establish any day-to-day control because no duty was created by this contractual right.
Employers with foreign suppliers should recognize that although the court found no right of the foreign employees to sue Wal-Mart in this case, its focus on control or lack of control by the American company over its foreign suppliers’operations abroad should remind employers that too much oversight could create an employment relationship where one would otherwise not exist.
To read more: “Employees Alleging Labor Violations by Foreign Suppliers Cannot Proceed Against U.S. Companies Based on Code of Conduct Clause in Supply Contracts,” Littler Mendelson, August 2009.