Calif. Court Exonerates Stores on Sweatshops

LOS ANGELES — "Joint liability."<br><br>The ill-defined phrase has been the California garment industry’s nemesis. But now, in a potentially precedent-setting decision that’s widely considered a victory for makers and merchants, a...

LOS ANGELES — “Joint liability.”

This story first appeared in the November 18, 2002 issue of WWD.  Subscribe Today.

The ill-defined phrase has been the California garment industry’s nemesis. But now, in a potentially precedent-setting decision that’s widely considered a victory for makers and merchants, a federal court here has ruled that retailer Bebe Stores Inc. is not jointly liable for wage and working conditions violations that allegedly occurred at a sewing contractor Bebe monitored for compliance.

The Nov. 12 ruling also set clear guidelines for establishing liability in future cases, shedding light on what’s been murky and treacherous ground for makers and private label retailers.

For years, joint liability has been repeatedly used to put retailers and manufacturers on the hook for labor violations at sewing shops they contract with, costing local producers millions in settlements and bad press. It’s also scared major players away from the state.

Under the federally mandated Fair Labor Standards Act, any company defined as a “manufacturer” and a “joint employer” can be walloped with penalties, interest on damages and hefty legal fees for labor violations. In the past, those suing “up the chain of responsibility” have racked up millions in settlements.

The FLSA is significantly broader in its ability to penalize than AB-633, a California state law that makes manufacturers wage guarantors when a contractor fails to pay its employees minimum wage.

“The issues of liability of a garment manufacturer as a ‘joint employer’ have been on the minds of virtually every garment company here because the law has not been clear,” emphasized Elizabeth Murphy, a senior associate with Buchalter, Nemer, Fields & Younger, who argued the case. “Many of the cases and many huge settlements have gone in favor of liability in manufacturing. So this is a huge development.”

She said the yet-unpublished case “promotes manufacturer responsibility for working conditions, but will also protect companies who are exercising good-faith efforts to monitor. This will protect them from being held hostage.”

In fact, some see the ruling as significant enough to make big businesses take another look at California. According to industry sources, several large manufacturers and at least one prominent California-based retailer have adopted a de facto policy of not producing in the state in recent years. These companies have publicly denied taking such a position.

“It should bring big companies back and I would hope it does,” said Stan Levy, partner with local law firm Manatt, Phelps, Phillips. “This case sets up excellent guidelines. If there is a real, independent relationship between the factory and the manufacturer, then the mere fact that the factory might be doing a lot of work and may be having q.c. [quality control] and monitoring persons on site does not establish joint liability.”

Attorney Julie Su of the Asian Pacific American Legal Center, which brought the notorious case on behalf of immigrant plaintiffs employed at El Monte, Calif.-based Apex Clothing Corp., also did not return calls at press time. In recent years, Su has sued Forever 21, XOXO, BCBG Max Azria, City Girl Inc., Hobby Horse Inc. and others on behalf of workers in contractor shops.

But most acknowledged the ruling was a setback for workers’ rights groups like Su’s organization, which have successfully been bringing case after case in an attempt to build a bridge for joint responsibility. They frequently argue that manufacturers and retailers wield indirect control over contractors by exerting enormous pricing pressure. These pressures essentially force contractors to violate wage and hour laws.

In the Bebe case, Su reportedly argued that the presence of the retailer’s quality-control staff and an independent labor-compliance agency at Apex constituted control over the working conditions.

But in his 12-page opinion, Judge Gary Allen Feess came down strongly against the reasoning, “Holding Bebe Stores to have exercised ‘control’ over Apex on the basis of its [labor compliance] monitoring activities, and therefore to be a joint employer with Apex, would be counterproductive and would create a disincentive for clothing designers and manufacturers to monitor contractor shops.”

Feess’ ruling also established that “direct control” standards should be used to determine if there is joint employment. Direct control is measured by:

Power to hire or fire employees at the contractor’s site.

Power to supervise the work schedule or conditions of employment.

Controlling the workers’ rate or method of payment.

Maintaining the business’ records.

Ownership of equipment or a facility together.

However, being the biggest or dominant customer of a contractor, or having a staff member on site at the factory did not constitute an employment relationship.

The case to determine whether Apex violated state and federal wage and hours laws is still pending.

For Bebe, considered a manufacturer because it provides materials and design specs to contractors, the stakes were particularly high. The 173-door Brisbane, Calif.-based chain stocks its floors monthly with of-the-moment fashions, producing 70 percent of its goods here and making it among the state’s largest manufacturers.

“We’re pleased some rationality has come back to this whole process,” said Bebe’s chief financial officer John Kyees. “This type of harassment has lead us to ask, ‘Do we want to do business here? Should we go elsewhere?’ That’s not what we want to think because we like doing business in California.”

After several years of mounting red-tape regulation, domestic manufacturers said the ruling is reason to celebrate.

“I feel better [about these issues] today than I have for the past two years,” said Reza Farmrh, chief financial officer of Edmund Kim International, who reviewed the judge’s opinion. EKI is an $80 million producer for several major brands and large, national retailers. This year, the Rancho Dominguez, Calif.-based company will do $20 million with Wal-Mart Stores.

Yet the company’s status as a California employer is sometimes a liability.

“No one has overtly said they have a no-California policy,” he said, adding, though, that some high-profile companies have refused to work with EKI because of the California connection.

Mark Brutzkus, partner in local law firm Ezra, Brutzkus, Gubner, said he’s even seen large companies source off-shore package production through other states.

These companies “have given directives to all their manufacturers that they will not source production in California,” Brutzkus said. “So that’s forced manufacturers to open sourcing offices outside of California — in Nevada or Florida — because companies don’t want to have the taint.”