LIQUIDATED DAMAGES: COST OF DOING BUSINESS OR WINDFALL FOR UNITE?
Byline: Eric Wilson / With contributions from Joanna Ramey, Washington
NEW YORK — As the controversy over liquidated damages collected by UNITE continues to swirl, the question of what actually happens to that money may soon be answered.
The apparel union is expected to announce this month that it will create an independent account in which it will deposit funds collected from liquidated damages — fees that unionized firms pay to UNITE each year for violating contracts that prohibit garments from being made in nonunion factories, here and abroad. Right now, those fees — which over the past decade have added up to an average of $10 million a year — go into UNITE’s general operating fund, where they mingle with members’ dues, returns on investments and other sources of income. There is no method of accounting for how those liquidated damages are spent by the union, something that rankles union critics.
Now, says Jay Mazur, president of UNITE, there will be.
Mazur disclosed to WWD that the apparel and textile union is codifying a plan to distinguish those funds, at least on the books, in an attempt to show that liquidated damages are being spent in the best interest of American apparel workers. He said no decision has yet been made on how UNITE would report the way that money was used.
The issue of liquidated damages has been at the heart of a contentious and long-running legal battle involving the union, Liz Claiborne Inc. and one of its contractors, Mademoiselle Knitwear Inc., and has raised the issue into a high-profile subject throughout the industry. It has even reached into the U.S. Congress.
In theory, monies garnered from liquidated damages are supposed to be spent for the betterment of all factory workers — union and nonunion — through labor-organizing campaigns, promotions of the union label and in lobbying for legislation to combat sweatshops, for example.
While Mazur insisted UNITE spends much more on those campaigns than the union derives from damages, in practice the union has not demonstrated how and if those dollars get from point A to point B.
What was once considered a cost of doing business has escalated into what some manufacturers called a unilateral labor practice and as onerous to business as a retailer’s chargebacks.
In interviews with union manufacturers, labor activists and historians, attorneys who specialize in labor law and heads of contractors’ associations, most of whom spoke on condition of anonymity, the ambiguity of liquidated damages and who or what they benefit was a universal concern.
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A Union-Specific Practice
The concept of liquidated damages is not unique to the apparel industry. Labor attorney Joel Cohen, a partner at McDermott, Will & Emery, who represented The Leslie Fay Cos. in its 1994 contract battle with the union, said the term is common in many contractual arrangements.
A typical apartment lease, for example, would include a clause obligating a renter who moved out prior to the contract’s termination date to pay a mutually agreed upon fee — often the security deposit — to the landlord. Liquidated damages are the financial penalty for breaking the contract.
“But while liquidated damages comes up all the time in contractual arrangements, liquidated damages as a method by which unions collect money when there are contract violations by employers is unique to the apparel union,” Cohen said.
All but one person interviewed for this article concurred that no other labor union exercises liquidated damages when a manufacturer breaks a contract. The dissenter was Mazur, but he could not name another union that uses the practice.
The union’s strategy of recouping damages from manufacturers dates back to the Twenties under the International Ladies’ Garment Workers’ Union, UNITE’s predecessor, which was founded in 1900, Mazur said. Although a record of the first case of such an assessment could not be found, several attorneys theorized that a labor-management dispute was arbitrated by an impartial third party, who then sided with the union and fined the manufacturer, setting a precedent that would eventually become a contractual standard.
In practice today, union manufacturers are routinely audited by the union. If the union auditor reports any contract violations, a bill is sent to the manufacturer. If the manufacturer pays the fine, the funds go directly into the union general operating fund. If the manufacturer does not pay, the case goes to impartial arbitration and can go all the way to the Supreme Court.
Until UNITE was formed in 1995 by a merger of ILGWU and the Amalgamated Clothing and Textile Workers’ Union, the practice had been limited to ILGWU contracts. While Amalgamated could have collected liquidated damages, that union, which represented mostly men’s apparel companies and textile firms, did not, said Jack Sheinkman, its former president, who remains vice chairman at union-owned Amalgamated Bank.
“The ILGWU had a lot more subcontractors and smaller units than we did,” Sheinkman said. “We, more often than not, manufactured in our own facilities.”
The nature of the women’s apparel industry is unusual in that approximately 95 percent of production is contracted to outside factories, most of which employ an average of only 50 workers, whereas the majority of men’s manufacturers own their own factories and have no need to use outside labor.
“We are in an industry with tentacles, with small units spread out all over the place,” Mazur said. “Enforcing the apparel agreement has always been very difficult.”
Mazur said negotiated-damages clauses were inserted into ILGWU contracts to protect the union in the Twenties when nonunion factories were proliferating around the country. In the Fifties, at the advent of imports, the practice was reaffirmed as a means to maintain domestic production in the face of cheaper offshore labor.
The most commonly cited purpose of liquidated damages is that they act as a “disincentive” for manufacturers to use nonunion labor.
While Mazur said damages are still used to remove the cost advantage that a maker has when using nonunion labor, manufacturers said the assessments have become more of a disadvantage to be in business because they cannot compete with nonunion vendors.
“As imports became bigger in the Sixties and Seventies, there was the beginning of a change in damages,” Mazur said. “As the industry changed, the application of liquidated damages changed. We have tried to deal constructively with how the industry changed, but the cardinal principle was always to protect jobs.”
However, in the Nineties, as the apparel industry matured, union membership and factories dwindled and vendors relied heavily on imports — raising the amount many manufacturers pay for breaking union contracts — the perception of liquidated damages has dramatically changed.
“The universe of union manufacturers is smaller, and the union is looking for more money out of fewer companies,” said one leading industry consultant.
A Manufacturer’s Lament
Although most manufacturers spoke on the condition their names not be used for fear of alienating the union, they expressed similar concerns about this issue:
When production is labor-intensive, they cannot produce a product at a competitive price with union labor. While they think UNITE’s assessment of a penalty for using outside labor in these cases is unfair, they also consider it a cost of doing business. Although several said the damages they are fined continues to increase, they feel it has not reached a point where they would consider challenging the union on the issue in court.
Several makers ask why the union feels it has a right to this money — or as one vendor called it, “UNITE’s tariff” — and more importantly, they question how it is spent.
A major concern among them is that UNITE has used liquidated damages as a bargaining chip when negotiating contract renewals. In several cases, they said, large manufacturers were offered either a break on the amount of damages in exchange for guaranteeing union jobs or a cap on annual damages — a move some smaller makers said eliminated any such disincentive to manufacture offshore.
The issue is making headlines now because of a high-profile legal challenge to the system: a lawsuit filed by Mademoiselle Knitwear, a former contractor for Liz Claiborne, claiming the liquidated damages were a payoff to allow Claiborne to avoid its obligation to provide work to the factory.
Rep. Pete Hoekstra (R., Mich.), chairman of the House Subcommittee on Oversight and Investigations, which has scrutiny over the Department of Labor and the National Labor Relations Board, has focused on the legality of the payments. He is currently seeking sealed documents in the Mademoiselle case, but has so far been thwarted by the courts.
Roberta Schuhalter Karp, vice president of corporate affairs and general counsel at Claiborne, would not discuss the matter for this article, but did issue this statement:
“Liquidated damages, part of collective bargaining agreements in the apparel industry for decades, have always been controversial, and many companies have hotly debated their legality. Federal and state courts, however, have consistently upheld their legality, and liquidated damages currently remain a standard part of collective-bargaining agreements.”
Other leading industry players were equally reticent.
Bud Konheim, chief executive officer of Nicole Miller, said, “I don’t know how I feel about it. The only thing I understand is the pressure that makes people do these things. Everything is getting more difficult because this is a mature industry. The cost of trying to do business today has led to the same developments of chargebacks and sweatshops. The cost of competition leads to all of this deal-making.”
One large ready-to-wear manufacturer that once produced its entire line domestically, but has in recent years come to rely nearly entirely on imports, said that because the majority of apparel firms to enter the market in the past 15 years are not unionized, an unequal playing field has developed among vendors.
“For an older company, it is not equitable,” he said. This maker described the practice as “selling the workers out because liquidated damages just goes to promote the union, not the workers.”
“I’d prefer to see it go away,” he said.
However, this manufacturer, who employs about 20 workers in domestic union factories, said even though payment of liquidated damages is spelled out in his contract, the union has been willing to negotiate the actual amount that is paid.
“They don’t hold true to the formula,” he said, referring to an industry standard of about 1.5 percent on the wholesale value of imports. “They do work with us. It’s a question of being fair.”
A large coat maker that relies mostly on 807 imports and pays under $1 million each year in damages to the union also took a laissez-faire approach.
“We pay it, but we don’t make an issue of it,” he said. “Yes, it’s unfair, but there are a lot of things in life that are unfair, such as retailers’ chargebacks. You just have to take a philosophy in your business that you can still make a profit if you take some abuses.
“A man of high ideals might want to fight the injustice,” he continued.
“But it’s probably going to be a company that is big enough and that pays an amount of damages big enough that it becomes worth fighting for. We don’t make that choice at this time.”
Richard Kay, co-president of outerwear manufacturer Herman Kay, said he agreed that the cost of liquidated damages are not great enough to make a fuss, but added, “I don’t think they are entitled to it.”
Since the percentages are negotiated individually, rather than by contractor’s organizations, Kay would not discuss the percentage Herman Kay lays out for 807 production.
A Question of Legality
Cohen, the attorney who represented Leslie Fay, is now Mademoiselle’s labor counsel. He has railed against liquidated damages for years and feels that under the current vagueries of the law, there is a strong potential for wrongdoing.
If a UNITE member is fired from a plant without cause, for example, the case would typically be taken to arbitration, where the employee could be found to be entitled to return to the job and receive back wages. But by paying liquidated damages, a vendor has the opportunity to selectively dismiss UNITE members in exchange for a lump sum paid to the union’s general operating fund. That payment is supposed to be for the betterment of all employees.
Mazur’s response is that in most cases, it would be impossible to determine which workers were damaged by the use of nonunion labor and that UNITE has effectively distributed its finances into programs designed to improve working conditions for all factory workers.
“As a practical matter, that is bunk,” Cohen said. “If that is true, then why does the money go to the union general operating funds?”
That is the type of response Mazur hopes to silence with an independently accounted fund for the receipt and disbursement of liquidated damages.
Still, Cohen thinks the practice should be illegal.
“Even if the union’s motivation is as pure as the driven snow, the potential for selling an employee’s rights out for personal gain is there,” Cohen said. “It’s like saying, ‘We know they’re going to import anyway, so why don’t we make some money off of it?”‘
A Challenge in the Courts
In 1994, a year after Leslie Fay filed for bankruptcy after an accounting scandal rocked the dress firm, the company was dealt another blow. After two months of stormy contract negotiations with the ILGWU, in which Leslie Fay’s proposal to shut down its U.S. production was the main issue, a strike was called.
At the time, Leslie Fay officials blamed the union’s demands for liquidated damages, which was in the millions, as a key reason for the strike. The strike ended after a month when both sides agreed to binding arbitration.
Part of the settlement included Leslie Fay’s agreement to drop a lawsuit over liquidated damages. It also allowed the firm to close its Wilkes-Barre, Pa., dress factory. Sources close to the negotiations said the firm eventually agreed to an annual cap of about $350,000.
Castleberry Knits, a former division of Leslie Fay that was spun off last year after the company emerged from bankruptcy, is currently negotiating with the union over the same damages. Castleberry inherited the responsibility of the union agreement once it split off.
According to sources familiar with the firm, workers at a Newark, N.J., factory — one of three factories Castleberry uses — have continually resisted unionizing efforts. Factory workers have threatened that they would rather close it down, so Castleberry is seeking a relief to the damages it pays for work done at that plant.
This system of negotiating caps has also been a controversial element of liquidated damages.
Claiborne was reportedly paying up to $5 million a year in damages, while under its new contract — a negotiated settlement signed last year — the annual cap was set at $2.5 million. That amount, say some smaller companies, is a drop in the bucket for a $2 billion-a-year apparel giant.
Claiborne has said it paid $13 million to UNITE as liquidated damages for violating the industry contract, but Claiborne avers the payment was not connected to Mademoiselle.
According to court papers in a suit filed by Mademoiselle employees, union audits showed that Claiborne paid the $13 million from January 1994 to May 1997. The papers also show that Claiborne paid $28 million for the period January 1990 to December 1993.
Still, at $350,000, Leslie Fay’s cap is significantly less than Claiborne’s. On the other hand, according to a Leslie Fay source, “the company would have gone out of business without the cap.”
UNITE is required to file an annual report with the Labor Department each year. According to those documents, UNITE and its predecessor unions collected $106.9 million in liquidated damages from 1986 to 1996.
The amount of money collected each year has increased from $6.9 million in 1986 to $13.2 million in 1992. The amount dipped slightly to $12.7 million in 1993, then dropped to $6.3 million in 1994. In 1995, the year the ILGWU and ACTWU merged, $7.9 million was collected and the amount increased in 1996 to $10.9 million.
UNITE has not filed a report for 1997, having missed the deadline to do so by more than three months. A Labor Department official said UNITE has been notified of its tardiness, which is not punishable by law.
Mazur conceded that the union has historically been tardy in furnishing these documents to Labor.
The reports neither indicate what portion of UNITE’s operating budget comes from liquidated damages nor disclose how they are spent. However, in 1995, UNITE’s first year, the documents say the union’s organizing expenditures were $11.7 million and in 1996 were $9.9 million.
UNITE’s Rationale
Mazur said liquidated damages are spent foremost on organizing nonunion workers. The cost of that alone, as evidenced by the Labor filings, should demonstrate that the funds are used legitimately, he said.
UNITE also spends millions of dollars lobbying for legislation geared to battle sweatshops around the country and on advertisements to promote the union label.
“There is a misunderstanding about it, but the money is spent effectively,” Mazur said. “Employers never liked it because they’re the ones who have to pay. I have no problem with what they said. I appreciate their opinion.”
To the argument that negotiating rates with certain vendors promotes a sense of unfairness, Mazur said, “We want to preserve jobs and still give employers the opportunity to be competitive. We don’t want liquidated damages to be so onerous that we put the guy out of business.”
As to how this practice has affected UNITE factory workers — the people whose jobs Mazur is entrusted with protecting — he insists that campaigns aimed at the betterment of all workers have had a meaningful impact on American jobs, possibly saving thousands of them.
While several manufacturers scoffed at that response, one of the labor attorneys pointed out that even if the average $10 million in damages UNITE recoups each year had been distributed evenly to UNITE workers, based on the union’s rolls of about 250,000 workers, that would have come out to only about $40 a person.