August 30, 2018 ILN

The Challenge of Corruption in Global Supply Chains: Compliance Risks Posed by Labor Protection Contracts in Mexico

By Tequila J. Brooks

The negotiation of “labor protection contracts” is a common but contested practice in Mexico. This practice involves foreign and Mexican companies entering into labor agreements with “official” trade unions at the establishment of an enterprise, without the participation of workers and frequently before any workers have been hired. When workers in an enterprise later endeavor to organize a trade union and register it with the local or national labor board, they discover there is already a collective agreement in place with a union with which they do not have a relationship. The labor protection contract system has been widely criticized as a practice that violates fundamental labor rights and as being inconsistent with the principles of corporate social responsibility (CSR) and ethical behavior.

Less widely discussed is the significant corporate compliance risk the practice poses under the U.S. Foreign Corrupt Practices Act (FCPA) and other anti-bribery laws. It would behoove human resources directors and compliance officers to eliminate this FCPA risk in their own operations and those of subcontractors in their supply chains in Mexico.

Labor protection contracts pose a risk under the FCPA and other anti-bribery laws because of the tripartite nature of Mexico’s current legal framework for settling individual and collective labor disputes. Under current Mexican labor law, representatives of the main employer federation and the main trade union federation in each jurisdiction each have a seat on the local labor board (there is more than one local labor board in each state, depending on population). When the company makes a payment to the president of the local trade union delegation, it is likely that that local union president is the trade union representative on the tripartite local labor board. Along with the employer and government representatives, this local trade union president/labor representative is directly involved in making decisions regarding individual labor disputes (firings, workplace injuries) and trade union matters (approval of the registration of a trade union or collective bargaining agreement). Thus, a payment made to the local union president is in fact a payment to a government official—a representative on the tripartite local labor board.

Tripartism itself is not the root of the problem; rather, the distortion of tripartism through the practice of labor protection contracts is the issue. Tripartism is a century-old internationally accepted practice of involving government, labor, and employer representatives in settling labor disputes and developing labor and employment law and policy. It is the bedrock of standard setting through consensus at the International Labour Organization (ILO). Tripartite dialogue was essential to the rebuilding of the Dutch economy in the 1980s and 1990s (the polder model) and in the development of modern labor and employment laws and policy in post-apartheid South Africa.

Labor protection contracts in Mexico have long been highlighted by the ILO Committee of Experts and Committee on Freedom of Association as violations of Mexico’s obligation to guarantee the fundamental labor rights of freedom of association and collective bargaining. Almost all of the numerous petitions filed about Mexico under the NAFTA labor side agreement since 1994 relate to the practice. Petitioners in these cases argue that, by allowing previously registered labor protection contracts to effectively deny workers the chance to register their own independent unions, the Mexican government has failed to enforce its own labor laws.

As discussed by John L. Sander, Joseph J. DiPalma, and Steven D. Baderian in their December 2017 article on the labor aspects of the recent NAFTA negotiations, the elimination of the labor protection contract system has been a key objective of the United States Trade Representative (USTR) in the renegotiation of the NAFTA and the negotiation of the Trans-Pacific Partnership (TPP). See John L. Sander et al., Labor Aspects in North America Free Trade Agreement (NAFTA) Renegotiation, Update (Jackson Lewis P.C.), Dec. 6, 2017. Critics point out that the prevalence of unrepresentative trade unions has led to the suppression of wages in Mexico’s manufacturing sector.

In recent years, the practice has garnered the attention of adherents to the practice of ethical corporate behavior in global supply chains and multistakeholder initiatives implementing corporate codes of conduct. In 2015, the Fair Labor Association (FLA) issued guidance to its members and auditors asserting that the labor protection contract system is a violation of the FLA Workplace Code of Conduct because the presence of a labor protection contract indicates that a trade union is not truly representative of the workers. In its guidance, the FLA highlighted several indicators that a labor protection contract is present in a workplace, including:

  • Lack of general assembly elections and worker participation;
  • Lack of meetings in which workers participate and develop agendas;
  • No indication that workers receive notice of collective agreement negotiations or are aware of who their trade union representative is or that they are represented by a trade union;
  • Automatic enrollment of workers in the union upon hiring; and
  • Collective agreements that are not provided to workers and do not go beyond existing protections in Mexico’s Federal Labor Law.

There is little publicly available information about the method or manner in which companies engage with “official” trade unions to secure labor protection contracts—what the quid is for the quo of signing of a labor protection contract with the representative of an “official” trade union is largely unknown. Anecdotal evidence indicates that the practice involves payments by the company directly to the trade union or its representatives. For example, in January 2010, the Mexican policy magazine Proceso reported that a company in Mexico paid the head of a trade union 2,000 pesos a month for “paperwork processing.”

While payments to trade unions and trade union officials in Mexico may seem unsavory and unethical, it is not immediately clear that the practice is unlawful under U.S. law. Section 302 of the U.S. National Labor Relations Act (NLRA) prohibits payments by employers to employee representatives or labor organizations, including loans or monetary gifts, or any other thing of value. Illicit payments by U.S. companies and company officials to trade union representatives do, however, result in reputational damage and possibly criminal penalties, as reported by The Wall Street Journal this year regarding the guilty plea of a Fiat Chrysler executive who made illegal payments to certain leaders of the United Auto Workers union (UAW).

The 1957 U.S. Supreme Court case Benz v. Compania Navierra Hidalgo S.A. held that the NLRA does not have extraterritorial application. In a 2009 law review article, John McDonald points out that the statute is silent whether the NLRA applies extraterritorially. See John McDonald, Note: Don’t Cross That Line! The Case for the Extraterritorial Application of the National Labor Relations Act, 64 U. Miami L. Rev. 369 (2009).

The FCPA does not explicitly prohibit direct payments to trade unions or trade union officials–though an argument could be made that Congress should amend the statute to address this oversight. Payments made to trade union officials may present third-party risk under Section 78dd-1(a)(3) of the FCPA if company officials are aware that all or a portion of the money or gifts provided may influence the act or decision of a foreign official. Examples include payments made to influence an official’s decision to favor the company in a workplace dispute or to deny the registration application of a trade union likely to demand higher wages on behalf of employees. Payments made directly to trade unions or trade union officials may also present a risk of violating the books and records provisions under Section 78m of the FCPA, especially if a company cannot demonstrate that the payment made for union dues was authorized by its workers. The FLA’s indicators of the presence of a labor protection contract can provide guidance to compliance officers on whether or not such payments to a trade union or its officials are legitimate.

Direct and third-party risks of FCPA violations are particularly acute in the case of labor protection contracts because of the current configuration of tripartite local and federal labor boards under Mexican labor law. Payments made directly by company officials to trade unions or trade union officials may actually be payments to a government official since trade union officials are actively involved in resolving workplace disputes on tripartite labor boards at the local and federal level under current Mexican labor law.

Thus, any payment made to an official trade union representative as a quid pro quo in exchange for the signing and registration of a protection labor contract may in fact be a payment to a government official or to a third party within the trade union who has influence over the trade union representative sitting on the local labor board. The illicit benefits from making payments directly or indirectly to the trade union representative on a local labor board can result in various labor-related benefits to a company, including the outcome of individual workplace disputes or rejection by the labor board of the registration of an independent, representative trade union that may request higher wages and benefits on behalf of the company’s workers.

In early 2017, the Mexican Congress amended the Constitution of Mexico to replace local and federal labor boards with specialized, neutral labor courts with independent judges. The replacement of local and federal tripartite labor boards with independent labor courts and judges would go a long way to eliminating the FCPA and corporate compliance risk posed by labor protection contracts in Mexico. The 2018 congressional session, however, closed without passage of legislation implementing the constitutional reforms. Until such implementing legislation is passed, the conflicts of interest and compliance risk posed by protection labor contracts and tripartite labor boards remain. For additional information, read my recent article:

Mexican Congressional Session Closes without Passing Legislation Implementing Labor Justice Reform, Int’l Comm. Newsletter (ABA Section of Labor & Emp’t L.), June 2018.

As N. Isabelle Figaro noted in her article in the Spring 2018 Newsletter of the Section’s International Anti-Corruption Committee Newsletter, companies can no longer ignore corruption in their supply chains. See N. Isabelle Figaro, Can Supply Chains Use Blockchain as a Tool for FCPA Compliance? Int’l Anti-Corruption Comm. Newsletter (ABA Section of Int’l L.), Spring 2018 at 17.

This includes both obvious risks—as with the payment of bribes by subcontractors to building inspectors in Bangladesh—and the more subtle risks involved with the common but contested practice of making payments to trade unions and trade union representatives in exchange for labor protection contracts in Mexico.

This article is also published in the Summer 2018 Edition of the Section’s International Anti‑Corruption Committee Newsletter.

Tequila J. Brooks is an attorney in Washington, D.C. and Co-Author of the 2015 book NAFTA and the NAALC Twenty Years of North American Trade-Labour Linkage.