By Ernest Kao

Cambodia has always taken pride in having comparatively better international labor and human rights standards in garment manufacturing than neighboring China, India and Bangladesh. Other than lower labor costs, labor standards are actually one of the country’s unique competitive advantages.

So when a report published in August 2011 by the Yale Law School’s Allard K. Lowenstein International Human Rights Clinic released its findings of how Cambodia, by retaining its widespread use of short-term employment contracts also known as ‘fixed duration contracts’ (FDCs) would “harm worker’s rights and threaten to destroy Cambodia’s reputation” as well as “violating domestic and international law”, tensions in the industry deepened.

Cambodia’s garment industry employs about 350,000 people, roughly half of all workers in the entire manufacturing sector. It also accounts for 80 percent of total exports, making it one Cambodia’s pillar industries.

In the eyes of many nongovernmental organizations (NGOs), Cambodia has been considered somewhat of a success story. Take the Better Factories Cambodia program launched by the International Labor Organization (ILO) in 2001, an oft cited example of this success. Through a fee-based subscription system, the ILO-BFC has helped factories improve their working conditions and productivity through monitoring and reporting “to ensure a rigorous and transparent cycle of improvement.”

Retailers and buyers take pride in the programs, now mandatory for all garment exporters. “H&M was one of the first international buyers to participate in the [ILO-BFC] and use its assessment, advisory and training services,” said a spokesperson at Hennes & Maurtiz.

“As an active member, we participate in two forums a year. The program has contributed to significantly improved compliance with our Code of Conduct by Cambodian suppliers…. since 2008 we have used the ILO-BFC’s assessments to promote further improvements and limit our own audits to requirements not covered by the program.”

The Yale report, “Tearing Apart at the Seams: How Widespread Use of Fixed-Duration Contracts Threatens Cambodian Workers and the Garment Industry” (2011) is a small blemish on Cambodia’s record of fairly good press on labor and human rights.

The debate about the issue of FDCs is not new. According to the Coalition of Cambodian Apparel Workers Democratic Union, one of the country’s biggest labor unions, 60 percent of the country’s 400 legal and illegal factories use FDCs, loosely known as short-term labor contracts. Some garment workers have been working on contracts as short as two months. Fingers point to garment manufacturers.

The Cambodian government has been easing restrictions on legislation favoring more FDCs. This would, according to the International Labor Rights Forum (ILRF), a labor rights advocacy, undermine much of the progress made by the garment industry by introducing this wholesale shift to use of temporary work contracts. Manufacturer’s have recently attempted to break down barriers on such arrangements by changing the country’s labor code.

It is said that short term work contracts tend to circumvent legal protections for workers. They can entail longer work hours, dissuade workers from joining unions, lower pay and above all, make the expression of basic rights harder for workers. The report concluded that it may also potentially lead to a breakdown in industrial relations and to massive strikes.

“In principle, we favor long term contracts and not short term contracts because short term contracts tend to be subject to abuse,” said Duncan Scott, vice president, external products for athletic footwear and apparel brand New Balance. “One of the biggest problems [for workers] with short-term work is that benefits (pension plans, bonus schemes, healthcare) are either reduced or eliminated, and you can quickly get into a situation where workers are really treated unfairly.

“In its worse form, employers can systematically let people go before they reach a certain benefit level to keep wages as low as possible…factories can hire someone, pay them minimum wage till they’ve worked there for X amount of time, until its time to raise wages, then they fire them. You have a contract that basically runs out, they then re-hire them three months later at the original lower wage.”

Other international buyers such as Gap, Nike and Wal-Mart have also expressed concern over the issue. Cambodia’s influential labor unions have also joined in on bashing their employers. Last September two of Cambodia’s biggest unions organized strikes involving more than 200,000 garment workers over wages.

Ken Loo, secretary general of the Garment Manufacturers Association of Cambodia (GMAC) spoke out. He believes the blame on manufacturers is unwarranted. “The reason that garment factories employ this fixed-duration contract is that it is a function of the buying practices of the international retailers and their buying offices,” he said.

“They give us X amount of orders for this season, but cannot guarantee us the same for the following season. We have no security in terms of orders and if we have no security in orders how can factories give workers security in terms of contracts? What if next season they decide to put orders in another country and we are stuck with 2000 workers but only enough orders for just 500 workers. Do we dismiss all of them? NGO’s would scream at us for doing that,” he admonished.

“I always tell the buyers, if you guarantee us one to two year’s orders then we can give the equivalent length employment contracts to our workers. How can we employ X number of workers if we don’t know what amount of orders they will give us next year? Unions should talk to the buyers not to us.”

The same applies to wages. Mr. Loo feels that there is a sense of hypocrisy going on at the buying level, especially since buyers are the ones that control price and ultimately determine what factories and the workers make. But everyone refuses to believe that.

According to a 2009 study by the Cambodia Institute for Development, profit margins in Cambodia’s garment industry are 31percent. This is unusually high compared with other competing nations (India 11.8 percent, Indonesia 10 percent, Vietnam 6.5 percent and China 3.2 percent). The figure is disputed, but the country’s unions have frequently used this as a weapon to get their way. Unions believe factories are earning excessive profits. Mr. Loo questions the credibility of this figure.

He challenged unions and buyers at a recent buyers’ forum with a proposal. Accepting their figure of “31percent” at face value he invited any to come in as a partner in a garment factory with zero capital injection. As the manufacturer/employer he proposed to take in a fixed 11percent profit, leaving them with a 20 percent margin. No one stepped up to the plate.

Scott Nova, executive director of the Washington D.C.-based Worker Rights Consortium agrees. Mr. Nova and the WRC show strong support for labor law reform but acknowledge that it is the international brands calling the shots. “The question is whether the international brands will take meaningful action,” he said. “Real pressure from the brands on the government and the manufacturers would allow this problem to be solved very quickly,”

“It is quite possible that the brands will pay lip service to the issue publicly, while signaling the government and their business partners that the new legislation is not really going to have much effect on the placement of orders. If the brands make it clear that anti-worker changes to the labor law will cost Cambodia business, these ‘reforms’ will disappear faster than you can say ‘corporate social responsibility,’” he added.

But is it really just a matter of business? Some blame loopholes in the law. To begin with, the problem really arose only when Cambodia’s Arbitration Council chose to interpret the law one way, which was intrinsically very different from what the ministry of labor interpreted the law to imply, as well as what the original drafters of the law intended.

The Arbitration Council interpreted the article in the labor law to state that the total duration of FDC could not exceed two years. The ministry interpreted it as is any single contract could not exceed two years. Nonetheless, stakeholders rarely take matters to the courts because they don’t trust what appears to be a corrupted system anyway.

“It is not okay for suppliers to say that because they have the law [on their side] its fine, because in many cases, consumers and NGO’s won’t accept that,” said New Balance’s Mr. Scott, who himself once worked with NGOs, as well as in the field of compliance and labor.

Historically, the way global apparel sourcing developed was that there was fragmentation across different countries because of quotas and such. Every developing country was also using apparel as a low cost point of entry to industry, which would boost exports and also employ large numbers of workers. “What you have is the tendencies for developing countries is to make the price of entry as low as possible, and means having a flexible work force. This eventually can lead to short-term contract abuse,” said Mr. Scott.

“I don’t buy what factories are saying about needing to have to have that flexibility. Sure, it’s easier for them, but ultimately they need to have enough capital to invest so that they can survive the normal ‘fluctuations’ in the industry. They need to work with buyers to minimize these fluctuations.”

That being said, not all contract work should be banned. There should be exceptions just like in agriculture, another seasonal industry, as long as “it is not being used systemically to deprive workers of their rights,” said Mr. Scott.

Brands and manufacturers each have valid points. But like any debate about globalization and its flaws, it is another “chicken and egg” problem and has led to a stalemate.

Other countries have been revising laws (though not necessarily enforcing them) regarding short-term contracts. China, for instance, adopted their new labor contract law in January 2008 which gave a little more bargaining power to workers and made it harder for employers to terminate contracts. Colombia introduced decrees to limit labor “cooperatives” (albeit without much tangible success), while Mexico has been proposing a series of labor law reforms. Only Cambodia seems to be taking a step back in the opposite direction.

It will be in the interests of the Cambodian workers, trade unions, garment manufacturers and government to foster stability and growth in the garment industry. Giving fairer contracts to workers and upholding strong labor standards are two good approaches. However, it will depend on how buyers, manufacturers, NGO’s and the unions are willing to compromise.