Not So Sweet: Subcontractor Employees May Still Be Your Responsibility

hersheysYou’ve built a first-class company with state-of-the-art operations, a global reputation for environmental stewardship and an enviable supply chain that is the toast of your industry. You also possess a brand worth billions based on smiles and good times, all rooted in an historic ‘company town’ that is a tourist destination in its own right. What could possibly go wrong?

Well, if you’re the Hershey Company, quite a lot. Like many companies that produce and distribute consumer products and goods on a global basis, Hershey operates a vertically distributed supply chain.

That means, for example, that the company’s massive “Eastern Distribution Center III”, a state-of-the-art warehouse facility located in Palmyra, Pennsylvania, is actually operated under contract to a third-party logistics (3PL) that manages the facility on Hershey’s behalf. In turn, the 3PL provider hires a small army of staffing companies to provide workers in the facility, some of whom in turn rely on yet other staffing services, recruiters and the like to deliver the workforce.

When all is said and done, it is entirely understandable that a “Hershey warehouse” which contains only Hershey products, receives deliveries only from Hershey trucks and ships out products just for Hershey customers, nonetheless has nothing, legally speaking, to do with Hershey the company.

In 2011, this highly efficient and yet byzantine business model created an unexpected consequence when it came to light that a sub-sub-sub-contractor had recruited international students through a U.S. State Department cultural exchange program. Furthermore, many of the students paid hefty fees (often ranging from $3,500 to $6,000 or more) to participate in the program, secure the necessary J-1 visa, and come to the U.S. Then, upon arrival for their intercultural business experience at a major American company, they found themselves instead operating as warehouse laborers performing physically demanding – and sometimes dangerous – tasks at the “Hershey-but-not-Hershey” facility.

Muddying the waters in the case was the fact that the students were paying exorbitant rents on top of the extensive fees and, in the end, often actually pocketed less than minimum wage on an hourly basis, once all ‘required’ costs paid to the exchange program management company were taken into account.

Once the situation came to light, matters started to take a turn for the worse. Initially, Hershey representatives said that they had little to no input in the matter – after all, the workers didn’t work for Hershey. That…didn’t quite fly.

So, the students staged a walkout protest, negatively impacting Hershey’s distribution operations. And the irony of students from countries such as China and former Soviet republics claiming that they were being exploited as “slave labor” in the supposedly ‘free’ United States marketplace was not lost on the media or the public.

As we alluded to earlier, the legal arrangement technically involved Hershey contracting the operations of the distribution center to a 3PL provider, which in turn subcontracted labor management to a regional staffing company, who in turn subcontracted recruiting and contracting of the workers to the organization that recruited the students in the first place.

The U.S. Department of Labor, the Occupational Health & Safety Administration (OSHA) and the State Department all stepped in and investigated the situation, with the major fallout being that the federal government required the various companies to pay more than $213,000 in back wages, $283,000 in OSHA penalties and $143,000 in labor penalties while also coordinating to solve a number of additional violations and grievances.

The civil penalties were assessed to the 3PL company, even though that company’s officials claimed quite understandably that they were not directly involved in or aware of the issues at hand. Nonetheless, the federal rulings also required the 3PL firm to make fundamental operating changes across its entire network of 500 distribution centers nationwide, and the company shared the cost of the employees’ back wages with the other two companies involved. Ultimately, the federal government fined every company that was a party to the process – except Hershey.

Hershey stayed relatively removed from the issue for as long as it could, but the company did negotiate to provide paid leave to the student workers and agreed to host them for a ‘business and cultural exchange’ for one day. While Hershey did remain legally isolated from the federal investigations and their direct impacts, the long arm of the law came much closer to the company than most analysts had predicted, considering that every other company involved ended up directly susceptible to multiple federal legal actions.

The reputational impact of the matter ended up causing bigger headaches for Hershey as well, since the “slave labor” claims taking place in bucolic Central Pennsylvania ended up dredging up longstanding concerns that the company’s suppliers use child labor in the harvest of cocoa used to make Hershey’s chocolates, thus fueling a renewed global labor rights campaign against the company to boot.

Bottom Line: Subcontracting services to other companies only goes so far to insulate your business from responsibility for employment-related wrongdoing. This case also proved that small businesses serving much bigger companies can also become caught up in a ‘dragnet’ disaster when things go wrong around them. The moral of the story is simple: When in doubt, find out. You need to know what’s going on in the workplaces your company is connected to, regardless of whose name appears on the employees’ paychecks.

Selected Sources:

Foreign students protest slave labor at Hershey’s

Foreign Students in Work Visa Program Stage Walkout at Plant

Pleas Unheeded as Students’ U.S. Jobs Soured

Feds say they will collect back wages for foreign students who claimed exploitation at Hershey warehouse

Hershey Warehouse Working Conditions Questioned As Foreign Students Protest

OSHA Cites Hershey Co. and SHS Staffing Solutions with Workplace Safety and Health Violations

Hershey’s Packer Is Fined Over Its Safety Violations

Photo Credit: thatedeguy @ Flickr (Creative Commons)

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