Does the California Transparency in Supply Chains Act Affect You?

Proper investigation and transparency helps ensure compliance

Published: Wednesday, July 22, 2015 - 11:27

If you’re like most savvy manufacturers, you know to watch out for changes in labor laws that could affect you in countries where you have factories or where you sell your products. We’ve all seen examples of how manufacturers were held accountable for the safety of workers and consumers alike.

As an example of the former, we’re all familiar with how government officials and factory owners faced criminal charges for the Rana Plaza collapse two years ago, and that a social compliance audit potentially could have prevented that tragedy. We’ve also discussed how North America’s largest hardwood flooring distributor faced a quality control disaster when it was discovered that its products didn’t meet California Air Resource Board (CARB) standards for safety.

Now we want to bring your attention to legislation that could put manufacturers and retailers at risk. The law is called the California Transparency in Supply Chains Act, and since it took effect in 2012, it has forced many manufacturers to be open about their products and supply chains. In this article, we’ll tell you how to know if you’re affected, and what you can do to make sure you’re compliant.

An overview of the California Transparency in Supply Chains Act

The California Transparency in Supply Chains Act concerns human trafficking and the use of forced labor in manufacturing. Signed into law in 2010, the act aims to push manufacturers and retailers to provide information to consumers about their efforts to eliminate slavery and human trafficking from their supply chains. It is also intended to educate consumers on how to investigate whether the goods they purchase are responsibly sourced.

Should you be concerned?
The California Transparency in Supply Chains Act set a deadline of Jan. 1, 2012, for compliance by certain retailers and manufacturers. So how do you know if you’re affected by the legislation?

1. Are you a “retail seller” or “manufacturer?” A “retail seller” is defined as “a business entity with retail trade as its principal business activity code.” On the other hand, a “manufacturer” is defined as “a business entity with manufacturing as its principal business activity code.”
2. Is your company doing business in California? The law defines this as “actively engaging in any transaction for the purpose of financial or pecuniary gain or profit.”
3. Does your company have annual receipts greater than $100 million? The definition of “gross receipts” is set in Section 25120 of the Revenue and Taxation Code.
If you answered “yes” to all of the above, you’re required to disclose certain information to consumers.

What information must be disclosed?
Affected retailers and manufacturers must disclose information concerning the following five aspects of their supply chain:
1. Evaluation of supply chains to verify the risk of suppliers employing slave labor or engaging in human trafficking. The company must also disclose if verification was conducted by a third party.
2. Carrying out factory audits to determine if suppliers are compliant with the company’s standards for trafficking and slave labor. The disclosure must specify whether audits were conducted independently and unannounced.
3. Requiring direct suppliers to certify that materials used to manufacture the company’s product meet the laws concerning trafficking and slave labor in the countries in which the company does business.
4. Maintaining internal standards and procedures for employees or contractors that fail to meet company standards regarding trafficking and slavery.
5. Providing training related to slavery and human trafficking for employees and managers responsible for supply chain management.

This information must be displayed on the company’s website with a “conspicuous and easily understood link.” Companies without websites must provide consumers with a written disclosure within 30 days of any request. To learn more about the law, view the California attorney general’s Resource Guide online.

Ensure you are compliant by auditing suppliers

The best way to make sure you’re compliant with the California Transparency in Supply Chains Act is to audit your suppliers. As part of a comprehensive program, a qualified independent auditor can visit your suppliers and determine whether factories are using forced labor, slave labor, or are engaged in human trafficking.

The auditing process
There are a number of steps that you and your auditing partner must take to determine if your suppliers meet standard set by local laws and your own company. The steps for booking an audit are similar to the four steps to scheduling a product inspection.

First, you’ll need to provide to your auditing partner relevant contact information and the address of the factory. At your initiation, the factory staff will actually book the audit by submitting a formal and written booking form to the audit company and specify a requested date.

Once an audit has been scheduled, your professional auditor should have some specific procedures in place for carrying out the service, including:
• Opening meeting. When the auditor arrives at the facility, a meeting is held with factory management to explain the objective and order of the audit.
• Factory tour. The auditor should be walked through the factory, dormitory, and other facilities to view general conditions of the work areas and living spaces.
• Interview of management representatives. Management should respond to questions related to forced labor, slave labor, hiring practices, personal documentation of staff, and other areas of concern that indicate the factory’s general labor policy.
• Interview of employees. Randomly chosen employees should be selected to complete an interview questionnaire. Questions specifically related to slave labor and trafficking would address hiring practices and personal documents of staff. There is a certain generally accepted ratio of employees that should be interviewed relative to the total number of employees.
• Document review. Prior to scheduling the service, the auditing company should provide the factory staff with a checklist of documents that will be verified. The auditor will review and record these documents.
• Concluding meeting. The auditor meets with factory management once more to discuss the findings of the audit. Management collaborates with the auditor to draft a corrective action plan, if needed.
• Issuing of report/rating. The auditing company will issue a report of findings to the client. A rating of “Complies,” “Complies but Needs Improvement,” or “Does Not Comply” will also be noted as part of advising any corrective action.

Summary and important next steps

The California Transparency in Supply Chains Act requires manufacturers and retailers to investigate the presence of human trafficking or slave labor in their supply chain. The law represents a big step toward more socially responsible business practices, and its effect can be felt worldwide.

So if this new legislature does affect you, how can you make sure you’re compliant? The answer is quite similar to ensuring that your company is socially compliant in general. Audit your suppliers to verify the absence of slave labor and human trafficking in your supplier chain. Professional firms can visit your suppliers and carry out audits specifically tailored to look for these types of issues. Some major companies, including Raytheon, have even gone a step further to comply with the California Transparency in Supply Chains Act by expanding its Code of Conduct to address these concerns.

The bottom line: California has deemed it a right of the public to know whether slave labor is used in the manufacturing of the products they consume. The best way for you to be certain and transparent about your supply chain is by carrying out an audit. So learn from the missteps of some of the United States’ largest clothing brands and don’t be caught off guard by poor labor practices.

First published June 30, 2015, on the inTouch Manufacturing Services blog.

About The Author

John Niggl

John Niggl is a client manager at InTouch Manufacturing Services, an American-owned company that provides solutions for quality and overseas manufacturing issues through product inspection and related quality control services.