Interview with Erica van Doorn, director en Ivo Spauwen, international verification coordinator at the Fair Wear Foundation
"By now we know why paying a living wage is necessary and what the components of a living wage are. It is time we start looking for smart, practical and effective ways to implement payment of living wages along the international supply chains. The main question that then rises is: how much does it cost to pay a living wage?
1. Why do you consider it important to include Living Wage in your supplier's code?
From the very start of the Fair Wear Foundation (FWF), the founding stakeholders agreed that a living wage needed to be part of our set of labour standards. Striving for living wages adds to the credibility of this unique multi-stakeholder initiative that was founded in 1999 by a consortium of trade unions, NGOs and companies in the garment industry. The FWF Code of Labour Practices is based on the ILO core conventions and the Universal Declaration of Human Rights - both of these normative frameworks include ‘the right to a just remuneration for a worker and his family'.
Payment of a living wage is needed because in so-called high risk countries the minimum wage - if existing and enforced at all - is not a decent living standard. At FWF we believe that a worker in these countries should be able to meet his and his families' basic needs by working a normal workweek under normal working conditions. This is not just fair - we also see that investing in workers will in the long run prove beneficial to a company. Workers are more productive and there is less personnel turnover which is a driver from a business perspective.
2. How is Living Wage implemented in your production process?
How is it calculated?
In the FWF Code of Labour Practices, a living wage is defined as a wage paid for a standard working week meeting basic needs of workers and their families and to provide some discretionary income. The highest standard is a collective bargaining agreement in countries where workers have the right to organise and bargain collectively. A key question is how to move forward in countries where this fundamental right is insufficiently secured through legislation and law enforcement. FWF's approach is to use various existing international benchmarks to set the living wage for a certain country or region. The Asian Floor Wage (AFW) is a good example of such benchmark. Additionally, we work closely together with local stakeholders and use their data.
We believe that a living wage cannot and should not be implemented top down. Ideally, local social partners have negotiated credible collective agreements. If these are non-existing and if there is no decent minimum wage either, we will start the process of collecting local opinions and data from key stakeholders such as trade unions, government agencies, universities, NGOs. These data are then made visible in our ‘wage ladder'.
The ladder graphically shows how paid wages relate to several benchmarks in a specific country (Figure 1). These benchmarks contain both existing figures, like the international poverty line, minimum wage and best practices among garment factories, as well as calculated figures as to what a living wage would be for the country (or region) in question. These calculations are made by government bodies, trade unions and/or NGOs.
For factories that are producing for our member companies, we highlight the position of their supplier(s) on the wage ladder. Depending on the position we advise on a strategy - the living wage benchmark in certain sourcing countries and particularly in certain sectors demands a long term approach. We find that in every sourcing country, whether in India, Thailand or Bangladesh we should research the specifics before advising on strategy. And every sector has its own dynamic too, the most feasible approach differs from one company to another - e.g. from a high street fashion brand to a more technical garments such as uniforms or sports apparel.
Figure 1: example of a wage ladder for a factory in China
How is it monitored?
FWF members are required to have a coherent monitoring system that provides insight in the labour conditions along the supply chain. The member company always announces the audit that is done by local teams. As a part of the audit interviews with workers are undertaken both inside and outside the factory. FWF's local teams resemble its multi-stakeholder DNA. In some countries they contain (former) NGO staff and former factory managers, which makes FWF's audit approach even more robust. The multi-stakeholder aspect of the team also minimizes the risk of auditor corruption. FWF checks the effectiveness of its members' monitoring system through random audits that are conducted at the factories that supply FWF members. If problems are noticed Corrective Action Plans are drafted mapping the steps to be taken to solve the issue. FWF verifies whether these plans are implemented, taking into account the complexity of the problems, the local situation and other factors.
Moreover, FWF implemented a complaint procedure that allows workers or their representatives in garment factories which supply members of FWF to make complaints about their working conditions and the way the code of conduct is implemented in these factories. In every country or region where FWF is active, we appoint a contact person to whom employees and other stakeholders can submit complaints. If a complaint is deemed admissible, FWF investigates. If the complaint is justified, FWF starts working on a solution together with the member company that produces in the factory concerned. When relevant, other companies, stakeholders or experts are involved. Complaint reports are made anonymous however they do specify which FWF member was involved in the process of following up on the complaint. All reports are published on the FWF website.
How does it affect the price?
This is the key question we are asking ourselves now - a question we are addressing in order to make the production process financially transparent and see where in the supply chain there is an opportunity for positive change in wages without jeopardising the business (relation). We are studying the relationship between price and wage more and more and act upon the outcome of these research projects. In a country like Vietnam the gap between price and profit of a garment is bigger than in a lower risk country. It is harder to think of smart solutions to make this supply chain more efficient so wages can go up. Recently we saw an interesting example with a FWF member company that was able to reduce costs on packaging and hereafter agreed with its suppliers to increase worker wages, this will be verified by FWF. We can also look at improving productivity. Either way, it is crucial that local management is transparent about their internal costing and wage payments, as well as willing to learn and improve.
During the update of the FWF living wage policy, we researched the impact that an increase in wage would have on pricing. In 2011-2012 FWF made living wage costing analyses for 10 factories in India, Bangladesh, China and Vietnam. Looking at the example of an Indian t-shirt factory FWF developed a hypothetical pricing model wherein living wages where paid. A €0.27 increase in salary costs translates to a €1.57 increase at retail in the particular supply chain studied. Ultimately, thanks to the practice of compounding escalation, a wage increase that represents less than 1% of the original retail price would actually cost the consumer more than 5% because other supply chain actors profit at a total rate that is many times greater than the gains for workers. Several questions arise from this case study which we are now addressing with our members. Most importantly, we are looking at how to ensure that workers take-home wages improve if our members implement better prices. FWF is now testing different approaches in Bangladesh and India.
We are eager to tackle the financial implication in a smart, practical and effective way. We believe that in most production countries there are possibilities to cover the wage increase by improving factories productivity. FWF is presently running a project in Macedonia on the linkages between productivity improvements and wage increases*. Moreover we are experimenting with methods for identifying the full cost of living wage increases, for example in a project to determine the impact of increasing wages on FOB and retail prices of backpacks and jackets*.
3. What are the obstacles for implementing a Living Wage?
We just talked about an important obstacle that we are currently addressing and continue to research: How much would payment of a living wage cost? We are gathering important data and discussing this with our members. If a company then decides on an appropriate strategy to pay living wages, the immediate question that follows is: how to make sure that the extra pay will actually reach the workers? Linked to this question is ownership: in what way do the workers want to receive additional compensation (salary, benefits or meals for instance)? Another is: what is a fair split among workers that differ in age, capacities and job levels?
Another obstacle we face is the lack of sound international data and benchmarks on living wage.
4. How does FWF tackle these obstacles?
We have an ambitious strategic plan laid out for the next 3 to 4 years. We want to be a cutting edge organisation in the field of living wage - meaning that we want to do more research on the financial aspects, how much does the payment of a living wage cost? We are pioneering in a research field that needs more attention than ever. Only by providing companies with hard data can we help them make the appropriate strategic decisions. The next step, as said, is starting pilot projects that aim to get the extra money to the right people.
In our work, we focus on sector and country specifics. Implementing a living wage is no one size fits all. We need to research the price dynamics of certain products or product groups.
On the benchmarks: we do not set benchmarks ourselves, but we do want to raise the issue and work on practical solutions. How can governments, NGOs, trade unions, universities and companies work together to make more data publicly available? How can we decide on a functioning performance system?
5. How can our EU conference help you, e.g. by presenting a living wage roadmap?
Our goal is to see real improvements in practice. We should stop discussing whether a living wage is needed and start focusing on ways to implement it as well as finding smart solutions that are supported on the ground. How can we make it happen? That should be addressed in a practical way at this conference. The road map could help if it addresses the right (financial) issues with key European stakeholders:
- How to improve the level of the existing wage benchmarks?
- How to get more insight in the impact of payment of a living wage increase on production costs, pricing along the supply chain, and retail pricing?
- How to make sure that the workers are actually receiving a living wage once a buyer has decided to pay more?
A road map process laying out the ambitions for the next 3 years will help to coordinate initiatives on a European level. Stakeholders should work together more and learn from each other. A coordinating platform will make data available for all. We strongly believe that it is now time for action on the global and local level. That means that we should focus more on the engineering part of the process and also on raising awareness with consumers and retailers. It is our pleasure to contribute to this European process.
* FWF is working on several projects that contribute to a practical framework for payment of living wages:
- Determining the impact of increasing wages on FOB and retail prices of backpacks and jackets.
- Linkages between productivity improvements and wage increases in Macedonia.
- Development of practical frameworks to ensure that workers benefit from price increases (on-going work in India and Bangladesh.
More information on the progress of these projects will be provided by FWF during the European Conference on Living Wage in Berlin in November 2013.
More information on Fair Wear Foundation can be found on their website: http://www.fairwear.org/
Nora el Maanni
Irina van der Sluijs
Berenschot, May 2013
 FWF Complaint procedure, 2009
 FWF living wage policy update: climbing the ladder to living wages, 2012.
 Collaborative pilot project with Fairtrade International and Max Havelaar Foundation Switzerland. Example cited in FWF living wage policy update: climbing the ladder to living wages, 2012.
Erica van Doorn