EL SALVADOR: HERMOSA MANUFACTURING CASE REMAINS

UNCLAS SAN SALVADOR 001013

SIPDIS

SENSITIVE
SIPDIS

STATE/DRL FOR GABRIELLA RIGG

E.O. 12958: N/A
TAGS: ELAB ES ETRD PGOV
SUBJECT: EL SALVADOR: HERMOSA MANUFACTURING CASE REMAINS
IN GRIDLOCK



1. This is an action request; see para. 7.


2. (SBU) SUMMARY: Hermosa Manufacturing Co., a Salvadoran
owned and operated apparel manufacturer, ceased operations in
May 2005, leaving more than 250 workers jobless and
liabilities of USD 825,000 in outstanding wages, severance
payments, and unpaid benefits. Hermosa was a sewing
subcontractor to an Adidas-Salomon supplier from 2000 until
mid-2002. Although the factory,s remaining assets appear to
be sufficient to satisfy both the workers, claims and bank
liens, there has been no progress in resolving the issue,
despite the good faith efforts of Adidas-Salomon in assisting
workers in seeking a solution with the Salvadoran
Presidential Commissioner for Governance. More Salvadoran
inter-agency coordination to solve labor problems is
necessary because these problems may undermine the investment
environment in El Salvador, particularly within the context
of CAFTA-DR. END SUMMARY.


3. (SBU) Owner and General Manager Salvador Montalvo opened
Hermosa Manufacturing Co. in 1992, located in a bonded
warehouse (DPA) in Apopa, North of San Salvador. At its
peak, Hermosa employed some 600 workers, and assembled 12,000
clothing items per day. It worked as a subcontractor to other
Salvadoran companies working for prestigious brands such as
Adidas, Nike and Puma. Citing problems relating to
contractual matters such as quality and delivery times,
Adidas withdrew from its contractual relationship with
Hermosa in the middle of 2002. The factory shut down
operations in May 2005, citing lack of raw material; 254
workers have yet to be paid USD 825,000 in back wages,
severance payments, and other benefits. Banco Cuscatlan and
Banco de America Central hold liens of approximately USD 1
million, but the factory,s remaining assets of approximately
USD 2 million appear sufficient to satisfy both workers,
claims and bank liabilities. However, neither the Ministry
of Labor (MOL) nor the Solicitor,s Office (PGR) enforced
Article 38, Section four of the Constitution, which specifies
that workers' compensation takes precedence over competing
claims, liens and liabilities. In meetings with
Adidas-Salomon and worker representatives, owner/manager
Montalvo communicated his desire to resolve the matter, but
failed to follow through with good-faith efforts to pay
workers. On many occasions, Montalvo,s attorney Oscar
Armando Mena appeared reluctant to look for possible
solutions, but did ask the Ministry of Labor to release
Montalvo from the travel restrictions placed on him due to
non-payment of social benefits to workers.

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CURRENT STATUS
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4. (SBU) Although not legally liable in any way to its former
client Hermosa, according to Salvadoran law Adidas-Salomon
has had numerous meetings with the Minister and Vice Minister
of Labor, Minister of Economy, Montalvo,s attorney, and the
workers, attorney. However, the involvement of the
Presidential Commissioner for Democratic Government was
necessary to set up a temporary settlement for former Hermosa
workers. Gloria Salguero Gross, the Presidential
Commissioner for Democratic Government, arranged a meeting
with the Presidential Technical Advisor, the Presidential
Legal Advisor, the Minister and Vice Minister of Labor and
the Minister and Vice Minister of Economy on April 4th. At
this meeting, the government stated that they could not pay
Hermosa workers for unpaid compensation using public funds,
but would continue to expedite several legal proceedings for
the Hermosa case. Currently, the labor tribunal is
considering 73 workers, cases; approximately 30 cases have
been ruled in favor of the workers (Hermosa,s owner has
appealed 17 of those cases) but because of the lack of
enforcement of the above-mentioned constitutional provision,
there are not assets available to pay the compensation
awards.


5. (SBU) The Salvadoran Government agreed to offer former
Hermosa workers two types of medical coverage: basic medial
coverage through the Ministry of Health (Unidades de Salud)
and additional coverage for serious medical illness through
the Salvadoran Institute of Social Security. Coverage will
be available for one year or until re-employment. The MOL
will send written notifications to former Hermosa workers
this week. Additionally, to address the allegations of
blacklisting, the government has scheduled a job fair in a
central exhibition hall in San Salvador for May 12-13, and
will ensure that unemployed Hermosa workers are given
priority for interviews and employment opportunities during

this event.


6. (SBU) The Ministry of Labor asserted it is in the process
of hiring 69 new labor inspectors, effectively doubling the
labor inspectorate, and the government agreed to send the new
inspectors to external training in the Guidelines of Best
Employment Practices, as the Guatemalans did in late 2005.


7. (SBU) ACTION REQUEST: Post requests that the Departments
of Labor and State representatives to the Central American
and Dominican Republic Labor Ministerial Conference to be
held in Guatemala City meet and discuss the Hermosa case with
Salvadoran Minister of Labor Roberto Espinal. Espinal has
agreed to meet with DOL and State representatives at 8:00am
on April 21st. Post suggests the following questions as
helpful to clarify a solution to this case.

- We are particularly interested in knowing the
Salvadoran Government,s plan to enforce the constitutional
right of precedence (Article 38, Section 4 of the
Constitution) for payment of back wages and benefits to
workers in the Hermosa case.
- If the Salvadoran Government is not going to enforce
the right of precedence, can it explain its reasons for not
doing so?
- What is the current status of legal proceedings against
the owner Salvador Montalvo Machado?
- We know the cases of 73 workers have been brought
before the Labor Tribunal, but there were more than 200
workers at Hermosa. What is the status of the other workers
and their claims?
- CAFTA-DR entered into force for El Salvador on March
1st, and Article 16.1 states that parties to the agreement
will reaffirm their obligations as members of the ILO, as
well as their own Constitutions. How is El Salvador putting
this provision into practice?


8. (SBU) COMMENT: Although the Salvadoran Constitution
codifies the protection of workers, there is a lack of
enforcement that undermines El Salvador,s credibility in
adequately protecting workers, rights. With CAFTA-DR in
force as of March 1 for El Salvador, an unresolved Hermosa
case could establish a bad precedent for Salvadoran labor
authorities, and damage the investment climate. The brands
involved have done a lot of good faith work to bring the case
to conclusion without resorting to the courts, but to date
have failed. This type of negotiation between buyers,
producers and workers can be extremely useful and under
CAFTA-DR several projects have been proposed to create
mechanisms for alternative dispute resolutions. However, the
Salvadoran business community and the government need to work
together to address these kinds of problems before they reach
the status of the Hermosa case.

Please visit San Salvador's Classified Web Site at
http://www.state.sgov.gov/p/wha/sansalvador/i ndex.cfm
Butler