ADIDAS OPEN LETTER SEEKS RESOLUTION OF LABOR CASE

UNCLAS SAN SALVADOR 002324

SIPDIS

SENSITIVE
SIPDIS

DEPT FOR DRL, USDOL FOR ILAB

E.O. 12958: N/A
TAGS: ELAB PGOV ES
SUBJECT: ADIDAS OPEN LETTER SEEKS RESOLUTION OF LABOR CASE



1. (SBU) Summary: Hermosa Manufacturing, a Salvadoran
owned and operated garment manufacturer, ceased operations in
May 2005. The closure resulted in more than 250 unemployed
workers and liabilities of USD 825,000 in outstanding wages,
severance payments, and unpaid benefits. The GOES has been
unwilling or unable to enforce laws which require the factory
owner to pay workers, claims. On October 29 Adidas Group,
frustrated by the lack of progress in the dispute, published
an open letter in the two leading daily newspapers asking the
Salvadoran government to take immediate steps to settle the
case. The Minister of Labor was upset at the negative
publicity. It remains to be seen if the letter will generate
the political will necessary to settle the dispute. End
Summary.


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ADIDAS GROUP PUSHES GOES FOR RESOLUTION
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2. (SBU) The Hermosa Company produced garments for Adidas
Group from 2000 to mid-2002 and then as a subcontractor to
Partex Apparel Group until mid-2003. Under Salvadoran law,
Adidas bears no legal liability in the dispute between the
former workers and Salvador Montalvo Machado, owner of
Hermosa Manufacturing. However, under the Adidas Code of
Conduct, the Adidas Group has made repeated efforts to
resolve this case, including participating in several
meetings with high level Salvadoran officials, including the
Minister of Labor and the Minister of the Economy. On April
4, 2006, Gregg Nebel, the head of social and environmental
affairs for Adidas, met with the Presidential Technical
Advisor, the Presidential Legal Advisor, the Minister of
Labor, and the Minister of the Economy. At that meeting the
GOES agreed to provide healthcare services to the workers
through the ISSS (the Salvadoran Social Security System) and
agreed to assist workers in finding other employment.
However, several workers have since been denied healthcare
services. Workers also claim that while the Ministry of
Labor arranged for a job fair, they were untrained or unable
to perform the positions offered. Workers reported that the
jobs offered included positions as pastry chefs and security
guards.


3. (SBU) On October 29, 2007, the Adidas Group published an
open letter to the Salvadoran government in La Prensa Grafica
and El Diario de Hoy. The letter asked the Salvadoran
government to take immediate action to resolve the case,
including implementing the April 2006 agreement to provide
the workers with healthcare services, to fund the workers,
ISSS accounts with the 145,000 USD fine collected by the
government in spring 2007, and to pursue the repatriation of
Hermosa assets that were disposed of before workers claims
were satisfied. The letter also alleges that the GOES failed
to follow and enforce Salvadoran law and took actions that
prevented the workers from finding new employment or making
formal claims against Hermosa. The Minister of Labor left a
message for LabOff saying that the letter was "outrageous8
because it criticizes his efforts to resolve the dispute.

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IN 2005, HERMOSA CLOSES AND OWES USD 825,000 TO WORKERS
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4. (SBU) In 1992 Salvador Montalvo Machado opened Hermosa
Manufacturing Co. in Apopa, north of San Salvador. The
Hermosa factory produced garments, as a direct supplier or
subcontractor, for numerous brands, including Adidas, Nike,
Russell Athletics, and Majestic Athletics.


5. (SBU) In May 2005, citing a lack of raw material,
Montalvo closed the factory and obtained a permit from the
Ministry of Labor to suspend commercial activities. The
closure resulted in the unemployment of over 250 workers.
When the factory closed workers were owed USD 825,000 in back
wages, severance payments, and other benefits. Banco
Cuscatlan and the former Banco Salvadoreno, now HSBC Bank,
reportedly held liens of approximately USD 1 million; however
the factory,s assets of approximately USD 2 million appeared
sufficient to satisfy both workers, claims and bank
liabilities. The Salvadoran constitution specifies that
workers, compensation takes precedence over competing
claims, liens, and other liabilities. However, neither the
Ministry of Labor nor the Public Ministry, composed of the
Attorneys, General Office and the Solicitor,s Office,
enforced the constitutional provision.


6. (SBU) According to a 2006 report by the Independent
Monitoring Group (GMIES),between 1997 and 2005 Hermosa did
not regularly pay Salvadoran Social Security (ISSS) quotas
that allow workers to obtain health care. Currently several
former Hermosa workers suffer from serious health conditions,
including cancer, but have been denied medical treatment due
to the lack of ISSS payments. The GMIES report also states
that Hermosa did not pay workers, pension quotas (AFP)
between September 2004 and June 2005.

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WHERE ARE THE ASSETS?
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7. (SBU) Although the factory,s assets were reportedly
sufficient to satisfy all claims in May 2005, the current
status of Hermosa assets is unknown. On October 26, LabOff
met with former Hermosa workers who provided official
documents that show Montalvo sold the Hermosa building to
Commercializadora Santa Teresa, a new company formed the same
month Hermosa closed, for USD 840,908.


8. (SBU) On December 8, 2006, the Third Sentencing Criminal
Court sentenced Montalvo to two years of prison and ordered
him to pay a fine of $144,724, which he paid with Hermosa
assets. Although the court initially prohibited Montalvo
from departing the country, it revoked that decision and
authorized Montalvo to travel to the United States on
December 12, 2006 to attend a family wedding and conduct
business on behalf of another apparel company, MB Knitting.
Montalvo owns 25 percent of MB Knitting, along with his wife
(35 percent) and Hermosa Company (40 percent). In a meeting
with LabOff, former Hermosa workers allege that assets
formerly located in the Hermosa plant have now been
transferred to MB Knitting. Workers said they intend to file
a criminal complaint against Montalvo for moving assets in
order to avoid fulfilling his obligations to workers.


9. (SBU) Comment: The case of Hermosa Manufacturing
highlights a number of the labor issues that we believe are
common in the maquila industry. The GOES has been unwilling
or unable to enforce labor laws that protect workers claims
when a factory closes. This provides strong incentive for
factory owners who are behind in payments to close down and
then reopen a few months later under a new name and with a
clean slate. In addition, the government fails to enforce
social security payments and, in this case, should have known
the owner was pocketing workers contributions. Hermosa
workers were unaware that their payments had not been
submitted until healthcare services were denied. The Hermosa
case is unusual because a handful of workers have continued
to press their claims even though the majority of workers
have moved on. Some of the women have chosen to continue
because they are terminally ill and have nothing to lose.
Unfortunately, while the Ministry of Labor is aware of their
situation, its actions could leave the impression that it is
content to wait them out. While the open letter from Adidas
did catch the government by surprise, it remains to be seen
if the negative publicity will generate the necessary
political will to address the workers claims. End Comment.
Butler