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Outsourcing by multinational companies can unwittingly lead to child labor and human rights abuses, harming the company’s reputation and bottom line. RECENT ALLEGATIONS of improper worker conditions at foreign factories making products for companies like Microsoft and Dillard’s department stores highlight the challenges multinationals face when outsourcing.

“This is a global problem; it needs global solutions,” said U.S. Ambassador-at-Large Luis CdeBaca during a recent webinar on the issue hosted by law firm Steptoe & Johnson LLP. CdeBaca directs the State Department’s Office to Monitor and Combat Trafficking in Persons.

“The reality of a person who is being held in forced labor is eerily similar whether it’s in a shrimp processing factory somewhere in the Mekong subregion or whether it’s in a factory or a farm here in the United States,” he said. “What governments need to do to ameliorate it and what civil society can do to join in is remarkably similar throughout the world.”

In the United States, the Trafficking Victims Protection Reauthorization Act (TVPRA) of 2008 lowered the proof requirement standard for sex trafficking and other forms of forced labor. The government used to have to prove that someone knowingly engaged in a violation and benefited financially; now, prosecutors need to show only that the defendant acted in reckless disregard of the fact that such means would be used.

Last year the Department of Labor’s (DOL) Bureau of International Labor Affairs (ILAB) released its initial public list of goods believed to be produced by forced or child labor in violation of international standards. The list, which was required by the TVPRA, sorts the risks by country, type of goods, and whether the goods were produced with child labor, forced labor, or both. The ILAB found 122 goods in 58 countries were produced with one or both, ranging from strawberries, clothing, and tobacco in Argentina to cotton in Uzbekistan. The list will be updated periodically as new information becomes available.

The revised law also makes companies civilly liable, CdeBaca said. “With the DOL list, especially, putting companies on notice about particular products in particular countries, the reckless disregard standard is particularly appropriate to talk about,” he said.

Human rights cases against multinational companies doing business overseas have increased sharply in the past 10 to 15 years, said Jonathan Drimmer, head of the business and human rights practice at Steptoe & Johnson. There are approximately six to 10 new cases filed against companies a year, and about 20 percent of these have a labor component, he said.

While most cases are dismissed because of jurisdiction, some have resulted in large settlements, like the $30 million Unocal Corp. agreed to pay in 2005 to settle suits relating to forced labor allegations in the construction of a pipeline in Burma and the $20 million several U.S. retailers paid in 2002 to settle allegations of abuses in factories in Saipan.

CdeBaca and Drimmer agreed that one of the biggest risks for companies is brand protection and reputational harm. Accusations of “human rights abuses is a terribly dramatic thing,” Drimmer said. “The reputational harms are truly huge, and that is not only if you’re being accused of committing human rights violations directly but also if your suppliers or people acting on your behalf are doing it.”

Such reputational harm can drive down market share and drive away institutional investors or cause them to divest, which could also affect consolidations, acquisitions, or financing.

Drimmer recommended that companies conduct a country-by-country risk assessment of manufacturing and other operations to determine the level of labor-related controls and consider whether they need to be strengthened. He also emphasized the importance of examining relationships with third parties, looking at what they are doing on the company’s behalf, and how they are doing it.

CdeBaca pointed to New York University (NYU) as an example of an organization that is taking the risks presented by third parties seriously. The university recently amended its contractual requirements for all companies involved in the construction and operation of the NYU Abu Dhabi campus on Saadiyat Island. Among other provisions, the contract requires that employees be allowed to keep in their possession personal documents like passports and driver’s licenses, that they work no more than eight hours a day, five days a week (or six days a week for those working in construction), and that overtime be voluntary and compensated at premium rates.

Drimmer outlined the components of a successful compliance program, including good training and internal reporting as well as contract provisions with third parties that allow for audit rights, conducting due diligence, and vetting of third-party staff.

Once organizations do put a compliance program into place, Drimmer said, they need to test it repeatedly. Testing the program may involve hiring an independent firm to carry out audits. “It’s not enough to have a compliance program,” he said. “It’s not enough to put something on the books. It needs to work; it needs to be functional.”