In late November, a group of laid-off garment industry workers in Indonesia collected more than US$ 4 million in severance pay owed to them by their employer. It was a rare victory, won with the help of local labour unions, international advocacy groups and major retailers like Nike. But it may not happen again: The government there is moving forward with a controversial plan to roll back labour protections in the hope of attracting more foreign investment.
In November 2018, a factory in West Java that was producing sportswear for Nike and other international retailers shut down, leaving 2,000 workers without a job. Under Indonesia’s generous severance laws, most of the workers should have been eligible for 18 months worth of severance pay, equal to about US$ 4,000 each.
Instead, Hojeon, the Korean company that operated the factory, paid out only half that amount, according to an April report by the Washington-based advocacy group Workers Rights Consortium (WRC), which was contacted by the unions for the factory workers to investigate the situation.
That report kicked off months of negotiations between labour unions, WRC, the Korean company Hojeon, Nike and other retailers that purchased apparel from the factory. (The government was not involved because unions made a decision not to pursue legal action against Hojeon, which they feared would result in a lengthy court battle, according to the WRC report).
In August, Hojeon agreed to pay all of the overdue severances, which added up to more than US$ 4 million. The workers collected their final round of payments last month.
Generous … But For How Long?
The victory comes at a charged moment for Indonesia’s garment industry. On paper, the country has some of the world’s most generous severance laws, according to the World Bank. Generous severances are commonly mandated in many countries, like Indonesia, that lack reliable unemployment insurance and other social safety nets, in effect shifting the burden of supporting unemployed workers from the government to the private sector. Other top severance countries include Mozambique, Sierra Leone and Sri Lanka.
But in practice, those requirements are often not enforced, researchers and advocates say. Indonesia’s garment industry has had a checkered history of wage theft and other abusive practices, including withholding severances. And whether worker protection requirements are followed or not, they’re poised to get weaker: The government plans to finalise an overhaul of labor regulations by early January.
The overhaul is expected to reduce severance requirements, potentially reduce the minimum wage and make it easier and cheaper for companies to rely on temporary contract workers, says Indrasari Tjandraningsih, a professor of industrial economics at Parahyangan Catholic University in Bandung, Indonesia.
At an economic forum in late November, finance minister Sri Mulyani Indrawati told Reuters the rationale for the changes: “The existing labour market really is not creating easy job creation for new entrants.” Pro-business labour reforms were a key campaign platform for President Joko Widodo, who was re-elected this spring, but those reforms also drove a series of massive protests by students and workers this fall.
Against that backdrop, the severance payments can be seen in two different lights. They are a sign of progress – labour advocates and unions were able to leverage the fact that Nike and other Western garment retailers are under increasing consumer pressure to clean up labour abuses in their supply chains. Yet they could be the last hurrah of the sky-high-severance era.
“This is a very rare case, and it could become a reference point for labour unions to fight harder for their interests,” Tjandraningsih says. “But I’m not very optimistic, because the government is keen to have more investment, even at the expense of workers’ welfare.”
A Worker’s Plight
In paperwork filed in June 2018 to the government, Hojeon cited a decline in orders from Nike as its main reason for closing the factory. In a statement, Nike spokesperson Sandra Carreon-John said the company “conducted a responsible exit … and ended our business relationship with the Hojeon supplier group” but declined to elaborate on why.
But over the next few months, many workers were pressured to sign resignation letters, which would allow Hojeon to pay a much smaller severance. According to the WRC report, many employees faced “a campaign of coercion and deception” by the company – and eventually, many of them relented and “resigned.”
Jay Park, Hojeon’s CEO, declined to comment for this story.
“The workers had a real fear that if they didn’t take the resignation the company was offering, that the company would ultimately refuse to pay them anything,” says Jessica Champagne, WRC’s deputy director for field operations and strategy. “Or that [the company] would lock the workers in legal battles that would continue indefinitely or just disappear.”
How The Customers Reacted
In a response to WRC’s April report, Hojeon denied violating the law and said the resignations it collected from workers were legitimate. But that argument didn’t hold up after WRC shared its findings with Nike, Fanatics and other factory customers as well as its coalition of 156 US universities that have committed to improving labour standards in their athletic apparel supply chains, including Harvard and the University of California system. The companies put pressure on Hojeon to pay up.
“Since that time we have been supportive of the efforts taken by the WRC and current buyers to ensure that Hojeon meet its legal obligations to workers,” Nike spokesperson Carreon-John said.
Meier Raivich, a spokesperson for Fanatics, issued a statement to NPR that “when we were first made aware of potential serious labour rights allegations, we launched our own investigation and collaborated closely with the WRC to strongly encourage Hojeon’s leadership to accept WRC’s recommendations.” (WRC’s Champagne confirmed that Fanatics “very quickly understood what was happening and told Hojeon that they needed to make workers whole.”)
Kim Elliot, a trade policy fellow at the Center for Global Development, says that using third-party factories like Hojeon to produce products allows companies like Nike and Fanatics to take a public stand against labour abuses but avoid any financial responsibility.
“What you find is that firms respond when they’re faced with a scandal,” she says. “But there’s very little evidence that they’ve changed their overall behaviour. Western garment companies don’t usually raise their prices in order to provide higher wages or severances. They just put pressure on the suppliers.”
The Debate Over Generous Severance
Gordon Betcherman, a global labour economist at the University of Ottawa, says that high severances, while they might look beneficial on paper, are a fundamentally flawed way to compensate unemployed workers. “It imposes a burden on employers at exactly the time they may not have the cash to make the payments,” he says. “Economists tend to agree that government-backed unemployment insurance is a better way. But in low- and middle-income countries we recognise that unemployment insurance may not be realistic. So severance may be the only thing that works.”
In any case, by August 2019, Hojeon capitulated. At the end of November, workers received full severance. Is the government justified in its concern that severance payouts like this are ultimately bad for the Indonesian economy? Elliot says that assumption is common among economists at global financial institutions like the World Bank, but that the real-world evidence is inconclusive.
“There have been battles for years over this idea that any regulation is worse for business,” Elliot says. “But that’s a very simplistic approach. If labour regulations raise productivity by encouraging factories to train and retain experienced workers, then it’s good for both the firm and for the worker.”
In a September review of labour regulations in two dozen low- or middle-income countries Betcherman published in the journal IZA World of Labor, he found evidence that raising the minimum wage had a job-killing effect in some countries, including Indonesia. He also found that stringent hiring and severance requirements may in some cases actually reduce worker protection by driving more workers into unregulated, informal workplaces.
But overall, he added, “the effect of labour regulations is often really overblown on both sides”: They don’t restrict growth as much as some business leaders like to claim nor do they necessarily protect workers (especially since the regulations often go unenforced).
Tim Bartley, a labour sociologist at Washington University in St. Louis who has worked in Indonesia, says the country is keen to position itself to benefit from the Trump administration’s ongoing trade war with China. In order to evade US tariffs on Chinese-made goods, some Chinese manufacturers are outsourcing some of their production to Vietnam and other Asian countries. “There’s a lot of hand-wringing in Indonesia about why more of those companies aren’t coming there as an alternative to China,” Bartley says.
Still, in his opinion, the government plan to remove worker protections as a way to compete just puts Indonesia in a race to the bottom. “They’re just trying to keep up with the lowest sets of labour standards that we have,” he says. “But to remove this piece of the safety net would be devastating.”