Why competition law shouldn’t stop collaboration on living wage

Anne Lally, Living Wage Specialist working with Fair Wear Foundation

New legal guidance shows the way ahead for collective corporate action on living wage.

At a recent living wage conference, a number of garment brands came together with trade union and NGO representatives and hatched a plan for innovative collaboration to raise wages in garment factories.  The enthusiasm in the room was palpable.  At some point in the plenary, however, it was pointed out that such collaboration among garment competitors represented a real risk with regard to anti-trust, or competition, law.  No one in the room was a competition lawyer, and the threat was undefined.  Yet it was clear that many in the room – particularly company reps – perceived this as a very real obstacle to moving forward.

For more than a decade, I’ve been party to living wage discussions similar to this one. Concerns about competition law run deep – and with good reason. Competition law violations can lead to expensive fines or even criminal sanctions. According to Mark Held, Executive Director of the European Outdoor Group and a member of FWF’s Board, ‘There is a conventional wisdom among outdoor and sports companies – and probably most garment companies – that you don’t go near anything that could be misconstrued as a violation of competition law.’.

The impact for living wages in the garment industry is real. Collaboration is needed to raise wages in the garment industry.  This is because most garment production takes place in shared facilities, where a single factory produces for numerous brands.  So generating the funds to cover the costs of increased wages requires support from various garment brands. But agreement among competitors on anything related to costs is, intuitively, a no-no. 

Yet, despite the chilling effect of this intuition, it is surprising that no published legal analysis on competition law and living wages exists. What are the laws that apply in the context of brand collaboration for improved wages?  Is it possible to work within the bounds of those laws to raise wages collectively? Fair Wear Foundation (FWF) approached globally-recognised law firm Arnold & Porter with this legal quandary in the context of European competition law.  They took us on as a pro bono client.

FWF recently published Arnold & Porter’s legal opinion – as well as some practical legal tips for companies seeking to move forward to raise wages collaboratively. 

So does collaboration to raise wages in garment factories actually present a legal risk to European garment brands?

The upshot of the legal advice is: No.

At the same time, companies should take some key precautions.  For those working in this area, it is worth reading through the tools themselves.  But from where I sit, there are a few valuable handles Arnold & Porter have offered those of us working on wages.

1. The intuition that garment companies have to avoid sharing information about production costs actually does align with the objectives of competition law.  But there is room for manoeuvre. FWF’s approach focusing on labour minute costing offers a methodology for targeting wages without affecting the price of other production inputs, like material costs and time required to produce particular garments.  Because each brand designs its product differently, the time required to make each product – along with materials inputs – will differ.  Brands’ negotiating position varies too, depending on factors such as the size of the order or the length of the buying relationship.  This diversity means that collaboration to raise wages does not impede companies’ abilities to compete against each other.

To protect this kind of diversification, companies must limit discussions to wage levels or labour minute costing.  Brands should not share information about any other costs  – whether at the factory level or down the supply chain (e.g. transport and agent fees).

2. Concerns among garment brands about the potential impact of shared living wage efforts for consumer prices also align with the spirit of competition law. Competition authorities do not like to see companies working together to raise prices, and FWF’s own work on costing living wages illustrates how paying more to ensure living wages can spell significant retail price increases.  This is due to what FWF has dubbed ‘compounding price escalation’ – a prevailing practice in the garment industry. In its research, FWF predicted consumers would pay $9 USD more for a hypothetical jacket after wage increases, even though living wages only involved a per product increase of $1.40 USD.

A&P have explained that the practice of compounding price escalation – or cost plus/ad valorem pricing, as it is known in legal circles – is problematic and highly inefficient.  Yet this practice is not automatic or unavoidable in garment supply chains.  A garment brand collaborating to raise wages may always opt to absorb part or all of the costs of higher wages.  Or the brand could work to change the pricing methodology in their supply chains.

The key point here is that living wage arrangements among brands do not in themselves lead to higher prices for consumers.  So we can proceed, placing this perceived legal risk to the side. 

3. It is also encouraging to learn that competition law actually supports labour experts’ advice that raising wages through collective bargaining agreements is best.  CBAs offer increased wages that are more scalable and sustainable – since wage levels (or, for FWF, labour minute costs) can be negotiated by all involved parties and are monitored by the workers themselves. Interestingly, from a competition law perspective, CBAs also offer further protection against competition law enforcement.  They are treated by the European court as being outside the scope of competition law because they are designed to achieve social and not economic objectives.  FWF sees this as yet another argument in favour of brand-factory-trade union CBAs – at the level of the factory or sector – to raise wages. 

Raise wages. Now.

This new guidance on competition law and living wages represents a significant step forward: We now know the rules of the game.  And what’s clear – and exhilarating – is we have real room for manoeuvre. 

So let’s return to those inspiring plans for collective action on living wages.  The path ahead seems more straightforward than ever: Start raising wages now.  The rest will follow.

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Access FWF’s competition guidance for companies, Arnold & Porter’s opinion and other valuable living wage resources on FWF’s Living Wage Portal