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Modern slavery and its impacts on franchising


Published:

Philip Zeidman

Illustration by Jonathan Hankin

There is no shortage of outrages in today’s world, surely more than enough to keep us in a state of near constant anger and revulsion: the bombing of innocent civilians, not infrequently by their own rulers; rampant disease, allowed to become epidemics by indifferent or incompetent political leaders; and crimes against humanity so ubiquitous that we become inured to the fleeting reports of them on the nightly news.

One which captures much less attention is modern slavery, conduct which seems so far removed from our daily lives that even the insertion of the word “modern” cannot save it from conjuring up images of a distant practice, far removed from 21st century America. But it is neither so far away nor so long ago.

The accepted definition is the use of force, fraud or coercion to compel a person to do or provide certain things (labor, services, sexual acts) against his or her will. Encompassed within this broad umbrella are slavery, servitude, forced or compulsory labor, and human trafficking.

And what does that set of distasteful and unsavory practices have to do with us? How does it even make an appearance in our sanitized existence? More often, and more pervasively, than you might think.

First, it is truly widespread. While the regions where it is most common are Africa and the Asia-Pacific, there is no country invulnerable to it, including the United States. Although women and girls are disproportionately the victims (99 percent in the commercial sex industry), men are victimized to almost the same degree in other types of forced labor. And, sadly, it is a growth industry, ranking behind only drug dealing and arms trading in the growth of criminal enterprises. Because of its higher profits (estimated annually at $150 billion) and lower detection, a recent report prepared for Liberty Shared, a nonprofit human rights organization based in Hong Kong, says it “is one of the great criminal threats of our time, and it infects many of the industries we use in our daily lives.”

Does that still sound distant from our lives and our businesses? That may not be the case, and certainly less so than ever. A wide range of legal initiatives is increasingly moving against this conduct, and not only arising from bodies such as the United Nations. In California, for example, companies of a certain size are required to report on their efforts to prevent slavery and trafficking within their supply chains; and, if after a successful injunction by the state attorney general a company has failed to do so, it is subject to an unlimited fine.

Quite apart from the potential for legal and regulatory action, the very real risk of reputational damage is clearly a concern for affected businesses. But what businesses are those? And where does franchising become relevant? The most directly affected industry is almost certainly hotels. That segment is probably the most international of all industries in which franchising is prevalent, with most chains striving to place their footprint in virtually every country in the world—and with many of those countries ones in which these practices are present and the rule of law much less honored than in the developed world. The report cites three examples:

•  The use of hotels as a convenient place where victims can be exploited, or through which they can be moved by traffickers.

•  Victims in housekeeping or other lower-skilled roles, frequently recruited or subcontracted by exploitative agencies. The use of extortionate fees and confiscation of passports is  an effective way to preserve what is essentially bondage.

•  Some of these and other practices employed at numerous points in the supply chain which services the hotel

Lest one think this sordid pattern is found only in the dank undergrowth of some developing countries, it is estimated that annually there are more than 1 million victims in Europe, including almost 100,000 sex slaves and almost 5,000 victims of forced labor exploited in hotels. Considering the large and growing share of the hospitality industry in Europe which is controlled by franchised hotel chains, most of them U.S.-based, one can begin to grasp the danger to hotel franchising. In the U.S. itself, while the 20-year-old Victims of Trafficking and Violence Protection Act contains in its 82 pages no reference to hotels, a tentative step in the direction of regulation is advancing in legislation to direct U.S. government employees not to patronize hotel chains unless they subscribe to efforts to stop human trafficking.

How are franchisors to deal with the risks this poses to an industry so exposed—perhaps uniquely so—as is the hotel industry? First, as might be expected, is extensive due diligence. Beyond those types of investigations, the franchise agreement itself, of course, is the prime instrument through which steps can be taken to limit the franchisor’s liability. This will entail extensive warranties and representations as to compliance with existing national and transnational statements of principle.

But it is when the franchisor wishes to go further, seeking to protect itself by providing for enforcement of these undertakings, requiring extensive disclosures of problematic incidents, and establishing the right to terminate or take other disciplinary action, that matters get dicier. All of the legal complexities with which U.S. franchisors have been grappling—vicarious liability, joint employer—will be on full display in the context of modern slavery and the effort to prevent it and avoid liability for it. Franchisors engaged in international hotel expansion (which means essentially all of them) through franchising (which means essentially all of them) will be treading in this quicksand until national legislation or an international treaty sets out clear rules. One hopes those rules will be manageable; we will be closely following the efforts to establish them.

Philip Zeidman is a partner in DLA Piper’s Washington, D.C., office. Reach him at 202.799.4272 or philip.zeidman@dlapiper.com.

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