Analysis: The government has announced plans to cover workers’ severance, but is it the best solution to factory disputes?

Workers protest at the capital’s Benoh Apparel factory last month after returning from a work suspension to find the factory shuttered and the owners gone.
Workers protest at the capital’s Benoh Apparel factory last month after returning from a work suspension to find the factory shuttered and the owners gone. Pha Lina

Analysis: The government has announced plans to cover workers’ severance, but is it the best solution to factory disputes?

The government will begin to pay out of pocket for severance wages for labourers at abruptly shuttered factories whose owners have fled, effectively enacting a pro-worker policy without further burdening private businesses – albeit at the risk of discouraging good corporate citizenship, experts say.

The move was at the behest of Prime Minister Hun Sen and goes against the advice of several economists and labour activists, who have instead suggested a policy that would require companies to place deposits down before they open to discourage firms from fleeing without meeting their obligations to their employees.

The Labour Ministry is already set to pay a total of $4.6 million to workers at nine factories that were abruptly shuttered this year and whose owners absconded without paying their workers, according to ministry spokesman Heng Sour.

Prime Minister Hun Sen already approved the transfer of money from the Ministry of Economy and Finance to the Labour Ministry, after saying in a speech last week that latter ministry should “borrow” money to promptly pay laid-off workers, Sour said yesterday.

“With regards to the nine factories where the owners ran away, Prime Minister Hun Sen already provided the cash in advance,” he said. “This money will be brought to pay over 4,000 workers early next week.”

According to Article 116 of the Labour Law, an employer must pay any severance or indemnity pay to employees within two days of a contract being terminated.

But when a factory owner absconds, that legal requirement is rarely met. Instead, usually following a protest by workers, a local court often orders the sale of all the factory’s assets to pay the back wages.

However, the sale of assets often fails to cover the amount owed. The process can also take months, a serious problem for the majority of workers who live paycheck-to-paycheck and spend most of their wages on rent and food.

Ensuring workers get paid severance fits with the ruling party’s ongoing populist push to shore up support among garment workers ahead of July’s national elections, and paying the wages out of state coffers ensures that the impact on businesses is minimal, according to Miguel Chanco, lead Asean analyst at the Economist Intelligence Unit.

“Policymakers are probably wary that an additional cost burden could force some factories to reconsider their presence in the country, given the generally thin margins of the garment industry,” Chanco said in an email yesterday.

Even so, Chanco noted that while a social safety net system was necessary in Cambodia, a system whereby the government and private businesses shared responsibility would be preferable to an entirely state-run operation.

“If it was all down to the government, this would run the risk of creating moral hazard as businesses will have less of an incentive to act appropriately in such scenarios in the knowledge that the state is more than happy to clean up the mess they leave,” he said.

Ngeth Chou, a senior consultant at Emerging Markets Consulting, called the government’s plan a “temporary solution” and suggested a plan similar to the one described by Chanco, which Chou said would be more sustainable.

“In the long term, for prevention, the government needs to make sure that they create the strategy to prevent the investors from escaping easily, and deposit the right amount of the capital when they start business operations,” he said.

A scheme requiring deposits also has the support of labour rights groups. Esther Germans, program manager at Better Factories Cambodia, suggested a similar scheme last week, noting that “deposits of factories can be used to pay workers their missed wages, severance pay and indemnity payments when owners run away”.

Ben Gehrt, Southeast Asia field director of Workers Rights Consortium, backed the deposit scheme as well, saying that “money needs to be paid on a regular basis by factories and buyers into some kind of escrow account or public insurance scheme” in order to pay severances in the case of closure.

But Sour from the Labour Ministry rejected the deposit scheme yesterday, while also saying the ministry needed additional time to craft a policy.

“It’s not really the right solution,” Sour said, noting 98 percent of employers were following the Labour Law properly. “It may impact them, and to make one policy specifically to prevent this case requires time to discuss with our business partners.” He also noted that neighbouring countries do not have such a policy, potentially hurting Cambodia’s competitiveness, adding the “government is discussing the prevention strategy with stakeholders, but we need more time”.

Stephen Higgins, a managing partner at Mekong Strategic Partners, agreed that a scheme requiring deposits could spook potential investors in the country.

“Requiring companies to pay a deposit up front isn’t the solution, as it will only make Cambodia a less attractive investment destination,” he said.

He said it made sense for the government to provide a safety net for workers in these cases, pointing to Australia, which has a similar policy whereby the government covers some guaranteed wages and benefits if they were not fulfilled by a bankrupt company.

“[A] reality of life is that sometimes businesses go bankrupt and are unable to pay,” he said, adding that while the government should make it difficult for owners to flee, the payments to workers would not overburden the national budget.

Yang Sophorn, president of the Cambodian Alliance of Trade Unions, also suggested the government use its resources to prevent the factory owners from fleeing the country in the first place, noting the factory owners provided documents, addresses and passports when they first register a company.

“If they flee, the government must know very clearly that they need to catch that employer, either at the airport or any other border,” Sophorn said. “From my understanding, if they don’t want to let them go, they can always find them.”

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