June 14, 2021

Volume XI, Number 165

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June 11, 2021

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New Labor Obligations Contained In USMCA Present Risks for Covered Employers

In effect since July 1, 2020, the United-States-Mexico-Canada Agreement (“USMCA”) replaced the North American Free Trade Agreement (“NAFTA”).  Although the worldwide COVID-19 pandemic largely overshadowed the effective date of this new international agreement, its new labor provisions should not go overlooked.  While the USMCA retains most of the NAFTA commitments, it revamped the old agreement in key areas — including labor.  Unlike NAFTA that included some labor commitments in a side agreement, the USMCA provides labor standards in the core text of the agreement (Chapter 23, Labor), making them fully enforceable.

The commitments on labor are not only relevant to manufacturers located in one or more of the USMCA countries but also companies that rely on these goods as inputs into their supply chains.  This article provides a broad overview of the labor standards contained in Chapter 23 of the USMCA — with a particular emphasis on the Facility-Specific Rapid Response Labor Mechanism.

Labor Standards in the USMCA

Article 23.3 of the USMCA requires that each party adopt, if applicable, and maintain laws that protect the following labor rights:

  1. The freedom of association and collective bargaining;

  2. The elimination of all forms of forced or compulsory labor;

  3. The effective abolition of child labor; and

  4. The elimination of discrimination in respect of employment and occupation.

The USMCA also requires each country to take measures to prohibit the importation of goods produced by forced labor, to address violence against workers who exercise their labor rights, to address sex-based discrimination in the workplace, and to ensure that migrant workers are protected under labor laws.

Indeed, as between these three parties, Mexico will likely be making the most changes to its laws and regulations in order to comply with its USMCA labor commitments.  To that end, Mexico enacted historic labor reforms on May 1, 2019, and is implementing transformational changes to its labor regime, including new independent institutions for registering unions and collective bargaining agreements and new labor courts to adjudicate disputes under the judicial branch that were previously part of the executive branch.

The Rapid Response Mechanism and the Rights of Free Association and Collective Bargaining

With respect to the rights of freedom of association and collective bargaining noted above, the novel Rapid Response Mechanism (“RRM”) allows persons in the United States, Mexico and Canada to lodge complaints against “covered facilities” when there is a good faith basis that workers are being denied the right of free association and collective bargaining (collectively, “denial of rights”).  Under the USMCA, a “covered facility” is a facility that either: (1) produces a good or supplies a service traded between the countries; or (2) produces a good or supplies a service that competes in the territory of a Party with a good or service of the other Party.[1]

From a U.S. perspective, at a high level, the RRM allows U.S. persons to file petitions on a public docket alleging the “denial of rights” by Mexican-covered facilities.  The petitions are reviewed by the Interagency Labor Committee for Monitoring and Enforcement (“Labor Committee”), which has 30 days to determine whether the petitions have “sufficient, credible evidence of a denial of rights.”  If the petition satisfies these criteria, a complex process ensues, which includes government-to-government engagement; possible inspections of the target facility; and the potential formation of a USMCA Panel to resolve the disputes.

During this process, the United States may suspend liquidation of goods entered by the facility subject to the complaint until:

  • a labor panel under the RRM determines there is no denial of rights;

  • a course of remediation for a denial of rights has been agreed to and completed within the agreed-upon timeframe; or

  • the denial of rights has been otherwise remedied.

A determination that there has been a denial of rights may be costly to facilities as penalties may include:

  • suspension of preferential treatment for goods manufactured at the covered facility;

  • imposition of “penalties” on the covered facility; or

  • denial of entry for such goods.[2]

Labor and trade experts predicted that the RRM would open the floodgates to a “flurry” of petitions against Mexican covered facilities.  However, to date, there have not been any petitions filed, even though certain labor organizations publicly announced their intention in 2020 to employ the RRM.  One potential reason why petitions have not yet been filed is that the “sufficient, credible evidence of a denial of rights” standard will likely require significant corroborating evidence to meet the threshold.  In other words, plain allegations of denial of rights will likely be dismissed by the Labor Committee.

Takeaways for Covered Employers

The following list of “best practices,” which is not exhaustive, should be considered by employers on both sides of the border seeking to reduce the likelihood that they will become USMCA enforcement targets.

  • Wage and hour audits, including issues of calculating workers’ overtime rate of pay, issues of meal and rest period compliance, and sufficient rest and recovery periods when working in heat, for example;

  • Equal Pay Act audits;

  • Updated employee handbook, to include clear written anti-harassment/discrimination policies to which employees agree to adhere;

  • Anti-harassment training;

  • Child labor law compliance; and

  • Health and safety compliance measures in the workplace, which have elevated in importance on both sides of border due to COVID-19.

[1] A covered facility must also be in a “priority sector,” such as sectors that manufacture goods, supply services, or involve mining.  Manufactured goods include, but are not limited to, “aerospace products and components, autos and auto parts, cosmetic products, industrial baked goods, steel and aluminum, glass, pottery, plastics, forgings, and cement.”

[2] This is the most egregious penalty and can be invoked if a covered facility has received at least two prior denial of rights determinations.

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 118
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Mario Torrico is an associate in the Government Contracts, Investigations, and International Trade Practice Group in the firm's Washington, D.C. office.

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