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Basics of a Social Compliance System

Learning Objectives

  • Understand the key components of a social compliance system and how they fit together.
  • Become familiar with industry or cross-industry social compliance programs that may be available to you.
  • Begin to define the scope of your social compliance system.
  • Understand the personnel requirements for a strong social compliance team.
  • Recognize the management systems that will make your social compliance system successful.

Key Terms

Corporate Social Responsibility (CSR)—A broad concept intended to cover how companies integrate social and environmental concerns into their operations and their interactions with stakeholders aside from legal requirements. Many other terms are also used to address such actions, including the “triple bottom line,” sustainability and corporate citizenship. “Corporate accountability” is a term often used to reference companies’ actions that are more closely linked to legal requirements.

Social Compliance System—One component of a company‚Äôs broader CSR, sustainability or accountability program. ¬†A social compliance system is an integrated set of policies and practices through which a company seeks to ensure maximum adherence to its code of conduct.

Supply Chain—The chain that is comprised of all organizations and individuals involved in producing, processing, trading, transporting and/or distributing a product or commodity from its point of origin to the company and/or to the final retailer.

Before using this toolkit, it is important to familiarize yourself with the basics of a social compliance system.  The links below can assist.

  • Model of a Social Compliance System
  • While systems may vary from industry to industry, a good social compliance system in any industry includes eight components, functioning in an integrated way.

    Although the steps below are numbered for ease of understanding, social compliance is an iterative and ongoing process. Companies may choose to proceed through these steps in a different order, and typically should not expect to complete one step before undertaking another. At the same time, a system without all components‚Äēfor example, an auditing system that operates in isolation from communication and training, remediation and other measures‚Äēis very likely to not be sufficient to address challenging social issues that can arise in global supply chains.

    1. Engage stakeholders and partners
    2. Assess risks and impacts
    3. Develop code of conduct
    4. Communicate and Train across your supply chain
    5. Monitor compliance
    6. Remediate violations
    7. Independent Review
    8. Report performance

    It is important to note that most robust social compliance systems are designed to address the fundamental labor standards identified by the International Labor Organization (ILO)‚Äēcovering freedom of association, collective bargaining, employment discrimination, child labor and forced labor‚Äēas well as other labor standards such as occupational safety and health, wages and hours of work (see Step 3 : Develop a Code of Conduct for further information on these ILO standards).

    This toolkit provides guidance for comprehensive systems, but focuses in particular on child labor and forced labor, consistent with the mandate provided to ILAB under the Trafficking Victims Protection Reauthorization Act (TVPRA) of 2005.

  • Joining an Existing Social Compliance Program
  • In some industries, groups of companies have already come together to develop joint social compliance systems‚ÄĒor in some cases, system components‚ÄĒthat individual companies can adopt.¬† Joining such networks usually entails a commitment of time and resources to collaborate with other companies, but ultimately may save effort by capitalizing on other companies‚Äô insights and experiences.¬† It is important to learn about the initiatives that exist in your industry before deciding to either join an existing program or develop your own.

    Example in Action

    Better Work Program in the Garment Industry

    The Better Work program, a joint initiative of the International Labor Organization (ILO) and the International Finance Corporation (IFC), is designed to improve labor practices and productivity in the apparel sector.¬† Better Work is a transparent factory monitoring program conducted by a credible monitor (the ILO) in participating countries.¬† The ILO‚Äôs locally recruited enterprise advisors visit factories to assess compliance with core labor standards‚ÄĒon freedom of association and collective bargaining, employment discrimination, child labor and forced labor‚ÄĒas well as national laws on compensation, contractor and workplace relations, occupational safety and health, and working hours.¬† Better Work makes these assessments public, enabling international buyers to direct their orders to factories making compliance improvements.¬† The program also provides advice and remediation assistance to firms to improve their compliance.¬† Better Work is structured to align the incentives of factory owners, buyers, governments and workers more effectively in order to protect rights and improve livelihoods.¬† The U.S. Department of Labor is a major funder of Better Work programs in several countries, along with USAID and several other donor governments and institutions.

    Learn more about Better Work.

    Most industry associations have a basic set of requirements for any company wishing to join.  For instance, the Electronics Industry Citizenship Coalition has adopted a set of Key Performance Indicators (KPIs) against which members must report.

    Whether or not there is a group within your industry, you may also wish to explore social compliance systems that span multiple industries.  One such program is the Ethical Trading Initiative (ETI).  Through consultation with trade unions, non-governmental organizations (NGOs) and corporate members, ETI developed the ETI Base Code.  Companies that join ETI must adopt this Code and agree to ETI’s Principles of Implementation. Companies then receive tools, training and access to ETI’s global network for support in tackling on-the-ground compliance issues.   For more information, see ETI’s toolkit.

    Step 1, Engage Stakeholders and Partners offers many more examples of collaborative programs and initiatives you could opt to join.

  • Defining the Scope of Your Social Compliance System
  • Today, around the world there are roughly 80,000 transnational enterprises and ten times as many subsidiaries.¬† Most U.S. companies doing business globally contract with vendors, agents and/or producers abroad rather than owning production facilities overseas.¬† Moreover, few companies market or sell a single product line, and many deal in hundreds if not thousands of products.¬† Companies‚Äô supply chains are long and complex, with a large number of links from their immediate suppliers back to the farms or mines where raw materials are sourced.

    For most companies, a social compliance system that enables oversight and control over every actor in every supply chain may be challenging.  At the same time, it is fundamentally important that your company not only avoids causing or contributing to child and forced labor though your own activities, but also seeks to prevent or mitigate adverse labor rights impacts linked to your business operations through business relationships.  Step 2, Assess Risks and Impacts, describes due diligence processes you should put in place in order to identify such abuses and impacts.

    Ideally, your compliance system should be designed to prioritize those areas of your supply chains where the risk of egregious labor abuses is most significant, whether due to the operating context, the products or services involved, or other relevant considerations.  By necessity, you may also need to prioritize those areas of your supply chains where your company has the greatest leverage to effect meaningful change.  Step 2, Assess Risks and Impacts, will also help you identify those points of greatest risk and leverage.

    As noted below, recent guidance from international institutions has directly addressed the issue of supply chain responsibility—clarifying that companies must take responsibility for human and labor rights abuses in their supply chains.¬† Specific responsibilities may vary depending on the severity of problems in the supply chain, the extent to which your company is directly causing or contributing to a problem, your company‚Äôs leverage to influence supplier behavior, the nature of the business relationship between your company and the supplier in question, size of the company/supplier, and other factors.

    In Their Own Words

    International Institution Guidance on Supply Chain Responsibility

    “Where business enterprises have large numbers of entities in their value chains it may be unreasonably difficult to conduct due diligence for adverse human rights impacts across them all. If so, business enterprises should identify general areas where the risk of adverse human rights impacts is most significant, whether due to certain suppliers’ or clients’ operating context, the particular operations, products or services involved, or other relevant considerations, and prioritize these for human rights due diligence.”

    “The means through which a business enterprise meets its responsibility to respect human rights will be proportional to, among other factors, its size. Small and medium-sized enterprises may have less capacity as well as more informal processes and management structures than larger companies, so their respective policies and processes will take on different forms. But some small and medium-sized enterprises can have severe human rights impacts, which will require corresponding measures regardless of their size. Severity of impacts will be judged by their scale, scope and irremediable character.”

    Source:  United Nations Guiding Principles on Human Rights and Business, 2011.

    “‚Ķ [In] complex situations where an enterprise has not contributed to an adverse human rights impact, but that impact is nevertheless directly linked to its operations, products or services by its business relationship with another entity, ‚Ķ the enterprise, acting alone or in co-operation with other entities, as appropriate, [should] use its leverage to influence the entity causing the adverse human rights impact to prevent or mitigate that impact. ‘Business relationships’ include relationships with business partners, entities in its supply chain, and any other non-State or State entity directly linked to its business operations, products or services.”

    Source:  OECD Guidelines for Multinational Enterprises, 2011.

    “The International Finance Corporation (IFC) requires that enterprises receiving IFC loans meet eight Performance Standards on environmental and social issues. Performance Standard 2 lays out enterprise responsibilities with respect to labor and employment issues. With respect to their own employees, enterprises are responsible for identifying and remediating problems related to all core labor standards. With respect to contracted workers, the enterprise’s responsibility is more limited, and with respect to workers in its supply chains, enterprises are only responsible for identifying and remediating child labor, forced labor and significant safety problems. The IFC defines “supply chain workers” as “workers engaged by the [enterprise’s] primary suppliers‚Ķprimary suppliers are those suppliers who, on an on-going basis, provide goods or materials essential for ‚Ķ core business processes‚Ķ”

    Source:  IFC Performance Standard 2, 2012.

  • Management Systems
  • Like any successful business unit, the social compliance management team should have management systems that are integrated into the overall systems of the company, rather than existing in a silo separate from other business operations.¬† Many management system elements‚Äēsuch as risk assessment, communication plans, information systems, grievance and complaint mechanisms, and independent verification‚Äēare the subject of this toolkit and are covered more comprehensively in different sections.

    Managing any system or program should start with setting goals, objectives and targets for performance.¬† Many social compliance programs establish metrics, or Key Performance Indicators (KPIs), against which to measure progress.¬† KPIs can be developed internally, or as part of a benchmarking exercise to compare against other companies’ programs.¬† Once set, the team should periodically check progress against those targets or indicators, and address areas where they have not been met.¬† The team should also periodically review its processes and policies and update them as needed.¬† Companies with strong social compliance systems are always in “continuous improvement” mode.¬†

    In Their Own Words

    “Much will be learned in the process of beginning to implement the strategy and engaging with member enterprises, with government and with the range of other stakeholders‚Ķ. ‘learning by doing’ is not only a valuable principle that is used to guide workers and enterprises in increasing productivity. It is also a principle to be followed by employers’ organizations in the process of supporting the elimination of child labour.”

    Source:¬† International Labor Organization and International Organization of Employers, Eliminating Child Labour Guides for Employers: Guide Three: The Role of Employers’ Organizations in Combating Child Labour, 2007.

    At a practical level, the management team should ensure that it has documented all of the functions of the social compliance system.¬† This documentation should include written policies and procedures for all components of the system, as well as communication protocols. It should also include documents for distribution to other units of the company‚ÄĒfor example, a summary of the provisions of supplier contracts with respect to their social compliance obligations is likely to be very useful for the sourcing department.¬† The team‚Äôs documented policies and procedures should have approval and buy-in from senior management.

    The team leader should assign responsibility for various program elements to team members in writing, and hold them accountable for performance through standardized assessment processes.

  • The Social Compliance Team
  • In multinational companies, the social compliance team is typically comprised of both a management team, based at headquarters, and a field team, based in countries from which products are sourced.

    Corporate structures vary widely, but a social compliance team is often part of a larger corporate social responsibility (CSR) or sustainability department within the company.¬† The hallmark of the most successful social compliance/CSR teams is that they have a direct line of communication with high-level decision makers, including the CEO and Board of Directors.¬† In addition, the social compliance/CSR function must be well-integrated with other components of the company, particularly in areas such as supply chain management, product development and sourcing.¬† For example, Nike Corporation’s social compliance function sits within its “sustainable business and innovation team,” which is responsible for not only environmental and social compliance but also product development.

    The social compliance management team oversees the entire social compliance system.  It plans activities, monitors implementation and receives and analyzes reports from the field.  Ideally, the team is also empowered to make decisions on individual situations and on the system as a whole.  Aside from core management skills such as budgeting and data analysis, the management team should include members who have the flexibility to deal with unexpected situations, who can motivate and support the field team and who can advocate on behalf of the system to senior management.  Management team members should also have some field exposure.  They should shadow audits, speak with workers and the labor unions that represent them, both at the workplace and outside it, and experience for themselves the reality of workplaces from which products are sourced. 

    The social compliance management team should also be positioned for long-term continuity. In companies where social compliance is segregated from other business functions, the departure of one or two key members of the team can damage the entire social compliance program.  It is important, therefore, that the team build capacity across a spectrum of staff members, so operations can survive changes in personnel.

    Finally, the management team must have resources adequate to do its job.  Above all, the allocation of resources from senior management, as well as performance incentive structures that reward employees for social compliance innovation, initiative and impact, are signals that social compliance matters to the company.

    Compliance field teams consist of the social auditors who carry out social audits in production facilities and work with factory management to identify appropriate remediation strategies.  Composition of field teams, skills needed, and related issues are discussed in Step 5, Monitor Compliance.

  • Further Resources
    1. Dickson, Marsha, Suzanne Loker, Molly Eckman, “Stakeholder Theory and Social Responsibility.” Social Responsibility in the Global Apparel Industry; Fairchild Books, 2009: 112-215.¬†
    2. The International Organization for Standardization (ISO) has set a variety of standards for management systems, such as ISO 17021, ISO Guide 65, ISO 9001, and ISO 19011. These standards cover issues such as impartiality and confidentiality, documentation and record control, management reviews, personnel qualification criteria, audit procedures, appeals and complaints; available from http://www.iso.org/iso/home.html.
    3. The International Finance Corporation’s Performance Standard 1 discusses the elements of effective Environmental and Social Management Systems (ESMS); available from http://www.ifc.org/ifcext/policyreview.nsf/Content/PerformanceStandard1.
    4. Locke, Richard M., Thomas Kochan, Monica Romis, and Fei Qin. “Beyond corporate codes of conduct: Work organization and labour standards at Nike’s suppliers,” International Labour Review 146, no. 1/2 (2007): 21-37.
    5. Locke, Richard M., Fei Qin, and Alberto Brause. “Does Monitoring Improve Labor Standards? A Lesson from Nike,” Industrial and Labor Relations Review 61, no. 1 (October 2007): 3-31.
    6. Mamic, Ivanka, “Managing Global Supply Chain: The Sports Footwear, Apparel and Retail Sectors,” Journal of Business Ethics, (2005) 59: 81‚Äď100.
    7. Nike Corporation.¬† “At Nike, CR = Sustainable Business + Innovation.”¬† [online] June 1, 2009; available from http://nikeinc.com/news/at-nike-cr-sustainable-business-innovation.
    8. Roberts, Sarah, “Supply Chain Specific? Understanding the Patchy Success of Ethical Sourcing Initiatives,” Journal of Business Ethics 44, no. 2/3 (2003): 159-170.
    9. Social Accountability International and International Finance Corporation. Measure and Improve Your Labor Standards Performance. 2010; available from http://www1.ifc.org/wps/wcm/connect/a4aab30048865910b81afa6a6515bb18/SAI_IFC_LaborHandbook_Ch1-Intro.pdf?MOD=AJPERES&CACHEID=a4aab30048865910b81afa6a6515bb18.
    10. Social Accountability International (SAI) offers a “Social Fingerprint” program focused on management systems development. By participating in the “Social Fingerprint Supply Chain Management Program,” companies can assess their progress in key social compliance performance areas and access online training to boost competencies; available from http://socialfingerprint.org/. Note: this is a fee-based service.
    11. United Nations Human Rights Council. Guiding Principles on Business and Human Rights: Implementing the United Nations “Protect, Respect and Remedy” Framework.¬† New York: March 21, 2011; available from http://www.business-humanrights.org/SpecialRepPortal/Home/Protect-Respect-Remedy-Framework/GuidingPrinciples.

 

Note:¬† Any references to companies or other non-governmental entities within this guide are only for informational purposes and should not be interpreted as an official endorsement of those entities, their products or services by the U.S. Department of Labor.