"How does a company ensure that it, and its in-country business partners or suppliers, pay living wages to employees when the host country does not have a statutory minimum wage – or the minimum wage fails to provide for an adequate standard of living for a worker and their family?"

Definitions

Article 7 of the International Covenant on Economic, Social and Cultural Rights (ICESCR) requires recognition that remuneration must be enough to provide workers with a decent living for themselves and their families. This is linked to Article 11 of the Covenant, which establishes a right to adequate food, clothing, and housing.

Article 7 is reinforced by the ILO Convention No. 131 on Minimum Wage Fixing (1970), which requires signatory member states to implement minimum wage mechanisms at a national level. Despite the presence of such mechanisms in a large number of countries' ‘minimum wages' do not necessarily by themselves provide for a decent living as arguably conceived in the ICESCR – nor are they always up to date or enforced effectively. So a company might be operating within the bounds of national law by paying a minimum wage but not respecting the rights of its workers to receive a living wage defined in terms of a decent living for themselves and their families.

These challenges have resulted in a growing focus on the payment of a ‘living wage', i.e. a wage "sufficient to meet the basic living needs of an average-sized family in a particular economy". However, given a divergence in operating contexts and economic conditions around the world, there is a distinct lack of consensus between business, governments, trade unions and other labour organisations as to what the payment of a ‘living wage' actually means, how it should be calculated, and how it should be implemented, either generically or for any given economy. This can be particularly challenging when operating in, or procuring from, jurisdictions where there are no recognised industry standards or minimum wage levels to use as benchmarks.

As a result, designing and implementing a living wage programme can be a complex process for a business committed to respect these rights. Examples of questions that a company might need to consider include:

• What is a living wage (i.e. does it constitute ‘basic living needs' plus some discretionary income, if so, how much, or a ‘decent standard of living'?) in different contexts and jurisdictions?
• Why is a living wage important (i.e. does it help people overcome poverty and boost productivity?)
• How does a company define the typical number of people that a living wage should provide for (i.e. is a company obliged to pay a living wage to support a worker, or a worker and his or her family)?
• If a company decides that a living wage must be able to support both a worker and his or her family, how does it decide what constitutes the size of a ‘typical' family in different countries, regions, social contexts and cultures?
• In certain contexts, should non-monetary benefits (e.g. medical care, food, transport etc.) take precedence over the payment of a living wage as a means of providing workers with an adequate standard of living?
• How should a living wage be implemented in the supply chain, and what is the role of local managers in the process?
• If a company decides to implement a living wage in its supply chain, how far down through tiers of suppliers should it go (i.e. first tier suppliers only)?

Calculating a living wage

Businesses, looking at it from only the commercial angle, may also question the incentives for paying a living wage in a country where they are not legally required to go beyond the baseline duty to pay the statutory minimum wage. Addressing the challenges of a living wage requires not only a knowledge of international law and willingness to respect that over and above national law but also a thorough understanding of whether the benefits of paying a living wage (e.g. reduced staff turnover, increased productivity, protection of reputation etc.) outweigh the costs (e.g. ostensible loss of short-term competitiveness, higher wages bills etc., which may be problematic for the business in some competitive environments). For example:

• How do efforts by companies to promote living wages amongst suppliers balance with their need to purchase products and materials at the lowest cost possible in order to remain competitive?
• How does a company balance moving from paying a minimum wage to paying a living wage with its financial responsibilities towards its shareholders, especially where rising costs of living might require adjusting the living wage accordingly?
• How does a company calculate a living wage? Should it use a similar formula across different jurisdictions, what benchmarks should be selected and who should authorise or peer review such a calculation?
• How does a company estimate the full costs of paying a living wage under changing economic scenarios? For instance, should the assessment include not only the direct financial costs of paying higher wages, but also the costs of maintenance and enforcement (through economic crises, periods of inflation etc.)? Might the calculation also take the secondary costs of monitoring and auditing for compliance into consideration?

Companies can seek further guidance on this and other issues from the ILO Helpdesk, which provides a number of detailed factsheets and other information on a range of labour issues – including the payment of a living wage.

Supply chain considerations

As multi-national companies (MNCs) have less control over the business practices of their suppliers and business partners – compared to their own operations – expanding a living wage programme to suppliers, business partners and contractors may give rise to further challenges and unforeseen consequences. For example:

• Who should pay for wage increases in the supply chain – the company or the supplier (i.e. will suppliers accept smaller margins and/or retailers accept a smaller profit?)
• Would the payment of a living wage to workers in the supply chain create market distortion in sourcing countries? How far – with the best of corporate intentions – can labour standards be extended without creating a privileged ‘labour aristocracy'?
• Will consumers pay a premium for products produced by workers earning a living wage?
• Where does one start to implement a living wage programme? Might it be more reasonable to focus on certain categories of suppliers, such as those that deliver high-volumes, have multi-year contracts or provide services on-site?
• How would a potential change in wages to employees working on company sites (e.g. contractors) affect third party employers and are there potential legal complications?Is it more cost and time effective to bolster workers' union representation and bargaining to empower workers directly to be awarded living wages rather than to design and implement a living wage programme? Are both approaches practical and mutually acceptable?

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Concerns surrounding wage levels and general labour conditions have become more prominent in the media as a result of activism that began in the 1990s, particularly against MNCs that procure within labour-intensive and low wage industries such as apparel, footwear, sporting goods and toys. More recently, the focus has expanded to include working conditions in the production of agricultural commodities, including coffee, bananas, tea and cocoa, as well as supply chains in the electronics and ICT sectors. Companies most commonly face accusations relating to the payment of low wages among suppliers in emerging economies. Although the payment of a minimum wage is a legal requirement in many countries, minimum wages often fail to provide an adequate standard of living for a worker and their family.

Living wages in principle and practice

The payment of a living wage is a commonly accepted best practice standard. Numerous trade unions and at least three major multi-stakeholder initiatives monitor for a living wage - Social Accountability International's SA8000, the Ethical Trading Initiative and the Worker Rights Consortium. Wages should be ‘fair' and enable families to enjoy the right to a standard of living that includes adequate food, clothing and housing. ILO Recommendation 135 on Minimum Wage Fixing outlines the following criteria to be considered when defining minimum wage levels:

• "The needs of workers and their families
• The general level of wages in the country
• The cost of living and changes therein
• Social security benefits
• The relative living standards of other social groups
• Economic factors, including the requirements of economic development, levels of productivity and the desirability of attaining and maintaining a high level of employment"

The ability of MNCs to pay a living wage in a wide variety of contexts and locations is complicated by a series of practical and methodological challenges. A key over-arching challenge arises when attempting to provide living wages in particularly complex supply chains, including those in which work may be sub-contracted out to home and informal workers. For example, a 2006 report by the ILO, Wage fixing in the informal economy, found that: "Wage fixing in the informal economy is a much more complex and elaborated process than often thought. In particular, the provision of a number of diversified allowances and benefits, as well as ― at least in some countries ― the reference to the minimum wage, are common."

In such business contexts, failure to pay a living wage may arise from a combination of the following ‘direct' and ‘indirect' factors:

Direct influences on wage levels

Market competition

Commercial demands require MNCs to obtain the most competitive pricing from suppliers through often aggressive price negotiation. Likewise, suppliers and manufacturers compete to produce as quickly, cheaply and as flexibly as possible. As wages often form one of the largest proportions of suppliers' costs, this is a common area to look for cost savings – including reductions in wages. Other means by which suppliers may seek to reduce their costs include, for example, excessive fees charged to workers (e.g. for the provision of worker accommodation, food etc.), inadequate payment of overtime, and a failure to provide workers with benefits and services (e.g. clean uniforms, medical care, day care facilities, clean water and sanitation, transport etc.).

As a result, the ability of workers within the supply chain to bargain for improved wages can be inhibited by the stance of MNCs with respect to supply and price negotiations. In April 2009, for example, Reuters reported that buyers from 50 major brands and retailers including Marks & Spencer, Hennes & Mauritz, Walmart, JC Penney, Tesco and Nike Inc., attended a meeting with Bangladesh's textile exporters, calling on them to reduce their prices if they wished to remain internationally competitive.

Purchasing practices

The purchasing practices of companies, including frequent and last minute changes in orders and shorter lead times, have the potential to further increase time and cost pressures on suppliers, who can be fined for late delivery. This can further impact on the ability of a supplier to pay higher wages. It can also contribute to the need for excessive overtime, increased use of casual labour and even unauthorised sub-contracting. Often workers will do the overtime, as it is the only way they are able to earn enough to support their family. However, the mental and physical strain stemming from long hoursoften results in lower productivity and an increase in the health and safety risks a company faces (for further information about the effect of overtime, please see the working hours dilemma). For example, as part of an initiative to raise wages and lower working hours at a major Bangladeshi supplier, UK-based fashion retailer New Look improved its buying practices, including improved forecasting, reduced order changes, the imposition of longer lead times for orders and training for its buyers on the impacts of their buying decisions. In the first year, the lowest-grade wages increased by 24% and overtime rates dropped 46% (see New Look case study).

Government attempts to maintain low minimum wages

Governments often compete to attract foreign investment through the provision of favourable regulatory environments. This can include the non-adoption of minimum wage levels, or more commonly the adoption at very low rates. However, the ILO's Global Wage Report 2012/2013 notes that member states are encouraged to adopt a minimum wage to reduce working poverty and provide social protection for vulnerable employees. Meanwhile, the ILO's Global Wage Report 2011/2011 notes that although minimum wages are applied in more than 90% of its member states, levels vary widely across different countries. Furthermore, the ILO reported that in 2009 around 50% of the 108 countries in the report did not change the nominal value of their statutory minimum wage. In such situations, workers may not receive guarantee remuneration based on inflation levels and thus the real cost of living.

Despite a general global trend of increased minimum wages in real terms, in many countries the legally mandated minimum wage (or the recognised industry standard) often fails to provide for an adequate standard of living for a worker and their family.

The ILO notes, for example, that in many developing countries minimum wage levels are most frequently set at around 40% of average wages. In addition, ActionAid reported in 2010 that in Bangladesh, Sri Lanka and Cambodia, for example, the legal minimum wage falls below the UN defined poverty line of US$2 per day. This is also generally the case in countries where the law on minimum wage is not regularly updated (such as Egypt, where the minimum wage has remained static at EGP35 [around US$6.30] per month since 1984). However, according to a 2014 Oxfam issue briefing, some countries have bucked the trend, for example, Brazil's minimum wage rose by 50% in real terms from 1995 to 2011, reducing poverty and inequality.

Inadequate or patchy enforcement of regulations

Failure to provide a living wage can also arise where there is inadequate implementation and enforcement of wage legislation (i.e. by the government and through company audits). This may arise depending on the political, social and economic context of a country or where the ability of companies to monitor their suppliers is limited, and/or host governments lack sufficient will or capacity to enforce labour laws. For example, a 2005 study, Wages in Turkey's Garment and Textile Sector, undertaken by the Joint Initiative on Corporate Accountability and Workers' Rights, found limited enforcement of the minimum wage. It argued that this is due to a lack of capacity by the government to conduct a sufficient number of factory visits and tax audits to ensure that factories are paying adequate wages, payroll taxes, and social security payments. The threat of legal proceedings against employers who fail to pay legal wages, the report found, was also limited, while fines for non-compliance were low and therefore largely ineffectual when they were issued.

The effective enforcement of minimum wages may only take place in certain locations and sectors. In Indonesia, for example, provincial and district authorities, not the central government, establish minimum wages, which vary by province, district, and sector and are adjusted annually based on the recommendations of a local wage council. According to a 2015 report by the ILO, Indonesia has seen a noticeable increase in minimum wages for over a decade. According to the 2014 US Department of State (US DOS) human rights report on Indonesia, however, minimum wage policy only applies to the formal sector (an estimated 30% of the total labour force).

Collective bargaining and the living wage

Low wages will often be associated with situations where collective bargaining is discouraged, undermined or forbidden. Where workers are not sufficiently empowered or organised to secure improved pay and working conditions, particularly in developing economies, low-skilled workers are less likely to achieve a living wage (see Freedom of association and business dilemma).

While trade unions such as the International Textile, Garment and Leather Workers Federation support the inclusion of living wage provisions in company codes of conduct, the latter argues that workers should have more of a role in determining what a living wage is in their local context. This includes greater emphasis on collective bargaining for a living wage rather than the development of a ‘universal formula' for calculating one, for example.

Indirect influences on wage levels

Lack of social security and non-cash benefits

Social security and other non-cash benefits enable workers access to services that they might not otherwise afford. As a result, where wages are low, workers may still enjoy a decent standard of living. However, in developing countries, large numbers of workers lack social security and may not be covered by relevant employment laws. Many lack unemployment or incapacity benefits, pensions or social housing, while health and education services are not always provided free of charge. This is particularly the case, for example, if workers are "atypical" (e.g. smallholders, home workers, temporary and contract workers). Indeed, some suppliers may use contract labour in order to avoid social insurance contributions.

Where government provision is lacking, and companies fail to provide employees with any welfare benefits, workers are obliged to cover these costs (e.g. healthcare, education etc.) for their families out of their earnings, in addition to the usual outgoings on accommodation, food, transport, clothing, etc.

These additional burdens – and the local factors that give rise to them – should be factored into any decisions on pay-scales, particularly if a company is seeking to pay a living wage.

Geographical variations

Geographical differences can lead to acute economic disparities within a country, particularly in developing countries where much of the economic growth takes place in relatively well-defined industrial centres. As legal minimum wage levels in some countries may fail to account for such differences, companies paying employees standard wage levels in a country may be failing to provide a living wage in some areas, whilst successfully providing a living wage to employees in other areas. The relationship between low minimum wages and overtime.

Another reason that it is argued that a living wage level is required is the impact that low wages have on families. Often workers supporting a family are willing to work overtime as it is the only way they are able to earn enough income to support their family. This is a common practice in many countries including China, Bangladesh and India, where the minimum wage cannot support a worker and his/her family. Particular groups such as children, migrants and women are especially vulnerable given their employment circumstances (see the ‘Examples of Emerging Markets Scenarios' below).

Overtime is not illegal per se, but if a company ignores maximum overtime levels and workers' hours become excessive, then both productivity and health and safety could be compromised (this dynamic is discussed more fully in the working hours dilemma). Overtime that exceeds international and national guidelines on working hours can result in a MNC being complicit in advocating working hours that are outside international legal norms. In April 2009, for example, Reuters reported that buyers from 50 major brands and retailers, including Marks & Spencer, Hennes & Mauritz, Walmart, JC Penney, Tesco and Nike Inc., attended a meeting with textile exporters from Bangladeshand called on them to reduce their prices if they wished to remain internationally competitive. Foxconn and Toyota are other companies that have recently been accused of making their employees work excessive overtime hours. For a more detailed discussion of these incidents, see the dilemma on working hours.

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Real-world examples

Apple audits uncover wage violations in its supply chain

In its Supplier Responsibility 2013 Progress Report, Apple reported that at 102 of the supplier facilities it audited, pay for legal holidays due to night-shift workers was improperly calculated. At 21 facilities overtime wages were incorrect and at a further 15 the base wage used to calculate overtime was too low, resulting in underpayment. In addition, audits revealed 90 facilities where wage deductions were used for disciplinary purposes. This case highlights the potential complexity of worker payment methods among suppliers, thereby compounding the existing difficulties of understanding, defining and monitoring the payment of a living wage.

Sri Lankan suppliers to UK retailers Next, Tesco, Asda and Marks & Spencer's accused of paying just over half the living wage

A January 2010 report by UK newspaper, The Times, Ugly low-pay truth of high street fashion, reported that factory workers in Sri Lanka "struggle to survive on basic wages as low as 25p (US$0.38) an hour to produce clothes for leading British retailers, who say they abide by an Ethical Trading Initiative (ETI) intended to protect employees' rights." The report alleged that suppliers to UK retailers Next, Tesco, Asda (part of Walmart) and Marks & Spencer (M&S) "admit that the basic wages are insufficient to live on but say they are dictated by fierce international competition." M&S responded by saying that it has a permanent ethical compliance team on the ground in Sri Lanka and that its suppliers pay their workers 25% above the Sri Lankan minimum wage. Furthermore, the ETI said that its members, including M&S, Next, Tesco and ASDA, were "at the forefront of good practice ... [but] in this case the poorest-paid workers are saying they are struggling to meet basic needs. For those, even the efforts of the most responsible retailers are not yet good enough." The report highlights the potential reputational risks associated with allegations of failing to pay workers a living wage, regardless of whether minimum wage standards are exceeded or such payments would make an operation uncompetitive.

Labour Behind the Label claims apparel brands such as Tesco, Burberry, Asda and Levis are not paying a living wage in their supply chains

In the report, Let's clean up fashion 2011: The state of pay behind the UK high street, NGO Labour Behind the Label ranked British fashion retailers on their efforts to pay workers in their supply chains a living wage. While the report acknowledges positive efforts by many retailers, it notes that "[o]ne thing is clear: in no case have productivity programmes yet led to wages increasing to meet a living wage level for all workers." Four retailers, including Marks & Spencer, Inditex, Next and Monsoon Accessorize were praised for their work to increase wages and appear to have a more systematic approach to wage improvements, including efforts to engage further with stakeholders, promote worker-management participation and address purchasing practices. Nonetheless, it noted that they placed too little emphasis on the promotion of freedom of association, and too much emphasis on boosting productivity instead. Companies such as Debenhams, Peacocks and Republic allegedly failed to provide any substantial details on their efforts to implement a living wage commitment. Others, including French Connection, Gap and River Island were criticised for either not committing to, or acting on their pledge to pay, a living wage.1 This report, part of an on-going campaign, highlights the on-going scrutiny of companies who are increasingly being held to account on their commitments to pay a living wage.

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Where a living wage is not provided, companies risk allegations of infringing the right to fair remuneration and the subsequent denial of an adequate standard of living. In addition, if workers are hungry and sick, they are unable to be productive.

Potential risks to business can include:

Industrial unrest

Failure to pay a living wage may also cause operational disruptions due to industrial action. Wage levels are a particularly common focal point of negotiations – and conflict – between unions and employers. Where wages are very low, this can become a particularly serious issue – particularly if it is perceived to be a matter of survival amongst workers.

In July 2010, for example, Bangladesh's National Wage Board recommended an almost twofold rise in the minimum wage to BDT3,000 Bangladeshi taka (US$43.15). This followed months of unrest – reportedly caused by wages that workers say are too low to provide for even their basic survival. According to Bangladeshi NGO Alternative Movement for Resources and Freedom Society, 72 incidents of industrial unrest took place in the first half of 2010 – with numerous injuries and arrests.

Reputation and brand damage

Reputational damage and brand contamination may arise as a result of sustained or high-impact negative publicity and activism, particularly by NGOs, trade unions and journalists. In the past, such actions have typically been concentrated on the apparel and footwear sector, although companies in the food and beverage and electronics sectors have also come under scrutiny.

For example, in a December 2008 report, Fashion Victims II, (a follow-up to the December 2006 Fashion Victims report), NGO War on Want highlighted the conditions of Bangladeshi factory workers producing clothes for UK retailers Primark, Tesco and Asda. The report claimed that workers producing clothes for Tesco and Primark reportedly earned as little as US$0.10 an hour whilst working weeks of up to 80 hours. Some employees reportedly only received the legal monthly minimum wage (BDT1,663/US$24), far less than the BDT5,333/US$77 that War on Want says is needed for adequate food, clean water, shelter, clothes, education, health care and transport in Dhaka.

In a separate report, Sour Grapes, War on Want claimed that workers in South African vineyards are in some cases paid around £4 (US$5.67) per day for their work, well below the minimum wage, which for farm workers was around ZAR6.31 (US$0.85) per hour in 2009. Many workers at small producers were women, reportedly employed on seasonal contracts, who received lower wages than those with full-time contracts and received no benefits such as sick pay or housing. UK supermarket Tesco, which sources wine from South Africa, responded to the report in an article entitled, Cape wine workers paid less than £4 a day, in UK newspaper the Guardian: "We take our responsibilities on the South African supply chain and every country we operate in extremely seriously...all our South African wine suppliers' wages and benefits are above minimum levels." A subsequent report by the Guardian, Tesco 'breaking promise' to South African fruit pickers, claimed female workers on Tesco supplier farms near Cape Town continued to be paid South Africa's ‘minimum' rather than a ‘living' wage. Those interviewed were receiving just ZAR1, 231 (US$158) per month.

Consumer boycotts

In serious cases, companies who allegedly pay their workers (or workers in their supply chains) sub-standard wages can face potentially damaging consumer boycotts, often as a result of the kind of activism outlined above. While boycotts may arise in any country, they are most likely to take place in the developed world. For example, in 2001 the Coalition of Immokalee Workers (CIW) launched its Campaign for Fair Food with the first-ever farm-worker boycott of a major fast-food company in the US, Taco Bell. The campaign was launched in reaction to the ‘downward pressure' exerted on wages and working condition of suppliers as a result of the significant buying power of MNCs. In March 2005, following a four-year campaign, Taco Bell agreed to meet all of the CIW's demands. This included "the first-ever direct, on-going payment by a fast-food industry leader to farm-workers in its supply chain to address sub-standard farm labour wages."

Reduced productivity and efficiency

In its Global Wage Report 2014/15, the ILO noted that labour productivity is higher in countries where the level of average wages is also higher. Conversely, low wages and poor working conditions may result in:

• Poor worker health and safety (e.g. as a result of excessive overtime worked to bolster income)
• Staff absenteeism (e.g. due to sickness resulting from a lack of basic needs)
• Reduced worker motivation (e.g. due to a lack of financial incentive), this could turn to the extreme when wages do not cover a workers' minimum requirement for food, resulting in the poor health of the worker and reduced productivity
• Reduced product quality (e.g. due to reduced worker motivation, staff absenteeism etc.)
• Loss of opportunity to attract employees of a higher quality (e.g. if wages are below those of competitors)
• Higher turnover (e.g. due to low morale and wage competition from competitors)

For example, Taiwanese electronics manufacturer Foxconn (which supplies Apple, Dell, Hewlett-Packard, Nokia, Sony and others), announced on 7 June 2010 that it would increase wages by up to 70% - from TWN900 (US$132) to TWN2,000 (US$294) per month. The move was in response to international criticism over working conditions in its factory. Foxconn's Chairman Terry Gou was reported in an article by the UK newspaper The Telegraph as saying: "This wage increase has been instituted to … rally and sustain the best of our workforce."

It can also be argued that an increase in wages will also increase productivity. In an Economist article entitled, The next China, it reported that from 1995 to 2004 labour costs in the country tripled in the larger firms, but labour productivity more than quintupled.

In September 2014, eight major clothing brands including, H&M, Inditex, Primark, New Look, C&A and N Brown Group, Tchibo and Next sent a joint letter to the Cambodian government stating that they are prepared to pay more for clothes produced in the Cambodian garment sector. Following protests in Phnom Penh on 17 September 2014, where thousands of garment workers demonstrated during their lunch hour to demand a wage increase, retailers called for more cooperation with trade unions in the workplace. In the letter, the retailers stated their willingness to pay more for garments, enabling the payment of a fair living wage.

Similarly, when KPMG introduced a living wage policy for all directly and indirectly employed staff in the UK in 2006, it reported a halving of its staff turnover among its cleaning and catering staff, as well as improved morale, attitudes, service and productivity, and reduced training and other overhead costs as a result of growing employee loyalty (see the KPMG case study).

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In order for a company to provide its employees with a living wage, particularly when operating in jurisdictions where there is no statutory minimum wage or the minimum wage fails to provide for an adequate standard of living for a worker and their family, it might consider creating policies and procedures that enable it to respect international standards on living wages.

The UN ‘Protect, Respect and Remedy' Framework for Business and Human Rights provides guidance on how to protect individuals and communities from corporate related human rights harm.

The framework is comprised of three key principles:

• Protect: The state duty to protect against human rights abuses by third parties, including business;
• Respect: The corporate responsibility to respect human rights; and
• Remedy: Greater access by victims to effective remedy, both judicial and non-judicial.

The framework states that in addition to complying with national laws businesses have a responsibility, in the context of the countries where they operate, to respect human rights through their own business activities and through their relationships with third parties – such as business partners and entities in their supply chains. To meet this responsibility, the framework notes that businesses should engage in human rights due diligence and specifies the main components of the process:

Policies: Including a human rights policy containing broad commitments, supported by more detailed guidance in specific functional areas

Impact assessment: Including assessments that explicitly reference internationally recognised human rights and are used by companies to avoid potential negative human rights impacts on an ongoing basis

Integration: Including the embedding of respect for human rights throughout a company

Tracking performance: Including regular updates of human rights impact and performance

The Guiding Principles for the Implementation of the UN "Protect, Respect and Remedy" Framework aim to provide "concrete and practical recommendations" about how businesses can operationalise their responsibility to respect human rights. According to the Guiding Principles, the responsibility to respect human rights requires responsible companies to:

• Implement a human rights policy
• Apply human rights due diligence
• Provide for remediation

The UNGPs apply to all States and to all business enterprises, both transnational and others, regardless of their size, sector, location, ownership and structure.

The UNGPs have experienced widespread uptake and support from both the public and private sectors, and numerous companies have publicly stated their commitment to the Guiding Principles. The UN Guiding Principles Reporting Framework is also used by companies to report on how they respect human rights.

Companies can seek specific guidance on this and other issues relating to international labour standards from the ILO Helpdesk. This aims to help company managers and workers understand the ILO approach to socially responsible labour practices and to assist in the development of good industrial relations. This includes information on decent work principles including the payment of a living wage.

Specific actions that responsible business might take include:

1. Company policy

A basic starting point is for companies operating in, or doing business in emerging economies to develop and implement human rights policies and procedures to ensure that its managers and suppliers take a socially responsible approach to employment. This includes, for example, integrating a commitment to pay a living wage into their existing human rights policies.

At the very least, a company should seek to ensure that its employees are compensated in line with local legal or industry minimum standards (including with regards to the payment of overtime, working hours, holidays and rest intervals). Ideally, wages and benefits should have local parity, presuming the local average wages provide for a decent living.

A company might also choose to commit to compliance with international standards, including Article 7 of the International Covenant on Economic, Social and Cultural Rights, which states that all workers will be provided with "fair wages and equal remuneration for work of equal value", which provides a "decent living for themselves and their families", as well as ILO Convention No. 131, on Minimum Wage Fixing. ILO Convention 131 provides "protection for wage earners against unduly low wages, which, while of general application, pays special regard to the needs of developing countries". A "decent" and adequate standard of living should be achievable through wages earned in a standard work week, i.e. not necessitating overtime to achieve a living wage.

The Ethical Trade Initiative's Base Code, which over 50 companies (including Gap, Pentland, Marks & Spencer and Primark) have signed up to, may provide a good example.

Standard five of the Base Code addresses living wages and states the following:

• "Wages and benefits paid for a standard working week meet, at a minimum, national legal standards or industry benchmark standards, whichever is higher. In any event wages should always be enough to meet basic needs and to provide some discretionary income
• All workers shall be provided with written and understandable Information about their employment conditions in respect to wages before they enter employment and about the particulars of their wages for the pay period concerned each time that they are paid
• Deductions from wages as a disciplinary measure shall not be permitted nor shall any deductions from wages not provided for by national law be permitted without the expressed permission of the worker concerned. All disciplinary measures should be recorded"

In order to ensure that in-country business partners and suppliers also adhere to such standards, the company may wish to include (where possible and appropriate) such obligations as a contractual requirement, or to include it within its Supplier Code of Conduct.

For example, Nike's Code of Conduct requires that: "Contractor's employees are timely paid at least the minimum wage required by country law and provided legally mandated benefits, including holidays and leaves, and statutory severance when employment ends. There are no disciplinary deductions from pay."

In addition, Social Accountability's SA8000 requires the payment of a living wage so that: "wages paid for a normal work week shall always meet at least legal or industry minimum standards and shall be sufficient to meet the basic needs of personnel and to provide some discretionary income." The standard provides further guidance on wage deductions, benefit composition, overtime and labour contracts – particularly with regards to their impact on the living wage.

2. Promote freedom of association and collective bargaining

Freedom of association and collective bargaining are enabling rights that, if undertaken effectively and without restriction, will help involve workers in setting wage levels that at least cover their basic needs. Where freedom of association and collective bargaining are not restricted in law, a company might be advised to work with suppliers and business partners to ensure that these rights are not restricted in practice.

Labour rights advocates claim that free and well organised collective bargaining is the most successful way of achieving a living wage. In October 2008, for example, the International Textile, Garment and Leather Workers Federation (ITGLWF) launched a year-long global campaign on the living wage, Bargaining for a Living Wage.

Key messages of the campaign included the following:

• Unions should include the living wage figure in pay bargaining with employers at all levels
• Unions should convey their living wage demands to governments with a view to raising the minimum wage
• Brands and retailers should include the payment of a living wage as a contractual requirement on all suppliers and take this obligation into account in their price negotiations with suppliers
• Freedom of association must be guaranteed and unions need to have access to workplaces for the purposes of organising

Some companies are also working with unions to address this issue. In a submission to Labour Behind the Label's Let's Clean Up Fashion 2009 report, Gap Inc. noted that it has been working with the trade union SEWA in North India where "nearly 500 women have been organised ... and are now earning nearly 80% higher wages than before in a timely manner with transparent documentation being maintained."

However, impediments to freedom of association and collective bargaining (as outlined in the Freedom of association business dilemma) may limit the scope for pursuing this option. This is particularly the case for companies, suppliers or business partners operating in countries (e.g. China or Viet Nam) or locations (e.g. Special Economic Zones) where freedom of association and collective bargaining are legally restricted.

Where restrictions are in place either by law or practice, companies may choose to establish alternative mechanism (such as workers' committees) for their employees and – if feasible – those of their suppliers and business partners. Although different from an independent union, workers' committees could provide a consultative worker/management forum to give workers a voice in setting defining living wages.

3. Conduct due diligence

In order for a company to understand what a living wage is in a particular location, it can conduct a full assessment of its operating contexts, including at the local level. This might include the identification of whether any living wage benchmarks (e.g. Asia Floor Wage) currently exist in the countries in which it sources or has a presence and monitor actual wages against them. Such research can be conducted independently or in conjunction with a local NGO or other research institute as they often have local knowledge and expertise.

The types of information that a company may wish to gather include:

• Whether legal minimum wage levels are in place and what they are
• The averages wages within the country and/or sector
• The typical ‘basket of goods' that an employee would need to have for an adequate standard of living
• Whether there are significant variations in the cost of living within a country
• The average size of a family within a country

Even where a company has defined a living wage within a particular jurisdiction, it is advisable to keep such figures under regular review as a result of fluctuations in the cost of living. For example, in a report, Adding Insecurity to Life, trade unions FNV Mondiaal and FNV Bondgenoten noted that the 2,500 employees working on the Nilgiri tea plantations in India (which supplies tea to Unilever) are disadvantaged by the fact that, over a two year period, food prices in the region went up by more than 40%, while wages increased by less.

4. Coordinate efforts with suppliers and industry groups to increase wages in the supply chain

Competition between buyers means that individual companies are unlikely to want to put themselves at a disadvantage by promoting higher wages within their supply chains. Even where they are willing to promote higher wages through progressive pricing and sourcing practices, this can be undermined by the practices of other buyers using the same factory.

As a result, a coordinated effort amongst suppliers, business partners and other companies aimed at increasing wages in the supply chain, through creating a "level playing field" may enhance the chances of making a positive impact on supplier wages.

Such an effort could initially focus on contexts where there is a critical mass of buyers who have a long-term relationship to the supplier and are willing to ensure that workers actually receive living wages. This may be arranged through industry groups, multi-stakeholder initiatives such as the Ethical Trading Initiative, or through supply chain data-sharing organisations such as Sedex.

Sedex, for example, provides a secure database for companies to store and share ethical data including self-assessment, audit reports and corrective action reports and status. Such information could be used by member companies to coordinate their efforts in the implementation of living wages in supply chains.

5. Working with suppliers and business partners

Companies may choose to work in good faith with business partners and suppliers to ensure that price negotiations, purchasing practices and other operating procedures are conducive to the payment of adequate wages. This could include engaging in dialogue on business processes that could be improved to ensure the payment of a living wage is achievable and sustainable.

This could include, for example, separating the cost of labour from other costs of production in bidding processes or integrating a living wage principle into rating and reward measures for suppliers and business partners (e.g. by giving them preferential status). As part of such measures, companies may provide suppliers with assurance that purchasing patterns would be suitably structured so as to ensure that a living wage could be paid.

Efficiency measures may also be targeted (see below).

For example, the Coalition of Immokalee Workers (CIW) worked with food brands, including McDonalds, Burger King and Subway, to successfully negotiate agreements for the companies to pay an additional penny for every pound of tomatoes picked. The agreement followed the criticism of companies purchasing tomatoes from growers in Florida over pay and working conditions in their supply chain (see the CIW case study).

Similarly, a company may consider, where affordable and appropriate, working with suppliers and business partners to provide workers with basic needs, benefits and services (e.g. uniforms, food, accommodation, medical care, day care facilities, free transport or medical check-ups etc.) and other schemes (e.g. production or attendance incentives) to ensure basic minimums are met irrespective of wage levels. Benefits could form a key part of an overall employment package. Companies, as buyers, may choose to positively evaluate and reward those suppliers and business partners that provide such benefits.

6. Monitoring suppliers

In order to ensure that business partners and suppliers are honouring agreements to pay a living wage, either as a result of a contractual obligation or as part of an agreed code of conduct, a company would ideally implement a meaningful monitoring system.

This might include:

• Unannounced or planned visits and audits of factories, including by third party specialists where it is deemed necessary
• Implementation of an anonymous whistleblower hotline, with details posted within, for example, supplier facilities, local media etc.
• Monitoring of local media for evidence of living wage related infringements and adverse news stories

According to the Ethical Trading Initiative, signs that living wages are not being paid include workers skipping meals so they can feed their children; borrowing from neighbours and/or loan sharks; cutting out ‘non-essential' expenditure (e.g. medicine, clothing); and taking on extra work (e.g. homework or another factory job).

One of the methods that Nike uses to monitor its wage standards, for example, is its Management Audit Verification Tool. This tool, in Nike's words, includes the following requirements:

• "Workers are provided with at least the minimum wage regulated by local law or any existing collective bargaining agreement (regardless of quota targets or piece rate agreements)
• All training or probationary wages are set and paid at or above the locally mandated minimum wage
• Factory pays in a timely manner workers' hourly or monthly wages and overtime according to local law and existing collective bargaining agreement
• Factory does not reduce workers' base wage through monetary fines and/or deductions for poor performance or disciplinary infractions
• Legally mandated tax deductions are paid to appropriate government agencies in a timely manner
• Legally mandated income-security benefits are provided (workers comp, medical coverage, social security, retirement funds, etc.) and are paid to appropriate agencies in a timely manner
• Factory properly calculates and provides each worker non-income security benefits mandated by law (allowances, holidays, leave, severance pay, etc.), collective bargaining agreement, or any other employment agreement"

Similarly, pharmaceutical company Novo Nordisk introduced an environmental and social evaluation supplier questionnaire in January 2002. The company sent the questionnaire to all of it suppliers and contractors, the data from which would be compared and evaluated on an annual basis. The questionnaire refers to relevant ILO conventions governing labour standards and included the following questions:

• Do you ensure that your employees are adequately protected according to the Universal Declaration of Human Rights regarding wages and benefits?
• What is the minimum wage as defined by the law in your country or industry average (whichever is higher)?
• What is the lowest wage paid by you to an employee on a full time basis?
• Which benefits do you offer to all employees beyond the legal minimum?

7. Develop calculation methodologies

Where benchmarks do not exist within a country, and where freedom of association and collective bargaining have failed to deliver a living wage, a company may choose to develop calculation methodologies that could be used to measure a living wage. This could be developed locally or used for global application, guiding the company in its implementation of its wage programme.

When considering a living wage programme, particularly in complex supply chains, companies may consider the following questions, among others:

• Are existing methods for calculating a living wage sufficient?
• Should you consider other benefits to employees (e.g. discounted company canteens, medical services and transport subsidies etc.) when calculating a living wage?
• What guidance measures exist to establish whether companies are breaching the right to a decent standard of living?
• How does a company audit the payment of a living wage, if and when it is implemented?

A company may work with industry groups, local government or trade unions to establish mutually acceptable calculation formulae. This may enhance the credibility of an initiative – instead of having the company perceived as dictating wage levels unilaterally and to their own advantage. It may also be advisable to engage local managers to devise a mechanism to monitor fluctuations in the cost of living (inflation, cost of basic basket of goods etc.) at the national and local level on an on-going basis – and to tailor wages accordingly.

A Working Paper from the ILO - A New Methodology for Estimating Internationally Comparable Poverty Lines and Living Wage Rates sets out a proposed method for calculating internationally comparable living wage rates. It does so by splitting requirements into ‘food' and ‘non-food' cost. Food cost calculations include the identification of a ‘national model diet', which takes into account factors such as total calorie requirements, typical food groups in model diet and local food preferences. When calculating non-food costs, the methodology takes into account issues such as the accurate conversion of individual costs into household costs and the typical number of working hours in a week. It also examines certain limitations, including the need to consider family debt repayments, differences in family size, inaccurate price information, seasonal variations in food prices and the cost of taxes. Elements of this methodology may prove useful to companies attempting to define a living wage for their employees.

8. Improve the productivity of business partners and suppliers

Companies may be more willing to accept the increased financial costs associated with payment of a living wage if they fully understand the potential benefits (e.g. reduced turnover, improved worker/management relationships etc.). In addition to this, MNCs can increase suppliers' appetite for the payment of living wages by helping improve their operational efficiency – thus ‘compensating' them for the additional labour costs they may incur. For example, MNCs are in a potentially strong position to help suppliers:

• Adopt and/or finance new technologies to improve production efficiency
• Adopt – and ‘operationalise' – new production techniques (e.g. through training)
• Improve logistical coordination and planning

In March 2010, for example, UK retailer Marks & Spencer committed itself under its ‘Plan A' ethical programme to ensuring that "our clothing suppliers pay this wage to their workers in Bangladesh, Sri Lanka and India" by 2015, by "working with our suppliers to improve productivity and management practices".

Nonetheless, MNCs will need to put mechanisms in place to ensure such measures do actually translate into the payment of a living wage to workers – not just higher profits for suppliers. This might include, for example, a formula by which a pre-agreed percentage of any efficiency savings are allocated to increased wages.

This measure alone may not guarantee the payment of a living wage, but may be considered as part of a broader strategy (e.g. that might include the promotion of freedom of association and collective bargaining). For example, NGO Play Fair 2008 has claimed that increased efficiency measures may not (on their own) benefit workers. Rather, they have the potential to increase production pressure and individual stress levels. The organisation notes that: "If these changes can also deliver increases in wages, they would be very welcome. At the moment, however, the jury is still out on whether increased productivity is the cure-all for low wages that some companies believe it to be."

9. Improve purchasing practices

A company may also examine the impact of its own purchasing practices on the ability of suppliers to pay a living wage. For example, the Ethical Trade Initiative, an alliance of companies, trade unions and voluntary organisations, held a roundtable discussion attended by senior buyers, merchandisers and ethical trade teams from more than 20 global retailers, including New Look, Asda, George, Gap Inc and Next, as well as NGOs and trade union members. Among the experiences shared was that improving buying practices can not only help in tackling workers' issues like wages and excessive overtime, it can also increase efficiencies that benefit the bottom line.

These include:

• Having a clearer critical path for each product line and integrating purchasing practices initiatives across the business
• Building two-way communication with suppliers (e.g. rather than just making demands for compliance, retailers should ask their suppliers what they can change so as to help a supplier or factory to improve)
• Establishing tools and guidance for designers, buyers and merchandisers to improve purchasing practices, and ensuring they are implemented consistently across the business
• Smoothing out peaks and troughs in ordering from suppliers
• Helping suppliers improve their forecasting, for example by giving suppliers earlier sight of the order book

Such measures will enable suppliers to gain more predictability and consistency in their forecasting of orders, thereby reducing potentially unforeseen time and cost pressures which may impact on their ability to pay living wages due to the need for excessive overtime, an increased use of casual labour and even unauthorised sub-contracting.

See Living Wage case studies

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Minimum wage

Article 7 of the International Covenant on Economic, Social and Cultural Rights (ICESCR) states that remuneration should provide all workers with "a decent living for themselves and their families." A minimum wage should be ‘fair' and to enable a worker to enjoy an "adequate standard of living for himself and his family, including adequate food, clothing and housing, and to the continuous improvement of living conditions" (Article 11 of the ICESCR). This is reinforced by Article 3 of ILO Convention No. 131, on Minimum Wage Fixing, which states that elements governments should take into account when setting minimum wage levels (as far as possible and appropriate in relation to national practice and conditions) include:

• "(a) The needs of workers and their families, taking into account the general level of wages in the country, the cost of living, social security benefits, and the relative living standards of other social groups;
• (b) Economic factors, including the requirements of economic development, levels of productivity and the desirability of attaining and maintaining a high level of employment"

Minimum wages are an important policy tool for social protection. According to the ILO, they are a "minimum sum payable to a worker for work performed or services rendered, within a given period, whether calculated on the basis of time or output, which may not be reduced either by individual or collective agreement, which is guaranteed by law and which may be fixed in such a way as to cover the minimum needs of the worker and his or her family, in the light of national economic and social conditions."

Living wage

The ILO defines the living wage as "the level of wages sufficient to meet the basic living needs of an average-sized family in a particular economy." A living wage reflects a certain basket of goods and services considered to cover basic necessities, taking into account the social circumstances and requirements of the operating environment. It should enable workers and their families to fully participate in society and live with dignity. Remuneration for a normal work week of no more than 48 hours should provide workers and their family with a decent standard of living.

When minimum wages were first conceived in 1909, they were designed to "protect the lowest-paid workers in order to guarantee them a decent standard of living." However, this emphasis has varied over time and across countries. Minimum wage today is often "a major instrument of economic and social policy because it can be manipulated in order to achieve diverse objectives, from income distribution to economic competitiveness." In one ILO paper it was found that the main criterion citied in minimum wage legislation was inflation/wage fixing. Workers' needs, productivity, and employment rate are often secondary criteria.

This means that, in reality, national ‘minimum wages' often vary from ‘living wages' as arguably conceived under the ICESCR. Minimum wages often rise slowly over time and may not correspond to increases in the cost of goods. In addition, a minimum wage may be the result of a political process and will not necessarily be based either on what that wage will be able to purchase, or whether purchases included in a basic-needs basket will provide for a family or ensure an adequate standard of living. As a result, a living wage will generally be higher than the minimum wage Even where they do correspond, implementation of the minimum wage can be variable.

Figure 1: Alternative wage standards summarised

Standard	Pros	Cons	Base of comparison for ‘decency' of wage
Minimum wage	Provides clearest standard Legally established by host country Legally enforceable in host country	Level of protection granted to workers by minimum wages varies a great deal across countries Countries may set and/or adjust minimum wages with other criteria than workers' needs (i.e. attracting investment) Are set too low to prevent poverty in most cases	Defines decent wages using an absolute measure (the legal minimum wage); which may or may not be related to ‘liveability' depending on how national legislation is determined
Prevailing wage	Generally higher than minimum wage Employers should be willing to pay without reducing employment levels or hurting competitiveness	Measurement can be unreliable or costly May vary considerably across regions and sub-industries within a country – and with regard to the level of non-wage benefits Is often too low to prevent poverty	Defines decent wages using a relative measure (the prevailing industry wage); considers fairness rather than ‘liveability' as the main criterion of decency
Living wage	Guarantees that wages meet workers' needs Can raise productivity of work Relieves poverty Sends strongest message to consumers	No consensus on definition or best methodology for calculation Potentially difficult or costly to calculate May set wages at an unrealistic or impossible level in some cases May reduce level of employment or competitiveness of suppliers	Defines decent wages using an absolute measure (a calculated ‘living wage') and explicitly considers ‘liveability' as a criterion of decency

The impact of inflation

The following table, which is based on ILO data from the Global Wage Report, highlights how (with the possible exception of China) minimum and average wages have lagged behind consumer price increases in major developing economies:

Figure 2: Average real wage growth vs. consumer price growth (2001-2007)

Country	Consumer prices: 2001 (where 2000 is the baseline year)	Consumer prices: 2007	Annual growth in minimum wages (real): 2001-2007	Average real wage growth: 2001-2007
Bangladesh	101.5%	147.6%	4.6%	No data
Brazil	106.8%	163.5%	6.5%	0.25%
China	100.7%	113.7%	8.3%	12.9%
Egypt	102.2 %	157.6%	9.1%	0.14%
India	103.0%	134.5%	1.5%	1.58%
Indonesia	111.5%	187.8%	8.7%	4.19%
Nigeria	118. 9%	236.6%	- 7.9%	No data

In its Global Wage Report: Update 2009, the ILO noted that the global economic crisis had a significant impact on wage growth in 2008. Presenting data from its updated Global Wage Database, the ILO reported that global growth in average wages declined from 4.3 % in 2007 to 1.4 % in 2008. Wage growth declined in countries like South Africa (-0.3 %), Mauritius (-1.0 %), Kazakhstan (-1.1 %), the Republic of Korea (-1.5 %), Mexico (-3.5 %), Taiwan (-3.6%) and Ecuador (-4.1 %).

The impact of food price inflation is particularly serious for poor workers and households in developing countries. This is because these groups tend to spend a far higher proportion of their incomes on purchasing food (e.g. those workers in Sub-Saharan Africa or South Asia where 60% and 40% of workers face extreme poverty earning less than US$1.25-a-day). According to the ILO's Global Wage Report 2008/9, less than 20% of household expenditure in developed countries such as Denmark, the Netherlands and Switzerland is on food. In many developing countries, food expenditure represents more than 60% of the household budget (e.g. 62% in Bangladesh in December 2008). In some, such as Armenia, Niger and Romania, food expenditure exceeds 70% of household expenditure

As a result, it is important to place particular emphasis on food expenditure then calculating a standard ‘basket of goods' when attempting to set a living wage.

Social and labour unrest

Increases in living costs without correlative increase in wages have the potential to ignite unrest among vulnerable members of the population – particularly among the least well-paid workers. The impact of low wage increases in the face of rising prices was highlighted during riots in more than 20 countries in 2008 over increased food and fuel prices. For example, a series of protests began in Egypt in April 2008 following a rise in household food expenditure of over 50% between January and March 2008. High food prices in Viet Nam are also considered to have increased the number of labour disputes across the country. In the first quarter of 2008, there were around 300 strikes, compared to 103 during the same period in 2007.

Protests continued in 2010. For example, an estimated 300,000 people gathered in Delhi, India, to take part in a rally over rising food prices on 21 April 2010. Food prices in India, including the cost of pulses, milk, wheat, rice and vegetables, have risen by as much as 20% over the past year. Similarly, around 500 protesters gathered in front of the Cabinet building in Cairo, Egypt, on 2 May 2010 to demand an increase in the minimum wage, which has stood at 35 Egyptian pounds since 1984. In 2011, 7 people were killed in Mozambique after widespread riots took place in Maputo, triggered by the rising cost of food and fuel.

Human rights impact

Other human rights that are typically associated with the failure to pay a living wage include:

Right to rest and leisure including reasonable limitation of working hours and periodic holidays with pay (UDHR, Article 24): Where wages are insufficient to provide an adequate standard of living, workers may need to work excessive hours to supplement their basic income. This could impact on the worker's quality of life, lead to low productivity, increase the risk of health and safety violations and potentially impact mental and physical health.

Rights of protection of the family and the right to marry (ICCPR, Article 23): Workplace practices may hinder the ability of a worker to adopt a healthy work/family life balance, including where wages are insufficient to provide an adequate standard of living and workers are required to work excessive hours in order to supplement their income. The failure to receive a living wage may also impact on a worker's ability to provide adequate care for their family, including with regards to childcare and affording adequate food and accommodation.

Rights of protection for the child (ICCPR, Article 24): As with Article 23, inadequate wages may compromise the ability of parents to provide necessary protection to their children – including adequate food, healthcare, and shelter. This is likely to be a particularly acute issue in areas where public child welfare systems are poor or non-existent.

Right to health (ICESCR, Article 12): Given that many of the countries in which living wages are likely to be a particular issue are unlikely to have strong or easily accessible public health systems, inadequate wages are likely to have an impact on the health of employees and their families. Healthcare can form a significant part of any person's income, with workers on low wages forced to ration the health products and services they purchase.

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