VZCZCXYZ0017
PP RUEHWEB

DE RUEHSN #2324/01 3332244
ZNR UUUUU ZZH
P 292244Z NOV 07
FM AMEMBASSY SAN SALVADOR
TO RUEHC/SECSTATE WASHDC PRIORITY 8641
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE PRIORITY

UNCLAS SAN SALVADOR 002324 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT FOR DRL, USDOL FOR ILAB 
 
E.O. 12958: N/A 
TAGS: ELAB PGOV ES
SUBJECT: ADIDAS OPEN LETTER SEEKS RESOLUTION OF LABOR CASE 
 
 
¶1. (SBU)    Summary: Hermosa Manufacturing, a Salvadoran 
owned and operated garment manufacturer, ceased operations in 
May 2005.  The closure resulted in more than 250 unemployed 
workers and liabilities of USD 825,000 in outstanding wages, 
severance payments, and unpaid benefits.  The GOES has been 
unwilling or unable to enforce laws which require the factory 
owner to pay workers, claims.  On October 29 Adidas Group, 
frustrated by the lack of progress in the dispute, published 
an open letter in the two leading daily newspapers asking the 
Salvadoran government to take immediate steps to settle the 
case.  The Minister of Labor was upset at the negative 
publicity.  It remains to be seen if the letter will generate 
the political will necessary to settle the dispute. End 
Summary. 
 
 
--------------------------------------- 
ADIDAS GROUP PUSHES GOES FOR RESOLUTION 
--------------------------------------- 
 
¶2. (SBU)  The Hermosa Company produced garments for Adidas 
Group from 2000 to mid-2002 and then as a subcontractor to 
Partex Apparel Group until mid-2003.  Under Salvadoran law, 
Adidas bears no legal liability in the dispute between the 
former workers and Salvador Montalvo Machado, owner of 
Hermosa Manufacturing.  However, under the Adidas Code of 
Conduct, the Adidas Group has made repeated efforts to 
resolve this case, including participating in several 
meetings with high level Salvadoran officials, including the 
Minister of Labor and the Minister of the Economy.  On April 
4, 2006, Gregg Nebel, the head of social and environmental 
affairs for Adidas, met with the Presidential Technical 
Advisor, the Presidential Legal Advisor, the Minister of 
Labor, and the Minister of the Economy.  At that meeting the 
GOES agreed to provide healthcare services to the workers 
through the ISSS (the Salvadoran Social Security System) and 
agreed to assist workers in finding other employment. 
However, several workers have since been denied healthcare 
services.  Workers also claim that while the Ministry of 
Labor arranged for a job fair, they were untrained or unable 
to perform the positions offered.  Workers reported that the 
jobs offered included positions as pastry chefs and security 
guards. 
 
¶3. (SBU)  On October 29, 2007, the Adidas Group published an 
open letter to the Salvadoran government in La Prensa Grafica 
and El Diario de Hoy.  The letter asked the Salvadoran 
government to take immediate action to resolve the case, 
including implementing the April 2006 agreement to provide 
the workers with healthcare services, to fund the workers, 
ISSS accounts with the 145,000 USD fine collected by the 
government in spring 2007, and to pursue the repatriation of 
Hermosa assets that were disposed of before workers claims 
were satisfied.  The letter also alleges that the GOES failed 
to follow and enforce Salvadoran law and took actions that 
prevented the workers from finding new employment or making 
formal claims against Hermosa. The Minister of Labor left a 
message for LabOff saying that the letter was "outrageous8 
because it criticizes his efforts to resolve the dispute. 
 
--------------------------------------------- ---------- 
IN 2005, HERMOSA CLOSES AND OWES USD 825,000 TO WORKERS 
--------------------------------------------- ---------- 
 
¶4. (SBU)  In 1992 Salvador Montalvo Machado opened Hermosa 
Manufacturing Co. in Apopa, north of San Salvador.  The 
Hermosa factory produced garments, as a direct supplier or 
subcontractor, for numerous brands, including Adidas, Nike, 
Russell Athletics, and Majestic Athletics. 
 
¶5. (SBU)  In May 2005, citing a lack of raw material, 
Montalvo closed the factory and obtained a permit from the 
Ministry of Labor to suspend commercial activities.  The 
closure resulted in the unemployment of over 250 workers. 
When the factory closed workers were owed USD 825,000 in back 
wages, severance payments, and other benefits.  Banco 
Cuscatlan and the former Banco Salvadoreno, now HSBC Bank, 
reportedly held liens of approximately USD 1 million; however 
the factory,s assets of approximately USD 2 million appeared 
sufficient to satisfy both workers, claims and bank 
liabilities.  The Salvadoran constitution specifies that 
workers, compensation takes precedence over competing 
claims, liens, and other liabilities.  However, neither the 
Ministry of Labor nor the Public Ministry, composed of the 
Attorneys, General Office and the Solicitor,s Office, 
enforced the constitutional provision. 
 
¶6. (SBU)  According to a 2006 report by the Independent 
Monitoring Group (GMIES), between 1997 and 2005 Hermosa did 
not regularly pay Salvadoran Social Security (ISSS) quotas 
that allow workers to obtain health care.  Currently several 
former Hermosa workers suffer from serious health conditions, 
including cancer, but have been denied medical treatment due 
to the lack of ISSS payments.  The GMIES report also states 
that Hermosa did not pay workers, pension quotas (AFP) 
between September 2004 and June 2005. 
 
--------------------- 
WHERE ARE THE ASSETS? 
--------------------- 
 
¶7. (SBU)  Although the factory,s assets were reportedly 
sufficient to satisfy all claims in May 2005, the current 
status of Hermosa assets is unknown.  On October 26, LabOff 
met with former Hermosa workers who provided official 
documents that show Montalvo sold the Hermosa building to 
Commercializadora Santa Teresa, a new company formed the same 
month Hermosa closed, for USD 840,908. 
 
¶8. (SBU)  On December 8, 2006, the Third Sentencing Criminal 
Court sentenced Montalvo to two years of prison and ordered 
him to pay a fine of $144,724, which he paid with Hermosa 
assets.  Although the court initially prohibited Montalvo 
from departing the country, it revoked that decision and 
authorized Montalvo to travel to the United States on 
December 12, 2006 to attend a family wedding and conduct 
business on behalf of another apparel company, MB Knitting. 
Montalvo owns 25 percent of MB Knitting, along with his wife 
(35 percent) and Hermosa Company (40 percent).  In a meeting 
with LabOff, former Hermosa workers allege that assets 
formerly located in the Hermosa plant have now been 
transferred to MB Knitting.  Workers said they intend to file 
a criminal complaint against Montalvo for moving assets in 
order to avoid fulfilling his obligations to workers. 
 
¶9. (SBU)  Comment:  The case of Hermosa Manufacturing 
highlights a number of the labor issues that we believe are 
common in the maquila industry.  The GOES has been unwilling 
or unable to enforce labor laws that protect workers claims 
when a factory closes.  This provides strong incentive for 
factory owners who are behind in payments to close down and 
then reopen a few months later under a new name and with a 
clean slate.  In addition, the government fails to enforce 
social security payments and, in this case, should have known 
the owner was pocketing workers contributions.  Hermosa 
workers were unaware that their payments had not been 
submitted until healthcare services were denied.  The Hermosa 
case is unusual because a handful of workers have continued 
to press their claims even though the majority of workers 
have moved on.  Some of the women have chosen to continue 
because they are terminally ill and have nothing to lose. 
Unfortunately, while the Ministry of Labor is aware of their 
situation, its actions could leave the impression that it is 
content to wait them out.  While the open letter from Adidas 
did catch the government by surprise, it remains to be seen 
if the negative publicity will generate the necessary 
political will to address the workers claims. End Comment. 
Butler