Business school teaching case: is private equity responsible for child labour violations?

Private equity firms commonly vet their acquisitions for environmental, social and governance (ESG) problems. And yet their portfolio companies can still become embroiled in social and environmental scandals.

Increasingly, private equity groups are under pressure from regulators, campaigners and even investors to scrutinise their business models in light of their impact — especially social.

Some of the industry’s challenges in becoming responsible businesses flow from the sheer size of its workforce. Today, private equity-backed businesses employ about 20mn workers globally, with a high concentration in low-wage sectors such as food services and private security.

For example, Roark Capital’s fast-food franchises, including Subway, employ more than 1mn workers. Warburg Pincus, through private security group Allied Universal, employs 800,000 workers worldwide.

Other challenges stem from private equity’s particular business model, and the nature of the work to which it is attracted. Buyout firms promise to cut labour costs and, in effect, provide publicly traded companies a way to distance themselves from social-impact risks. Cost savings typically occur by outsourcing operations to locations with a large low-wage workforce, sometimes involving labour or human rights risks, usually in lower-income countries.

And in the US, factories in a number of states have been found in breach of child-labour rules by drawing on an unprecedented pool of children who have arrived as unaccompanied migrants from Central America.

Packer Sanitation Services — a Blackstone portfolio company — is a case in point.

Packers is a cleaning contractor for slaughterhouses operated by meatpackers such as Tyson Foods. As its workers scrub butchery equipment, they have sometimes suffered injuries that include acid burns from cleaning agents and even, in a few cases, amputation.

The business was purchased in 2018 by Blackstone Core Equity Partners, a long-hold buyout fund whose investors included Canada Pension Plan, NY State Common Retirement Fund, North Carolina Retirement Systems and Keva, the Finnish local government pensions institution.

In 2022, a girl in Nebraska attended school with chemical burns on her hands and knees, apparently the result of her illegal night-time career in slaughterhouse sanitation. The US Department of Labor launched an investigation and filed a lawsuit against Packers, which led to a nationwide injunction in Nebraska federal court against what the judge called “oppressive child labour”.

In February 2023, the labour department found that Packers had employed at least 102 children — mostly undocumented migrants — at 13 plants across eight states, from Texas to Minnesota. Blackstone called any violation of Packers’ anti-child-labour policies “completely unacceptable”.

The legal consequences for Packers were trivial. It paid civil fines totalling $1.5mn, based on a maximum penalty of $15,000 per child for violations not resulting in serious injury, under the Fair Labor Standards Act. Packers’ revenue in fiscal year 2022 was $460mn. The largest financial penalties arose from its contracts at JBS Foods plants in Nebraska and Minnesota, with 49 children, and a Cargill plant in Kansas, with 26 children. Separately, the Department of Homeland Security launched an investigation into the possibility of a human trafficking operation to smuggle migrant children to work in US slaughterhouses.

Big-name companies that outsource abuse-prone work to subcontractors or staffing agencies can potentially outsource responsibility. In this case, the labour department did not investigate the meat processors that used Packers, such as JBS. Nor was JBS sued by the migrant girl whose injuries triggered the affair; the Washington Post reported that a county judge jailed her stepfather for driving her to work, and the family feared deportation.

But the reputational consequences — at least to Packers — were serious. Its leading clients, Cargill, Tyson Foods and JBS, cancelled many contracts, the Packers chief executive retired, and the trading price of Packers’ loan debt sank to distressed levels. The company took steps to improve its training and compliance, while establishing a $10mn charitable fund to combat child labour.

Pension fund investors in Blackstone from New York, North Carolina and Denmark were publicly critical, as was the California Public Employees’ Retirement System (Calpers).

While some argue it is the work of the government to address these problems, it has scarce resources to do so. The Department of Labor has one occupational safety officer for every 70,000 US workers. To compensate, the agriculture department has told its nearly 8,000 food inspectors to report child workers to the labour department. A bill proposed in Congress would raise the maximum fine to $700,000 per child in cases of serious death or injury, with up to 10 years in prison for repeat offenders, but it appears to have stalled.

In September 2023, the Department of Labor opened child labour investigations into two slaughterhouse sanitation subcontractors, QSI and Fayette Industrial — as well as meatpackers Tyson Foods and Perdue Farms. Its chief legal officer, Seema Nanda, told the New York Times: “We are long past the day when brands can say that they don’t know that they have child labour in their supply chain. The intention is to make sure that those higher up in the supply chain are holding their subcontractors and staffing agencies accountable.”

Letter in response to this article:

Don’t blame private equity for child labour violations / From Erin Lyon, Head of Consulting, LRQA, London EC2, UK