Apple (AAPL) Accused Of iPhone Supply Chain Violations Connected To Shanghai Factories Run By Pegatron Corporation

A labor rights organization says a factory in the supply chain of Apple Inc. (Nasdaq:AAPL) has been violating workers' rights since the big American corporation moved certain iPhone assembly work away from Foxconn.

New York's labor watchdog China Labor Watch, which investigates supply chain working conditions of major electronics manufacturers, said Saturday that Taiwanese contractor Pegatron Corporation (TPE:4938) withheld employee pay, imposed excessive working hours and also violated Chinese safety and environmental laws. The report also accused Pegatron, which employs 70,000 people in factories in Shanghai and Suzhou and assembles iPhone 4, 4S and 5 models, of discrimination against ethnic minorities and women, plus providing poor living conditions. The group said that Apple also undermined its own pledges at Pegatron's factories.

China Labor Watch said it sent undercover investigators into three Pegatron factories and conducted nearly 200 interviews with workers outside the factories from March to July of this year. Its major findings were that the majority of Pegatron production employees worked 66 to 69 hours per week, far above China's legal limit of 49 hours, and also that pregnant women had at times been required to work 11-hour workdays, more than the eight-hour legal limit.

Apple said its own audit had found that Pegatron employees making Apple products worked 46 hours per week on average, yet China Labor Watch said that employees were under pressure to falsify time cards to conceal the violations.

The group said it found production line workers had sometimes dumped water laced with hazardous chemicals from cutting tools into sewers and also accused Pegatron of "discriminatory hiring practices," such as refusing to hire people older than 35 or people among the Hui, Tibetan or Uighur ethnic minorities.

California's Apple said in a statement that it had in fact confirmed that identity cards of some Pegatron workers were being held by management despite Apple's having told the company to stop that practice. Apple also said it would send auditors to three Pegatron facilities this week to investigate the additional claims. Apple has published a code of conduct for its suppliers and joined a worker rights monitoring group called Fair Labor Association.

"Apple is committed to providing safe and fair working conditions throughout our supply chain," a company statement said, detailing 15 comprehensive audits of Pegatron facilities since 2007, including surprise audits in the past 18 months. "If our audits find that workers have been underpaid or denied compensation for any time they've worked, we will require that Pegatron reimburse them in full."

Pegatron also released a statement in its defense, promising to correct any violations of Chinese labor laws.

"We strive to make each day at Pegatron better than the last for our employees. They are the heart of our business. That's why we take these allegations very seriously," Pegatron CEO Jason Cheng said in the statement.