1,800 American Apparel workers may be ineligible

American ApparelAPP, no stranger to controversial headlines, said Wednesday that the government has found that 1,800 of its employees are either illegally working in the U.S. or potentially illegal to work.

Those employees comprise about one-third of the clothier's Los Angeles manufacturing operation.

The disclosure came as a result of an investigation by U.S. Immigration and Customs Enforcement. Of the 1,800 workers identified, 1,600 were deemed to be unauthorized to work while Immigration had been unable to verify the status of the remaining 200. The company said it was not found to have willingly hired illegal workers.

If the workers are unable to provide proof of eligibility, they will be forced to leave the company, American Apparel said in a statement. The company said the departures aren't expected to hurt its financial results and noted it has a surplus of inventory and production capacity.

KeyBanc Capital Markets analyst Edward Yruma said the immigration notice "thankfully led to no mass arrest or deportation of employees." He said that although the company has one of the highest risk profiles among those it covers, it also represents "some of the strongest upside on an absolute basis."

American Apparel has touted its "sweatshop-free" operation and says it pays some of the highest wages in the industry.

"The company remains very proud of its track record as an advocate for the comprehensive reform of the country's immigration laws," company founder Dov Charney said in a statement.

Yruma said the company has strengthened its screening process for potential employees over the past year.

"We remain comfortable that the immigration issue is more an unfortunate byproduct of its domestic garment production rather than systemic issues," he told investors in a research report.

Charney has been at the center of other controversies, most recently a $5 million settlement with filmmaker Woody Allen over the use of Allen's image in a billboard. American Apparel depicted Allen as a Hasidic Jew with a long beard, side curls and black hat. The billboard featured Yiddish text meaning the holy rabbi.

American Apparel shares have fallen 45% in the past year.

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