Amazon has admitted that thousands of agency workers who make its Echo smart speakers and Kindles in China were hired and paid illegally.

The US giant issued a statement regretting “issues of concern” following an investigation by the Observer and the US-based China Labor Watch into the “unethical and illegal” working conditions at its supplier factory in Hengyang.

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Amazon disclosed that its own auditors visited the Foxconn factory in March and found that it had hired an illegally high number of agency workers and was not paying them properly for working overtime.

Agency staff – known as dispatch workers in China – do not get sick pay or holiday pay and can be laid off without wages during lulls in production. China changed its labour laws in 2014 to limit their use to 10% of any workforce in an attempt to stop companies exploiting them to cut costs.

The China Labor Watch investigation – published on Sunday in association with the Observer – found that more than 40% of the staff in the Foxconn factory were agency workers. Those working overtime were being paid at the normal hourly rate instead of the time-and-a-half required by Chinese law and by Amazon’s own supplier code of conduct.

In its statement, Amazon said: “Amazon takes reported violations of our supplier code of conduct extremely seriously. In the case of the Foxconn Hengyang factory, Amazon completed its most recent audit in March 2018 and identified two issues of concern.

“We immediately requested a corrective action plan from Foxconn Hengyang detailing their plan to remediate the issues identified and we are conducting regular assessments to monitor for implementation and compliance with our supplier code of conduct. We are committed to ensuring these issues are resolved.”

The investigation also reveals that the Hengyang workers are paid far less than Foxconn workers in other Chinese cities. They earn a basic monthly wage of 1,750 yuan (£204), while workers at Foxconn’s factory manufacturing for Apple in Shenzhen start on a basic 2,400 yuan (£280).

The investigation produced payslip evidence to show that workers can work up to 80 hours of overtime in a month, rather than the 36 hours normally permitted by law. However, companies can and do secure exemptions. Workers at the factory also have to ask for permission from supervisors to go to the toilet.

Li Qiang, executive director of China Labor Watch, wrote to Amazon’s chief executive, Jeff Bezos, last month, setting out the findings. “This violates Chinese labour law. Foxconn uses a large number of dispatch workers and violates workers’ interests via these dispatch companies. This practice, in and of itself, is unethical and illegal,” he wrote. “I hope that you can compel your suppliers to improve their working situations and to manufacture Amazon products under ethical conditions.”

Kara Hartnett Hurst, Amazon’s head of worldwide sustainability, wrote back saying: “Amazon recognises our responsibility to ensure the wellbeing of factory workers manufacturing products for Amazon.”

China Labor Watch’s investigator – who spent a month at the factory, posing as a dispatch worker – reported workers slumped, exhausted, over their work benches trying to catch a few minutes’ sleep during breaks.

Amazon and Foxconn have both faced repeated criticism for their treatment of workers, but this is the first time Amazon’s manufacturing operation has been investigated.

Bezos is worth an estimated £83bn and the Foxconn chief executive, Terry Gou, has a fortune estimated at £6.1bn.

The investigation found that many workers earn about £233 a month, less than half the national living wage of £530, calculated for China by the Asia Floor Wage Alliance. The standard hourly rate of 14.5 yuan (£1.69) is £1 less than the £2.69-an-hour national average for a factory worker in China.

Li said that the use of agency staff was designed to save money. “The factory employs dispatch workers as a means to cut manufacturing costs,” he said. “Amazon is only concerned about whether or not its supplier factories are completing orders in time and is generally apathetic towards the working conditions.” The result was that workers were left struggling to make a living.

“The wages at Hengyang Foxconn are not enough to sustain a livelihood and workers must put in overtime hours so that they earn a sufficient amount to have a decent standard of living. The factory even cuts the overtime hours of workers as a form of punishment.”

Foxconn said it had a strict company policy of not commenting on matters related to current or potential customers, or any of their products. In a statement, it said that it provided a positive working environment and was committed to ensuring that all aspects of its business complied with industry standards. “Foxconn works hard to comply with all relevant laws and regulations in all markets where we operate,” it said. It added that regular audits were carried out “and if infractions are identified, we work to immediately rectify them”.