Sweatshops often involve poverty-level wages, excessive hours of labour, and unsafe or unhealthful workplace conditions. Certain social and economic conditions are necessary for sweatshops to be possible: (1) a mass of unskilled and unorganized labourers, often including children, (2) management systems that neglect the human factor of labour, and (3) lack of accountability for poor working conditions, or failure of governments to intervene on the behalf of workers.

Historically, the sweatshop has depended on homework (literally, work done in the home) and the development of contracting. In the homework system, members of a family receive payment for piecework done in their own home or in a residence that has been converted into a small factory. In contracting (contract labour), individual workers or groups of workers agree to do a certain job for a certain price. Sometimes they carry out this contract themselves; sometimes they sublet it to subcontractors at lower prices. This arrangement can lead to labour exploitation (often of women, children, and, in the developed world, undocumented workers or recent immigrants), erratic employment, and poor quality in the final product. When trade is brisk, extremely long hours are worked in seriously overcrowded workrooms. When trade is slack, the subcontractors—whose overhead costs are far lower than those of factory employers—typically dismiss workers without consideration. One of the earliest objectives of factory and minimum-wage legislation was to improve conditions for workers.

In the 19th century, sweatshops were common in the manufacturing of shoes, soap, cigars, and artificial flowers. Conditions have tended to be worse in large cities, where sweatshops can be hidden in slum areas. Although legislation had by the middle of the 20th century controlled sweatshops in most developed countries, the system was still operating in many countries in Asia, where large numbers of people were engaged in homework and in small factory shops.

Factors contributing to the control of sweatshops in the 20th century included the growth of national labour laws (labour law), pressures from trade unions (organized labour), the political influence of labour parties, social awareness stemming from activism, and, on the part of industry, recognition of the efficiencies of factory production and increased interest in human relations. Around the world, the International Labour Organisation (International Labour Organization) has attempted to raise labour standards in countries where sweatshops are still common. Sweatshops in the garment and shoe industries (clothing and footwear industry) became headline stories in the 1990s when popular American brands were discovered to have been made in sweatshops in the United States and its territories and in overseas factories.