Business and Human Rights - the Supply Chain Act is coming

March 2021 · Estimated read time: mins

Achten Unternehmen nicht auf menschenwürdige Arbeitsbedingungen, drohen drastische Bußgelder

Business and Human Rights – the new German act on fair supply chains 

Multinational corporations have a far-reaching impact on working conditions of labor in their supply chains. By conducting due diligence audits to reveal human rights violations in supply chains, they can exercise pressure on their suppliers to make them improve the working conditions of their workers. Many industrialised nations, amongst other Germany, are now working on laws to introduce mandatory due diligence obligations of corporations when surveying their supply chains rather than relying on voluntary action. The Federal Cabinet agreed on a draft act on supply chain responsibility on March 3 2021. The act shall pass Parliament within the remainder of this legislative period in September 2021. Major objection to the act in parliament is not to be expected. How can companies get ready for the upcoming legislation?


Planned Approach to Legislation in Germany 

The German government first took a voluntary approach in encouraging companies to engage with their human rights impacts: As part of the national action plan designated to implement the UN’s social development goals nationwide questionnaires were submitted to gain insights in how the companies engaged with these goals already, without binding legislation obliging them to. The learnings from this survey served as evidence for the rather low engagement of many German corporations with human rights interferences. Only 455 out of 2.250 corporations had answered the questionnaire and under 50% were compliant with due diligence requirements. While time (within the first Covid-19-lockdown) and manner of the survey (partly imprecise e-mail addresses) were criticised harsh, mainly by fashion industry businesses, the survey marked the beginning of a political effort to legislate due diligence requirements.

The act which was drafted by secretaries of both coalition parties replaces voluntary engagement regarding human rights due diligence with mandatory obligations. The act is planned to enter into force on 1 January 2023 and will oblige companies located in Germany that employ more than 3.000 employees to conduct audits on potential or actual human rights abuses in their supply chains and to report on these matters. As of 1 January 2024, the duties will be extended to companies that employ more than 1.000 employees. Agency workers with an assignment term of more than six months and group company employees are to be taken into account when calculating the relevant number of employees.


The new duties

The act obliges corporations to establish mechanisms to identify human rights abuses. A comprehensive risk analysis must be conducted and risk management systems introduced or amended with a focus on potential human rights violations. Additionally, the act requires companies to draft a policy statement on their human rights strategy to specify in more detail how the company aims to deal with the new obligations. If a risk is detected, companies will be obliged to take preventive and remedial action. Complaint procedures for affected workers whose rights were violated are to be established. Documentation and reporting obligations will be put in place that require annual non-financial business reports to be published and sent to the competent authorities.  

Enforcement is to be carried out by the Federal Office of Economics and Export Control. Intervention powers will exist both ex officio and at the instigation of affected workers. The Federal Office can order companies to take certain measures and will have a right to inspect and enter the companies' business premises. 

Most importantly, the draft also regulates comprehensive fine sanctions for breaches of mandatory legislative due diligence, risk management and reporting obligations. Fines can sum up to EUR 800.000. If a company achieves turnovers of over EUR 400 million, fines may sum up to 2 percent of the worldwide turnover of a company. The Frankfurter Allgemeine Zeitung recently calculated that on that basis Volkswagen could be fined with up to EUR 5 billion.

Besides, it is planned that companies in breach of the act can be excluded from public tendering for up to three years. So-called safe-harbour regulations which would allow companies to exempt themselves from civil liability vis-à-vis affected workers, if risk analysis has been carried out and remedial measures have been taken, are currently not envisaged. The draft law does not exclude tortious liability of companies, even though the law does not specify an international scope of application. Therefore, compensation for damages will continue to take place according to the rules provided by the state in which the damage occurred.

The bill allows for a new procedural representation of workers by trade unions and NGOs, if workers’ rights under the act were violated. This power is not limited to domestic workers and allows for simplified litigation for employees of suppliers abroad within the domestic court system. Affected companies will have to expect considerable media interest in such cases.


Quo Vadis?

The bill confronts affected corporations with unprecedented challenges in maintaining and surveying their international contractual relationships. Companies will have to establish audits even in those countries where they might not even have an own branch. However, keeping in mind the benefits of such efforts for labor in the Global South and the financial disadvantages of those companies that already engage in human rights due diligence voluntary, a statutory framework will possibly help in creating fairer market conditions for everybody. It has to be monitored, however, whether German companies will back out from "problematic" countries rather than trying to establish better working conditions locally – in that case, the act would disservice its own goals.  

Companies whose business models depend on extensive and intransparent supply chains may for the time being hope for the announced publications on cross-sectoral and sector-specific recommendations for compliance with the new requirements by the Federal Office for Economic Affairs and External Control. Keeping in mind the possibility of existential fines, they should, however, seek for advice on their potential new duties rather sooner than later. IT-based CRM-systems and blockchain should be evaluated to help companies, too. This is even more important as the European Union plans a supply chain compliance law itself which could come into effect in 2024 already. The EU aims at including all companies, regardless of the size of the workforce. Further, the whole supply chain is planned to be included, unlike in the German draft which only includes direct suppliers in a first step. Even civil and criminal liability are debated. The German act would have to be adjusted accordingly to such regulation.

Undoubtedly, the draft should therefore serve as a kick-off for companies who were hesitant to engage with human rights due diligence in starting to do so.

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