The role multinational corporations have in ensuring their supply chains remain consistent with applicable international labour and human rights laws is expanding. Designed, in part, to provide better protection for human and environmental rights within the global economy, Germany and other industrialised nations are working to introduce mandatory due diligence obligations to certain corporations. Such laws are intended to create legal parameters around the nature of multinational companies’ business relationships and may hold larger corporations liable for the conduct of smaller and foreign-based business partners.
Germany’s Supply Chain Act
Germany’s Federal Cabinet agreed a draft Act on supply chain responsibility – “Lieferkettengesetz or Sorgfaltspflichtengesetz” – on 3 March 2021. The Act, which sets out what companies must do to comply with human rights due diligence obligations as well as the limits and consequences of their duty, was passed by the Bundestag on 11 June 2021.
The law comes into effect in 2023 for companies with more than 3,000 employees and from 2024 to companies with more than 1,000 employees with a registered office or branch in Germany. 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.
What employers must do
The due diligence measures include the establishment of mechanisms to identify human rights abuses or environmental violations. As a result, employers should conduct a comprehensive risk analysis and risk management systems introduced or amended with a focus on potential human rights or environmental violations.
Additionally, the Act requires companies to draft a policy statement on their human rights strategy, specifying in more detail how the company aims to deal with the new obligations. If a potential risk is detected, companies will be generally obliged to take preventive and remedial action. Complaint procedures for affected workers whose rights were violated are to be established within the framework of the Act.
Moreover, there are interesting interactions with the recently failed draft of the German Whistleblower Protection Act (“Hinweisgeberschutzgesetz”). It was intended to implement Directive (EU) 2019/1937 of the European Parliament, on the protection of persons who report infringements (for example, for certain legal requirements relating to information about potential illegal manufacturing, import, or distribution practices related to unsafe products). In particular it included the establishment of reporting offices and the personal protection of the whistleblower. Although there is a lack of guiding regulations for German companies due to the failure of the draft, there is nevertheless an obligation to implement the directive by 17 December 2021.
If a corporation is unable to reduce Supply Chain Act breaches in the near future, it must establish and implement a plan to do so. This may involve either working with the supplier that caused the violation to find solutions, or to temporarily suspend, or as a last resort terminate the business relationship. In instances of regulatory violations, non-governmental organisations and trade unions will be able to represent private claims in German courts through representative action.
Further, companies shall ensure that an internal company complaint procedure established, to allow persons who have knowledge of a possible violation or risk for the legally protected rights to bring it to the attention of the company. Besides that, documentation and reporting obligations will be put in place that require annual non-financial business reports to be published and sent to the relevant authorities.
It should be noted that these specific obligations only apply to direct suppliers. But companies must also take action if they gain “substantial knowledge” of human rights violations from other business partners.
Liabilities and compliance
The law is not intended to create an additional basis for liability under civil law. Instead, a breach of due diligence obligations is to be sanctioned by means of administrative proceedings and the threat of fines.
The Federal Office can order a company to take certain measures and will have a right to enter and inspect a company’s business premises should it fail to comply with its obligations.
Perhaps most importantly, the draft also provides for comprehensive sanctions for breaches of mandatory legislative due diligence, risk management, and reporting obligations.
France’s duty of vigilance
Existing French legislation is similar to the German Supply Chain Act. Adopted on 27 March 2017, France’s “Law on Duty of Vigilance” was the world’s first legislation to set binding obligations for companies and provide judicial avenues for victims.
The main difference between the French and German laws is the scope of companies covered, with France’s being more limited. The Law on Duty of Vigilance applies to French companies with more than 5,000 employees in the company's direct or indirect French-based subsidiaries, and with more than 10,000 employees if including direct and indirect subsidiaries globally.
That being said, the purpose of the French legislation is the same as its German counterpart: it creates an obligation for parent companies to identify and prevent human rights abuses and environmental impacts resulting from their own activities, from the activities of companies they control, and by their subcontractors and suppliers.
The law requires companies to take adequate measures to identify risks within their supply chain and to prevent violations. These measures must be effectively implemented so companies cannot only interpret the legal requirements as a formal “tick-box” exercise. Measures include risk mapping, tailored actions to mitigate risks or prevent severe impacts, an alert mechanism, and a system to monitor the effectiveness of measures implemented.
Companies must include these measures in a “vigilance plan” and make it public. This transparency requirement enables stakeholders to scrutinise whether a company has correctly identified the risks caused by its activities, and whether the measures taken to address those risks are adequate and effectively implemented.
Regarding the liabilities, the French legislation seems to go further than the German Act. Judicial mechanisms have been included to enforce the law and provide remedies to victims. Any interested party may ask a judge to issue an order for a company to comply with the law. If a company’s failure to comply with the law has caused damage to a third party, that third party may request compensation under common civil liability law.
Other European developments
The requirements for due diligence laws are demonstrated by the scope of application, differentiating standards, regulatory oversight, a cross-industry approach, and a generous scope of protection. However, the requirements are weighted differently across Europe.
The UK, for example, only has reporting requirements instead of actual due diligence requirements, while Dutch law requires mandatory diligence from certain companies in relation to child labour concerns. The new German law also contrasts with the mandatory modern slavery and anti-trafficking disclosure laws that originated in California before being further developed in the UK and Australia.
The emerging patchwork of national and country-specific regulations is not ideal, leading the EU Commission to develop its own mandatory human rights due diligence directive. This new regulation could come into effect in 2024 and is intended to increase the effectiveness of the protection of human rights and to create uniform conditions of competition in the internal market.
Unlike the German draft, which only includes direct suppliers in a first step, the EU aims to include all companies, regardless of the size of the workforce. Further, it plans to include a company’s entire supply chain. Even civil and criminal liability are being debated. Germany and other EU countries would have to adjust accordingly to such new bloc regulation.