The regulations stipulate that companies based in Germany and with more than 3000 employees must comply with the Supply Chain Act. Foreign companies with their headquarters in Germany are also covered by the law. From January 1, 2024, the threshold for affected companies will be lowered to 1000 employees.
Udo Olgemöller, an expert in public commercial law at the international law firm Allen & Overy in Frankfurt, explains: “That sounds clear. However, it can quickly become complicated for corporations when it comes to the question of whether the employees of a subsidiary should be counted and what specific requirements the law places on the due diligence obligations of this company.”
What rights are involved along the international value chains?
Mansur Pour Rafsendjani from the law firm Noerr explains: “It’s about whether people or the environment are harmed by the company’s own business activities or by its business relationships with suppliers.”
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The European Union is also planning a supply chain law to ensure that large companies do not make any profits from child or forced labor or environmental damage in their international supply chains.
(Photo: imago images/Westend61)
The law names forced labour, child labour, discrimination, violation of freedom of association, problematic employment and working conditions and environmental damage as relevant risk areas.
How are corporations treated?
The Federal Office of Economics and Export Control (BAFA), which is responsible for compliance with the Supply Chain Act, has listed twelve different constellations just to clarify how “affiliated companies” are to be classified.
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What is decisive is a “determining influence” that results “from the overall view of the economic, personal, organizational and legal ties” between the subsidiary and the parent company.
What do affected companies have to do specifically?
First of all, there is an obligation to carry out a risk analysis. According to administrative law expert Olgemöller, companies must systematically go through which products they manufacture, which suppliers they use and which services they purchase: “How high is the risk to be assessed with regard to human rights-related issues, but also with regard to environmental standards such as hazardous waste with mercury spiked products or particularly resistant chemical compounds?”
Does the law apply along the entire supply chain?
Yes, emphasizes the Federal Office of Economics and Export Control (Bafa). In addition to one’s own business area, business relationships and production methods of direct suppliers must also be taken into account. Even with indirect suppliers, there may be an obligation to take action.
The Supply Chain Act names forced labour, child labour, problematic employment and working conditions or environmental damage as risk areas.
(Photo: dpa)
However, Bafa makes it clear: “The principle of appropriateness applies.” Companies are not required to tackle all identified human rights challenges at the same time. You would initially only have to concentrate on the main risks, so you can prioritize them. Nevertheless, according to lawyer Olgemöller: Even if you have 300 or 400 suppliers, you still have to carry out an individual examination, if necessary with the involvement of experts and environmental consultants who examine the processes on site.
What else belongs to the due diligence obligations of companies?
In essence, the following obligations result from the law:
- Establishment of a risk management system
- Adoption of a policy statement of corporate human rights strategy
- Establishment of preventive measures
- Immediate implementation of corrective measures in the case of detected legal violations
- Establishment of a complaints procedure
- Documentation and reporting requirements for fulfilling due diligence requirements
According to the Supply Chain Act, a “human rights officer” is to oversee the company’s risk management.
Lawyer Olgemöller reports on this from the consulting practice: “At which level of a group such a human rights officer should be installed, whether a group-wide compliance system for supply chains is sufficient or whether each group company has to ensure compliance with the due diligence obligations for itself – with this question alone you have to deal with it for a long time in order to ultimately find a solution for the individual case that is effective on the one hand and appropriate to the circumstances on the other.”
What happens when risks are identified in the supply chain?
If a company identifies risks with regard to human rights or compliance with environmental standards, it must act. In concrete terms, this means taking measures to ensure that risks in the supply chain are reduced or completely eliminated.
>> Read here: NKR boss Goebel: “The ministries don’t think enough”
Administrative lawyer Olgemöller sees room for maneuver here through the law, because “existing contracts cannot be supplemented at short notice by termination clauses due to corresponding violations”. In times of disrupted supply chains due to Corona and the Ukraine war, only limited pressure could be put on suppliers anyway. “But new contracts must contain clear regulations within the meaning of the Supply Chain Act.”
What if a company becomes aware of violations?
If companies discover violations, they have a legal obligation to take remedial action against their suppliers. Mansur Pour Rafsendjani from the law firm Noerr makes it clear that companies should first look for solutions together with the supplier or within the industry. “A termination of business relationships should only be a last resort to deal with human rights violations or environmental sins by subsidiaries or suppliers.”
What are the reporting obligations of companies?
According to the law, affected companies are obliged to submit an annual report to Bafa on the fulfillment of their due diligence obligations. The report must also be made publicly accessible on the company’s website free of charge for a period of seven years.
In the event of violations of the supply chain law, companies face fines of up to eight million euros or up to two percent of their global annual turnover. In the meantime, Bafa has published a – very comprehensive – template for a standard report on its website.
What is the EU Supply Chain Law?
The European Union is also planning a supply chain law to ensure that large companies do not make any profits from child or forced labor or environmental damage in their international supply chains.
According to the will of the Member States, EU companies would be affected that generate annual sales of more than 300 million euros worldwide and have more than 1000 employees. For companies from third countries, the rule would initially apply to EU sales of 300 million euros. Later, the regulations will also apply to smaller companies.
>> Read here: SMEs are changing supply chains – but dependency on China remains high
The European Parliament and EU states still have to agree on the specifications. The Federation of German Industries (BDI) and the Association of German Chambers of Commerce and Industry (DIHK) also warn of additional bureaucratic burdens here.
More: Union faction calls for postponement of its own supply chain law