Sustainability: Federal Government presents draft bill on Supply Chain Act

After long political negotiations, the German Federal Ministries for Economic Affairs and Energy (BMWi), Economic Cooperation and Development (BMZ) and Labour and Social Affairs (BMAS) have agreed on a draft law on corporate due diligence in supply chains. With the draft bill on the so-called Supply Chain Act of 15 February 2021, the Federal Government wants to oblige larger German companies to comply with human rights and environmental protection standards along their global supply chain from 2023 onwards. The bill is expected to be passed before the end of this legislative period. 

In addition to addressing the main points of the bill, the following article deals in particular with the labour law implications and the need for HR departments to take action.

What are the objectives of the Supply Chain Act?

The primary purpose of the Act is to ensure that German companies fulfil their responsibility in the global supply chain by monitoring the standard of human rights at their suppliers abroad to ensure that they are being complied with. Child labour and inhumane working and production conditions, for example, are to be prevented. Secondly, the Act will also make it possible to hold companies responsible for environmental violations within the supply chains.  

The supply chain covers all the contributions that are used by a company to produce a product or provide a service, from the extraction of raw materials to the delivery to the final customer. It covers both the company's own actions and those of its direct contractual partners and (indirect) suppliers.

The objective of the Supply Chain Act can therefore be summarised under the catchwords "legally binding sustainability" in the sense of sustainable management or the assumption of social responsibility, so-called "corporate social responsibility". 

Which companies fall under the Supply Chain Act?

Once it comes into force on 1 January 2023, the Act will apply to companies that have their principal administration, principal place of business or their registered office in Germany and generally employ more than 3,000 employees. Therefore, for the time being only larger companies are affected. From 1 January 2024, the threshold is going to be lowered to 1,000 employees. The company’s legal form is of no more relevance for the applicability of the Act than the sector in which the company operates. In practical terms, the Act will be highly relevant, especially for companies with global supply chains, such as those in the automotive or textile industries.

What provisions will the Supply Chain Act include?

Risk management will be required in future, and this will have to be introduced and implemented by the company effectively. It must be anchored in all (relevant) internal company business processes and be able to identify, prevent and end or minimise imminent risks in connection with human rights or environmental violations, for example by appointing a human rights officer. 

The draft law defines a risk within the meaning of § 5 as being the threatened violation of one of the legal positions listed in § 2 (2) (e.g. life, health, child protection, freedom from slavery) or the threatened violation of an environmental obligation by a company in the supply chain pursuant to § 2 (3). The risk is realised in the cases specified in § 5 Nos. 1-13.

The heart of the risk management is a comprehensive risk analysis, which requires that the company examines the risk of violations of human rights or environmental violations and for which the Act set specific requirements. The risks are to be identified both in the company's own business division and at its direct contractual partners (suppliers), and then weighted and prioritised appropriately. Indirect suppliers who are not contractual partners of the company are only excluded from the risk analysis until the company becomes aware of violations at the indirect supplier.

Following the risk analysis, the company must implement "appropriate" preventive or remedial measures. However, the bill does not provide for an obligation according to which these measures also have to be successful, i.e. ultimately actually contribute to the elimination of violations of human rights or environmental violations. The appropriateness is measured, for example, according to the type and scope of the business activity and the company's ability to exert influence.

What legal consequences do companies face in the event of violations?

Violations of the obligations arising from the Act constitute an administrative offence that is punishable with a fine. In addition, companies can be excluded from public contracts for a maximum period of up to three years. Governmental responsibility lies with the Federal Office of Economics and Export Control (BAFA), which, as the competent authority, will monitor compliance with the Act.

In addition to the persons affected by violations, non-governmental organisations and trade unions are also entitled to take legal action against the company in the event of violations, provided that they are authorised to do so by the affected person. In contrast, the law does not envisage any civil liability of the company for damage incurred abroad.

What need for action arises for HR departments?

Besides tremendous compliance requirements for companies, the Supply Chain Act will especially require the increased attention of HR departments. Under the catchword "sustainability", the preparatory and focal point of the work required until the Act comes into force on 1 January 2023 is likely to be adapting existing internal compliance policies to the new legal situation and implementing them effectively.

In addition, HR departments are likely to be called upon when it comes to the drafting or (supportive) implementation of the company's supplier policies. Attention also has to be paid to appropriate auditing and termination provisions in the supplier contracts.

Furthermore, under certain circumstances there may be a need to adapt existing whistleblowing systems.

Last but not least, at the latest once the Act comes into force, HR departments are likely to bear the central responsibility for implementing the appropriate sanctions and consequence management in the event of any breaches of the compliance culture.

In addition to avoiding regulatory offences, it will naturally also be a matter of avoiding any damage to the company's reputation in the event of accusations of inhumane working conditions along its own supply chain abroad. We can certainly expect that both a company's customers and society in general will pay even greater attention to the issue of "sustainability" and will take this criterion into account to a much greater extent when making purchasing decisions or awarding contracts.

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