Background and current status
In 2011, the United Nations adopted Guiding Principles on Business and Human Rights. The issue of corporate responsibility was also a subject of discussion, particularly with regard to global supply chains. In its “National Action Plan” for implementation of the UN Guiding Principles, adopted in December 2016, the German government initially implemented the principles on a voluntary basis. But now, the Federal Ministry for Economic Cooperation and the Federal Ministry of Labor and Social Affairs have reached a compromise with the Federal Ministry of Economics and Energy on a bill (PDF only in German) for an Act on Corporate Due Diligence Requirements in the Supply Chain (the Due Diligence Act). This bill will be presented to the Cabinet for a vote in mid-March 2021 and a vote in Federal Parliament is planned for the current legislative session.
Key provisions of the bill
The law would require German companies above a certain size to fulfill their responsibilities with regard to supply chains, which would serve to advance the cause of international human rights and harmonize corporate due diligence requirements. To this end, requirements for responsible management will be defined for certain companies. These due diligence requirements will take effect on 1 January 2023 for large German companies with 3,000 or more employees and on 1 January 2024 for smaller companies, with at least 1,000 employees. Section 1(3) of the bill contains an interesting provision with regard to corporate groups: for affiliated companies in accordance § 15 of the Corporation Act, the employees of all Group companies count towards the number of employees of the Group parent company.
The risks addressed by the law particularly include forced labor, child labor, discrimination, hiring practices, working conditions and damage to the environment. Companies would be required to examine their own businesses, and those of their direct suppliers, for human rights violations. This risk analysis would include only a limited examination of the company’s indirect suppliers. Such an examination may be required e.g. if the company becomes aware of complaints by the indirect supplier’s employees.
After completing the risk analysis, companies would be required to work with their supplier to develop solutions or pursue remedies within the industry. Termination of the business relationship is to be considered only as a last resort.
The aforementioned requirements will be designed as a duty to make best efforts. Accordingly, companies will not be required to prevent all human rights violations within their supply chains. Rather, they will only be required to take adequate and reasonable measures consistent with the principle of proportionality, taking into account the severity of the potential harm, the probability of the risk and the nature of the company’s business activities.
No liability for national companies
The Due Diligence Act does not make German companies liable for damages occurring within their supply chain abroad. But the enforcement and supervisory authority, the Federal Office of Economics and Export Control, has the option of imposing substantial fines and penalties in the event that companies violate their due diligence requirements. It can also exclude companies from the award of public contracts for up to three years, a possibility which should not be underestimated. This penalty can be imposed in case of fines of EUR 175,000 or higher.
Consequences of implementation for companies
About 3,500 companies would be affected by implementation of these requirements, according to the Federal Ministry of Labor and Social Affairs. The bill will be presented to the Cabinet for a vote in March, and a vote in Federal Parliament is planned for the current legislative session.
Challenges for the future
Companies with highly complex supply structures in particular will encounter problems once the Due Diligence Act takes effect. The bill has already faced severe criticism, as the bill seeks to hold companies responsible regardless of whether states are able and willing to protect human rights. In the view of the Steel and Metal Processing Association, this circumstance cannot be taken as a reason to transfer this responsibility to individual companies.
Because of the new risk analysis, the impending implementation of the Due Diligence Act will pose a growing challenge for German companies. Given the threat of severe fines, companies should therefore establish a compliance management system to ensure the protection of human rights within their supply chains, keeping in mind the following key aspects:
- applicability of the Due Diligence Act (depends on the size of the company);
- risk analysis to identify human rights violations (e.g. violations by direct or indirect suppliers);
- cause to investigate an indirect supplier (e.g. complaints from the indirect supplier’s employees);
- annual reporting;
- continuous monitoring and supervision of suppliers;
- developing solutions with the supplier or within the industry.