Implications of the Modern Slavery Act 2015 for Franchisors

The Modern Slavery Act 2015, passed by the UK Government on 26 March 2015, seeks to address the role of businesses in preventing slavery, servitude, forced or compulsory labour as well as human trafficking from occurring in their supply chains and organisations.

What is required?

Section 54 of the Modern Slavery Act 2015 requires all body corporates or partnerships (in the MSA referred to as "organisations") that supply goods and/or services to prepare an annual 'slavery and human trafficking statement' if their total global turnover is equivalent to or exceeds £36 million (after the deduction of trade discounts, VAT and other taxes) and they carry on business in the UK. This also applies to foreign companies as the organisation does not have to be registered in the UK; it is sufficient that it carries on business in the UK. There is likewise no minimum amount of turnover that the organisation must derive from carrying on business in the UK.

The total turnover is calculated as the turnover of: (a) the organisation itself; and (b) the turnover of any of its subsidiaries (including those operating wholly outside the UK). Where a parent company and one or more subsidiaries in the same group are required to produce a statement, the parent may produce one statement that can be used by its subsidiaries.

Crucially for franchisors, the turnover of its third party franchisees does not count towards the £36 million turnover threshold, even though the franchisees arguably form part of the supply chain of the franchise system. If a franchisee meets the turnover threshold itself, it will be required to prepare a slavery and human trafficking statement in its own right. This is different from the way reporting currently works under the Carbon Reduction Commitment Energy Efficiency Scheme where franchisors of certain premises-based franchises are required to report on the total energy consumption within their network.

The first companies required to produce a slavery and human trafficking statement are those whose financial year ends on 31 March 2016.

What does compliance entail?

There is no set form or minimum contents requirement for the statement. In the guidance note issued by the UK Government it merely says that the statement should be "succinct but cover all the relevant points" and written in plain English to ensure that it is easily understood.

The MSA further contains a non-exhaustive list of information that may (and probably should) be included in the annual statement, such as:

  • the organisation's structure, its business and its supply chains;
  • its policies in relation to slavery and human trafficking;
  • its due diligence processes in relation to slavery and human trafficking in its business and supply chains;
  • the parts of its business and supply chains where there is a risk of slavery and human trafficking taking place, and the steps it has taken to assess and manage that risk (ideally by country);
  • its effectiveness in ensuring that slavery and human trafficking is not taking place in its business or supply chains, measured against such performance indicators as it considers appropriate; and
  • the training and capacity building about slavery and human trafficking available to its staff

but this list is not mandatory and can be amended.

Once completed, the slavery and human trafficking statement must be published on the organisation's website with a link in a prominent position. If an organisation has more than one website, the link should be placed on the most appropriate website relating to the organisation's business in the UK.

There is no deadline by which organisations must complete their annual statement, although the guidance note states that organisations are "encouraged to do so" within 6 months of their financial year end.

Conclusion

In comparison to other recent pieces of legislation, such as the Bribery Act 2010 which contains a number of statutory penalties for failure to comply with its provisions (including imprisonment), the MSA relies primarily on the fear of a reputational backlash for those companies that do not comply with the provisions of the MSA. In the event that a business fails to produce the slavery and human trafficking statement for any financial year in which it meets the turnover threshold, the Secretary of State can seek an injunction (which if not complied with, in turn, is punishable by an unlimited fine), but there are no statutory penalties set out in the MSA itself for failure to comply with the reporting obligation.

Due to the relatively high threshold figure and the fact that the franchise network turnover is not combined, the MSA will not be relevant to a large number of franchisors. However, consumers are increasingly paying attention to the CSR initiatives and ethical business practices of the companies from which they buy their goods and services, so even where franchisors are not required to comply with section 54 of the MSA, it makes commercial sense for franchisors to audit their supply chain and ensure that appropriate codes of conduct, guidelines and handbooks are in place to deal with the prevention of modern slavery.