New enforcement activity is underway against retailers and manufacturers subject to the California Transparency in Supply Chains Act. The California Department of Justice is conducting a compliance review, sending letters to companies with manufacturing or retail sales listed as their principal business activity on California tax filings requesting them to submit information and state their compliance with the Act. You can view a sample letter here.

Covered entities should ensure their websites contain accurate postings and disclosures based upon their due diligence in selecting socially responsible suppliers and establishing internal accountability standards and procedures upon which they, or a third party, can and do audit. Corporate Social Responsibility (CSR) is increasingly incorporated into legal requirements with enforcement activity, as evidenced by the California DOJ most recent “warning letters.”

The California Transparency in Supply Chains Act

The California Transparency in Supply Chains Act (CTSCA) requires retail sellers and manufacturers doing business in California with over $100,000,000 in worldwide gross receipts to disclose their efforts to eradicate slavery and human trafficking from their direct supply chains for tangible goods they offer for sale.

Specifically, a covered entity must, at a minimum, "disclose to what extent, if any," it does the following:

  1. Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery. The disclosure shall specify if the verification was not conducted by a third party.
  2. Conducts audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains. The disclosure shall specify if the verification was not an independent, unannounced audit.
  3. Requires direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business.
  4. Maintains internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking.
  5. Provides training on human trafficking and slavery to company employees and management who have direct responsibility for supply chain management, particularly with respect to mitigating risks within the supply chains of products.

Cal. Civ. Code, §1714.43, subds. (c)(l)-(5).

For those covered retail sellers and manufacturers with Internet websites, disclosures must be posted "with a conspicuous and easily understood link to the required information placed on the business' homepage." Cal. Civ. Code, §1714.43, subd. (b). If a covered retail seller or manufacturer does not have an Internet website, it must provide a "written disclosure within 30 days of receiving a written request for the disclosure from a consumer." The exclusive remedy of the statute is an action brought by the State Attorney General for injunctive relief, but nothing limits remedies available for violations of any other state or federal law.

In reality, the teeth of the Act lies with consumers and their buying power, as well as statutory consumer claims that can and have been brought under California Business and Professions Code Section 17200 for unfair business practices and Section 17500 for false advertising. In describing and disclosing its efforts to eradicate slavery and human trafficking, it is critical that a company not purport to be a better “global corporate citizen” with respect to its supply chain than it is in practice. The CTSCA brings the employment practices of suppliers thousands of miles away within the compliance purview of procuring retailers and manufacturers which do business and file tax returns in California even if their headquarters are outside the state.

Increasing Legislative Social Responsibility

While supply chain labor compliance long has been a matter of voluntary CSR, driven by a positive sense of good global corporate citizenship or a negative concern of corporate vilification by consumer activists, unions or non-governmental organizations (NGOs), the labor practices of suppliers increasingly pose a significant legal risk for global companies. The CTSCA is only one of numerous statutes and international standards putting the spotlight on responsible supply chain practices.

An increasing list of laws mandate responsible sourcing and/or reporting and disclosure of CSR information. In the US, for example, Executive Order 13627 prohibits US federal contractors, subcontractors and agents from using misleading or fraudulent recruitment practices. For example, federal contractors, subcontractors and their respective employees are prohibited from failing to disclose basic information or from making material misrepresentations regarding the key terms and conditions of employment, including wages and fringe benefits, location of the work, living conditions and housing, any significant costs to be charged to the employee and hazardous nature of any work.

Additional prohibitions include charging employee recruitment fees and destroying, concealing, confiscating or otherwise denying the employee’s access to identity documents, such as passports or driver’s licenses. If a portion of the contract or subcontract is performed outside the United States, the employer must pay return transportation costs upon the end of employment. For certain contracts and subcontracts where more than USD $500,000 is performed outside US borders, the Executive Order requires the creation of an “awareness program” to prevent subcontractors at any tier from engaging in trafficking of persons and requires the contractor’s monitoring, detection, and termination of any subcontractor who has engaged in such activity.

Developments in the EU, India, China and South Africa, among other countries, further underscore the trend toward mandatory CSR reporting and disclosure. For more information on country specific developments, see Mandated Corporate Social Responsibility Reporting: Coming Soon to a Country Regulating You.

While the reporting obligations differ and are, to date, largely untested and often unclear, what is clear is that the legal and reporting reality for global businesses is changing. Companies not only must achieve compliance with each particular law for its own operations and potentially its supply chain, but also must ensure consistency across jurisdictions and corporate affiliates.

Practical Implications for Global Employers

Recent enforcement activity and emerging mandates are raising the stakes when it comes to accurate and complete CSR reports and related disclosures through effective systems to identify, gather, evaluate, manage, validate and report information, particularly with regard to human trafficking and forced labor. As a result, companies may need to reimagine the roles of their legal, marketing, compliance and auditing groups.

Global companies, including those subject to the CTSCA, should:

  • Take proactive steps to operationalize the company's social expectations by embracing human rights due diligence procedures and implementing remedial action plans.
    • A recent report, jointly released by the American Bar Association, the School of Politics and Global Studies, and the McCain Institute of Arizona State University, indicates that 54 percent of Fortune 100 companies have policies targeting human trafficking and 68 percent have a commitment to supply chain monitoring, with most using a mixture of internal and external monitoring methods. More than 60 percent also express a commitment to providing training for staff and supply chain vendors.
  • Implement and update their enterprise risk management systems and programs into their supply chains, including contractual and other measures that allow for close monitoring, regular audits, and reporting.
    • For example, even companies not subject to Executive Order 13627 are introducing strict prohibitions for suppliers against confiscating workers’ passports or other identity documents. Similarly, policies on recruitment fees are increasingly being included as part of supplier due diligence processes.
  • Conduct audits of key suppliers in all countries, with a specific focus on labor and human rights practices.
  • Vet labor brokers to assure they build relationships with reputable entities.
    • This is especially important in industries where foreign labor requires a brokerage relationships.
  • Ensure websites contain accurate postings and disclosures based upon their due diligence in selecting socially responsible suppliers and establishing internal accountability standards and procedures.
  • Provide training to their sourcing and procurement departments and to suppliers and employees to raise awareness and ensure that their employees and suppliers understand the various red flags, both generally and specific to industries and regions.
  • Develop an integrated CSR decision-making structure that includes key stakeholders such as those in government affairs, investor relations, communications and legal.
  • Join global and local initiatives to discuss standards and benchmarks with companies, NGOs, academia, and others.
    • Partnerships have emerged over the past few years to allow companies to unite and identify solutions to combat human trafficking and forced labor in their supply chains that are sector and industry specific (e.g., Global Business Coalition Against Human Trafficking, Electronic Industry Citizenship Coalition Code of Conduct for the Protection of Children from Sexual Exploitation in Travel and Tourism).
  • Closely monitor the legal, economic and political climate in relevant countries on labor issues and adopt a coordinated, integrated approach to global labor and supply chain issues.
    • Many companies rely on mature and varied “sensing mechanisms” that include a range of measurements, which, when viewed together, provide a detailed picture of risks and red flags for compliance officers. For example, companies look to NGOs for data and research, and media outlets for regional and industry-specific trends and events.
  • Prepare to respond to corporate campaigns to combat false and misleading information, as well as communicate with employees and other stakeholders.