On October 29, the U.K. government adopted regulations (availablehere) implementing provisions of the Modern Slavery Act 2015 (MSA) that require affected entities to publish a statement on their website for each fiscal year setting out the steps they have taken during that fiscal year to eliminate slavery and human trafficking in their business and supply chains. The U.K. government also has published guidance (available here) clarifying the application of the requirements, including the types of information a covered entity may include in its annual statement.

The disclosure requirements of the MSA may affect companies that are not based in the United Kingdom, but that have subsidiaries or operations there. Accordingly, U.S. companies with activities in the United Kingdom will need to analyze carefully the potential application of the MSA to them.

Background

The MSA’s disclosure requirements are similar to those that apply to companies that conduct business in California. Like the MSA, the California Transparency in Supply Chains Act of 2010 (CTSCA), which became effective on January 1, 2012, generally requires certain retailers and manufacturers doing business in California to publish on their websites information concerning their efforts to eradicate slavery and human trafficking in their supply chains. Therefore, companies required to comply with the CTSCA may be familiar with the type of requirements imposed under the MSA and the preparations required to draft a statement. The MSA, however, is less prescriptive than the CTSCA as to the type of information that should be included in a statement.

Our previous client alert on the MSA (available here) discusses the requirements of the law.

Timing

Transitional provisions in the regulations afford covered entities time to understand the new requirements and publish the required disclosures. The regulations provide that the first statements will be required for fiscal years ending on or after March 31, 2016. Accordingly, entities with a fiscal year ending before March 31, 2016 will not be required to publish a statement for that fiscal year. The guidance encourages entities to report within six months after each fiscal year-end, indicating that the government expects the first statements to be published by the end of September 2016.

Affected entities

Under the MSA, the disclosure requirements apply to any corporate body, limited liability partnership (LLP) or limited or other partnership (whether incorporated or formed within or outside the United Kingdom) that:

  • Carries on its business or part of its business in the United Kingdom;
  • Supplies goods or services; and
  • Has an “annual turnover” of at least £36 million.

Carrying on business. The guidance provides little amplification about the types of activities that would enable an entity to determine that it “carries on business” in the United Kingdom, other than that the government expects that this determination will be undertaken by applying a "common sense approach" and clarifies that having a U.K. subsidiary will not by itself mean that the non-U.K. parent company is covered, although the U.K. subsidiary might be caught by the new requirements. Accordingly, entities with a limited physical presence and activities in the United Kingdom will face some uncertainty as to whether the new disclosure requirements apply to them.

Turnover. The regulations confirm that “turnover” means total turnover derived from the provision of goods and services within the ordinary activities of the entity after deduction of trade discounts, VAT and any other taxes.

Unexpectedly, the regulations add that entities must include the turnover of any subsidiary undertakings (as defined by section 1162 of the Companies Act 2006) when determining whether they met the £36 million turnover threshold. Thus, a parent company with a small U.K. presence and turnover in the United Kingdom could become subject to the requirements by virtue of the turnover of a subsidiary whether or not that turnover is generated by activities within or outside the United Kingdom. This guidance will likely bring a greater number of entities within a scope of the new requirements.

Content of statements

The MSA requires entities to describe in their annual statement the steps they have taken during the fiscal year covered by the statement to eliminate slavery and human trafficking in their business and supply chains. Both the MSA and the guidance make clear that it is not compulsory for an entity to include any particular information in its statement, but the guidance indicates that the statement must describe all of the steps the entity has taken to eliminate slavery and human trafficking.

The guidance provides examples of the types of information that may be included in a statement, such as information concerning the entity’s:

  • Structure and supply chains
  • Policies concerning slavery and human trafficking
  • Processes relating to identifying slavery and human trafficking in the entity’s business and supply chains
  • Businesses where there is risk of slavery or human trafficking
  • Effectiveness in ensuring that slavery and human trafficking are not part of the entity’s business or supply chains
  • Training available to the entity’s staff on these issues 

The government indicates in the guidance that it expects that entities will build on their statements from year to year and that the statements will evolve, and improve, over time.

Definition of modern slavery. The definition of “modern slavery” for purposes of the law is based on the offenses established by the MSA of slavery, servitude and forced or compulsory labor, and human trafficking. The guidance recognizes that there is a "spectrum of abuse" and that determining in practice what amounts to modern slavery can be challenging. By way of clarification, the guidance states:

"There will be cases of exploitation that, whilst being poor labour conditions, nevertheless do not meet the threshold for modern slavery – for example, someone may choose to work for less than the national minimum wage, or in undesirable or unsafe conditions, perhaps for long work hours, without being forced or deceived. Such practices may not amount to modern slavery if the employee can leave freely and easily without threat to themselves or their family. Organisations do still nevertheless have a legal duty to drive out poor labour practices in their business, and a moral duty to influence and incentivise continuous improvements in supply chains.”

Groups. From the face of the MSA and the regulations, an entity is required to report only on its own business and supply chains, and not those of other group entities. Where more than one entity in a group is caught by the new requirements in its own right, each entity is required to publish a statement. The guidance confirms that a single statement may be used to cover entities in the same group, but that the statement should be published on each entity’s website.

The guidance, however, suggests that the application of the requirements to groups may be wider than might appear from the text of the MSA and the regulations. The guidance states that if a subsidiary is "part of the parent company's supply chain or own business, the parent company's statement should cover any actions taken in relation to that subsidiary to prevent modern slavery." The guidance also notes that it is good practice to report on the activities of all subsidiaries whether or not they are caught, particularly subsidiaries operating in a high-risk industry or location.

Approval and engagement. The MSA requires a statement to be approved and signed by a company director, with comparable requirements for LLPs and limited or other partnerships. The guidance is clear that not only should there be senior level approval and sign-off on an entity’s statements, but that the entity’s management must engage with modern slavery issues and provide senior level accountability, leadership and responsibility.

What businesses should be doing now

The U.K. government is seeking a "race to the top" by encouraging businesses to be transparent about what they are doing in relation to modern slavery and human trafficking. The government anticipates that failures by affected entities to take and disclose sufficient steps will result both in pressure to act from consumers, investors and NGOs, and in adverse reputational impacts.

Businesses will welcome the guidance and the transitional period for publication of their first annual statement. Many businesses, however, will remain uncertain as to the application and scope of the new requirements and, particularly for entities in sectors and jurisdictions not seen as at high risk of slavery, the practical measures they should take to assess and manage modern slavery risks in their business and supply chains.

Although the guidance recognizes that annual statements under the MSA will be something of a work in progress, enterprises likely to be affected will need to confirm the entities to which the new requirements apply, and begin assessing the relevant business activities and supply chains. Early preparation is essential to ensure that entities will be in a position to publish a statement that will satisfy the expectations of shareholders, customers and other stakeholders as well as the requirements of the new law.