Regulations have been introduced bringing into effect corporate disclosure requirements under the UK Modern Slavery Act 2015 (MSA). All organisations which carry on any part of their business in the UK will need to consider whether they are covered by these requirements.

Affected organisations will need to publish a statement for each financial year setting out what steps they have taken to eliminate slavery and human trafficking in their business and supply chains. The government has also published statutory guidance (available here) on the requirements, including the information which may be included in a statement. The most significant aspects of the regulations and guidance are discussed below.

The UK 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. It anticipates that failures by organisations to take and disclose sufficient steps will result both in pressure from consumers, investors and NGOs, and in adverse reputational impact.

Our previous newsflash (available here) provides background and detail on the new requirements.

First statements required for financial years ending 31 March 2016

Transitional provisions have been adopted to provide organisations with time to understand the new requirements and prepare a statement. The regulations provide that the first statements will be required for financial years ending on or after 31 March 2016. Further, the guidance encourages organisations to report within six months of each financial year end, meaning that the government expects the first statements to be published by the end of September 2016.

Application - turnover threshold 

Under the MSA, the disclosure requirements apply to any corporate body, LLP or partnership (whether incorporated or formed in the UK or overseas) which:

  1. carries on its business or part of its business in the UK;
  2. supplies goods or services; and
  3. has an annual turnover that meets a prescribed threshold.

As expected, the regulations set the turnover threshold at £36 million and confirm that turnover means total turnover derived from the provision of goods and services within the ordinary activities of the organisation after deduction of trade discounts, VAT and any other taxes.

Unexpectedly, the regulations add that organisations must include the turnover of any subsidiary undertakings (as defined by section 1162 of the Companies Act 2006) when determining whether the threshold is met. This will bring a greater number of organisations within scope and will mean, for instance, that a parent company with a small UK presence and turnover could still be obligated by virtue of the turnover of a subsidiary whether or not that turnover is generated by activities within or outside the UK.

Statutory guidance

Carrying on business 

The guidance says little about what 'carries on business' in the UK means, other than that the government expects this will be answered by applying a "common sense approach" and that having a UK subsidiary will not by itself mean that a non-UK company is covered.

The term 'carrying on' business is also used in the UK Bribery Act, and similar guidance has been issued as to the meaning of the term under that Act. However, organisations with limited physical presence and activities in the UK still face some uncertainty as to whether or not the new disclosure requirements apply to them. 

Definition of modern slavery

The definition of modern slavery for these purposes is based on the offences established by the MSA of slavery, servitude and forced or compulsory labour, and human trafficking. The guidance recognises that there is a "spectrum of abuse" and that determining in practice what amounts to modern slavery can be challenging. 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

Strictly, a company only needs to report on its business and supply chains, and not those of other group companies. Where more than one company in a group is caught by the new requirements (in their own right), each is required to prepare a statement. The guidance confirms that a single statement may be used to cover companies in the same group but that the statement should be published on each company's website.

However, the guidance notes 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". It also says that it is good practice to report on the activities of all subsidiaries whether or not they are caught, particularly for subsidiaries in a high-risk industry or location. Following this guidance, it seems that the application of the requirements to groups may be wider than might appear from the face of the MSA and the regulations.

Approval

The MSA requires a statement to be approved and signed by a company director, with comparable requirements for partnerships, LLPs and limited partnerships. The guidance is clear that not only should there be senior level approval and sign-off of statements, but that management need to engage with modern slavery issues and provide senior level accountability, leadership and responsibility.

Content of statements

Annex E of the guidance provides examples of potential information that may be included in a statement, together with examples of good practice and case studies. The guidance accepts that organisations will build on their statements year on year and that they will evolve, and improve, over time.

Both the MSA and the guidance make clear that it is not compulsory for an organisation to include any particular information in its statement, but the guidance emphasises that the statement must describe all the steps that the organisation has taken.

The guidance endorses the use of clear organisational policies and procedures, but says that this does not necessarily require a standalone modern slavery policy and that it may be possible to adapt existing policies and procedures. The statement should provide links to relevant publications, documents and policies.

The guidance sets out how organisations might approach business and supply chain due diligence, emphasising that procedures should be proportionate to the potential risks and to the level of influence that the organisation has, and that whilst greater efforts might be expected in relation to tier one direct suppliers, organisations should engage with lower tier indirect suppliers wherever possible. The guidance goes on to explain how the potential risks might be assessed, whether on a country, sector, transaction or business partnership basis.

Whilst the guidance suggests some measures that organisations could take, including supply chain audits and certifications, organisations may have expected more in terms of the practical steps that may be appropriate to take.

What should businesses be doing now?

The transitional period and guidance will be welcome, but for many businesses there will remain uncertainty as to the application and scope of the new requirements and, particularly for organisation in sectors and jurisdictions not seen as at high-risk of slavery, the practical measures that they should take to assess and manage modern slavery risks in their business and supply chains.

Although the guidance recognises that statements will be something of a work in progress, organisations likely to be affected will need to confirm to which entities the new requirements apply, and start assessing the relevant business activities and supply chains. Early preparation is essential to ensure that organisations will be in a position to publish a statement that will satisfy the expectations of shareholders, customers and other stakeholders.