Overview

Today section 54 of the UK’s Modern Slavery Act 2015 comes into force, and the Home Office has published its guidance. Modelled on the Californian Transparency in Supply Chains Act 2010, s54 will require many large businesses to start producing public “slavery and human trafficking statements”. This briefing sets out who will be affected, when, what will be required and what may be expected. It also addresses some particular issues arising for global businesses.

“Modern slavery” refers to the exploitation of people or the coercion of people to work. The ILO estimate that 21 million people are currently subject to conditions of forced labour. 

Map: ILO forced labour estimates

Click here to view image.

Who?

The requirement will apply to any entity which fulfils the following four criteria:

  • Is it a commercial organisation?
  • Does it supply goods or services?
  • Does it carry on part of its business in the UK? 
  • Does it have total, global turnover of £36 million or more?

“Commercial organisation” is defined broadly, and is likely to include large charities and other not-for-profit organisations.

“Carrying on a business” (or part of a business) is not defined. The Home Office’s guidance does not provide much help, suggesting a “common sense” approach and noting, correctly, that the Courts will be the arbiters of what the statute means. Firms which buy or sell goods or services in the UK are very likely to be caught; being listed in the UK is not considered by the guidance to be (on its own) enough to be caught. The question for companies in the grey area will be whether they want to be seen to be taking a technical point to avoid transparency – ultimately a reputational and therefore commercial question.

What?

Any organisation answering yes to these four questions will be required to produce an annual statement, approved by the board and signed by a director, and linked from a prominent place on its homepage. The statement has to set out the “steps taken during the financial year to ensure that slavery and human trafficking is not taking place in any of its supply chains or in any part of its own business, or a statement that it is taking no such steps”.

There is a tension at the heart of this obligation. To “ensure” modern slavery is not taking place in “any part” of a firm’s business or supply chain would be a tall order. This is the language of eradication; there is no global business that would be able to deliver such a promise. This vision of eradication is best understood as the ‘direction of travel’; the legal obligation is simply to set out the “steps taken” on that journey. At its core this is about transparency rather than outcomes. Businesses are encouraged, by the Act and by the guidance, to report on how effective their approach has been, and even to adopt KPIs, but legal compliance with s54 would be achieved by stating that no specific steps have been taken.

When?

Transitional provisions allow for entities with a financial year ending before 31 March 2016 to be exempt from the requirement to produce a report on their current financial year. In the guidance, which of course has no force of law, the Home Office states that it “would encourage organisations to report within six months of the organisation’s financial year end”. So we expect the first statements, which will address the financial year ending on 31 March 2016, to appear in August/September 2017.

Why?

The reporting obligation is legally enforceable only by the Home Secretary, who can apply to the High Court for an injunction requiring a business to publish a statement. Failure to comply with such an order could result in an unlimited fine.

In practice, “enforcement” is more likely to take place through the court of public opinion. In California, the equivalent statements are tracked by NGO initiatives like www.knowthechain.org, which maintain and publish lists of businesses which have produced statements, businesses which have failed to produce statements and businesses which assert that the requirement does not apply to them. By far the longest list is the first.

How?

Modern slavery is a specific form of serious human rights abuse. The approach businesses take to addressing it should therefore follow the approach taken to human rights risk generally. Many businesses will also find they can follow many of the same steps taken (and adapt the processes adopted) to address bribery and corruption.

Perhaps the easiest first step is to review procurement procedures, standard contracting terms, supplier codes and audit procedures, to ensure they deal specifically with modern slavery. Other policies should also be reviewed, including whistleblowing, and businesses may want to consider establishing an external whistleblowing hotline, if they don’t have one already. Training will also be key, to raise awareness within the business of modern slavery in all its forms. 

But businesses must be realistic about the limits of contractual assurances and audit. Often the major risks will be not with the tier-one suppliers, where contractual provisions carry some force, but at the very bottom of the supply chains. As with the implementation of the UN Guiding Principles on Business and Human Rights (UNGPs), the ‘best practice’ approach will therefore be founded on risk-based due diligence, a specialised form of due diligence that is focused on the risk to the ultimate victims of any human rights breach (rather than the risk to the business). Businesses will map their supply chains (and their own businesses) and identify areas of particular risk – preferably in consultation with credible external “critical friends”, including peers, advisers and NGOs. Such risks may arise from a particular geography, a particular transaction type, or a particular category of goods – or a combination. Further diligence will often be required, and businesses will need to develop bespoke responses to manage, mitigate and remediate the risks identified.

When it comes to producing the statement, setting out the steps taken during the year, care must be taken not to create a misleading impression as to the effectiveness of any steps taken. Some draft statements currently being circulated arguably go too far in this regard. In California, a class action has been filed against Costco citing its own statement against it; it is alleged in essence that the statement misleads consumers by implying its products are ‘slavery free’.

Issues for global businesses

Section 54 has extraterritorial effect, in that it applies to any commercial organisation – wherever incorporated – which does part of its business in the UK. Global businesses in practice are of course comprised of a number of different entities, with business functions and governance arrangements frequently cutting across the corporate structure. Such a group is likely to contain some entities which are caught by s.54 and others which are not.

The first question for such a group will be whether to produce a single global statement, applying to multiple entities within the group. Strictly, each entity will be required to approve and sign the statement. 

There is also a decision whether to produce the statement only on behalf of those entities which are caught, or, alternatively, to report group-wide. This is ultimately a commercial/reputational question, but, perhaps for consumer-facing brands in particular, businesses will need to consider the optics of being seen to embrace transparency only where legally required. 

Another question arising from the global application of the reporting requirement is what definition of modern slavery to adopt. S.54 ties its definition to the relevant UK criminal offences. These, however, are not perfectly aligned either to international definitions or even to the regional provisions applicable in the UK. For a global business implementing s.54 alongside other similar requirements – for example, in California – and wider reporting frameworks such as the UNGPs or the UK Strategic Report under the Companies Act 2006 – it will make more sense to ground the approach in one of the international standards.

  • Human trafficking in international law is defined in the “Palermo Protocol”. Contrary to popular belief, the definition does not require movement – a myth confusingly perpetuated by our own human trafficking offence in s2 of the Act – but is rather founded on the exploitation of people. The Palermo definition of human trafficking already applies in UK civil law – both through the EU directive on trafficking, and, via Article 4 of the European Convention on Human Rights as interpreted by the Strasbourg Court, through the Human Rights Act 1998 (and therefore, strangely, into the s1 offence in the Act). 
  • The three elements of the Palermo human trafficking definition

Click here to view image.

  • Covering largely the same practices is the concept of ‘forced labour’, defined in the ILO’s 1930 Forced Labour Convention as “ all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily”. The ILO explains this as applying to “situations in which persons are coerced to work through the use of violence or intimidation, or by more subtle means such as accumulated debt, retention of identity papers or threats of denunciation to immigration authorities”. An advantage of the ILO definition is that the ILO website contains some very helpful materials, including the so-called “ILO indicators”, the presence of one of more of which may point to a case of forced labour. Since 2012 the ILO have listed 11 such indicators. 
  • ILO indicators
    • Abuse of vulnerability
    • Deception
    • Restriction of movement
    • Isolation
    • Physical and sexual violence
    • Intimidation and threats
    • Retention of identity documents
    • Withholding of wages
    • Debt bondage
    • Abusive working and living conditions
    • Excessive overtime

What next?

This provision is near the crest of a broader wave of mandatory human rights reporting requirements. Soon further developments – including, from 2017, the EU Accounting Directive – will widen the ambit and for many businesses bring into hard law an increasing proportion of the UNGPs reporting framework. 

Reporting is itself likely to be an advance party. Sitting alongside the reputational risks, heightened by public reporting and social media, is the increased potential for investigations as a result of the due diligence exercise. Issues are also likely to arise over the extent to which companies can investigate further when a potential problem is identified in its supply chain. There is also the risk of litigation and we see this developing both from the top down and from the bottom up. The MSA has to be seen as part of a broader, unfolding pattern of legal enforcement in relation to companies’ duties to respect human rights.

  • Article 5(2) of the EU trafficking directive requires member states to ensure that a legal person can be held liable where a lack of “supervision or control” has made possible the commission of human trafficking offences. 
  • Increasingly, claimants in multi-claimant law suits are turning to the norms and standards of corporate behaviour laid out in the UNGP as shaping the duties of care under common law tort theory and in principles of non-contractual liability in civil law systems.
  • Tortious liability presents a material exposure where an organisation has a high level of control over a relevant abusive practice, ie, with modern slavery directly forming part of their business or a tier-one supplier. An example is the recent claim brought against DJ Houghtons Catching Services Ltd for exploiting 6 Lithuanian men in conditions of forced labour to harvest the so-called “Happy Eggs”, which were sold in major supermarkets. 
  • Legal liability for modern slavery at the very bottom of the supply chain can also appear through consumer protection litigation. Several class actions in California have been launched, in relation to the supply chains for products including chocolate, pet food and prawns (shrimp). Such claims are brought on the basis that the company concerned has misled consumers into buying products which are tainted with slavery. 
  • A parallel development has been the increasing use of the OECD’s National Contact Point mechanism. This is a mechanism that allows individuals, companies or NGOs to make a complaint to a designated entity (in the UK, the Department for Business, Innovation and Skills) in relation to breaches of the OECD Guidelines on Multinational Enterprises. These Guidelines contain labour and human rights provisions (the latter consciously reflecting the UNGPs) which could readily apply in a modern slavery context. Companies that fail to have adequate procedures in place risk formal censure from the NCP. Given the low admissibility criteria for such complaints, and the fact that the UK NCP has shown itself to be highly engaged, it is an increasingly popular mechanism for NGOs – in particular – to put human rights issues into sharp focus and flush out information about an enterprise’s policies and procedures that could conceivably lead to reputational harm and, further, could prove fertile ground for potential litigants in establishing tortious liability.

In the meantime we expect investigative journalists and social media to play an increasing role in bringing stories of modern slavery, often from the very bottom of global supply chains, into the public arena.