National and supranational legislatures continue to develop laws requiring employers to conduct due diligence of their operations and those of their business partners in order to address human rights risks such as forced labor and child labor. Recently, the European Union (EU), Switzerland, and Japan have rolled out such laws, described below:
EU’s Corporate Due Diligence and Corporate Accountability Directive
In October 2021, we reported on the EU’s Draft Directive on Corporate Due Diligence and Corporate Accountability (the “Draft Directive”). At that time, the Draft Directive was being reviewed by the European Commission. Based on the Draft Directive, on February 23, 2022, the European Commission adopted proposed legislation on corporate sustainability due diligence (the “Directive”).
The Directive is now working its way through the European Parliament, subject to amendments. Essentially, the Directive places substantive obligations on companies to identify, prevent and remedy adverse human rights and environmental risks in companies’ “value chains.”1
To Which Companies Does the Directive Apply?
Notably, the Directive will apply to certain companies formed both (1) within the EU, and (2) outside the EU but operating in the EU.
(1) For a company that is formed within the EU, the Directive will apply if it also meets one of the following criteria:
a) Had more than 500 employees on average and a net worldwide turnover of €150 million, in the last financial year for which financial statements have been prepared; or
b) Did not meet the thresholds outlined in a), but had more than 250 employees on average, and had a net turnover of more than €40 million in the last financial year for which annual financial statements have been prepared, with at least 50% of the net turnover generated in one or more of the following sectors:
- Manufacture of textiles, leather and related products (including footwear), and the wholesale trade of textiles, clothing and footwear;
- Agriculture, forestry, fisheries (including aquaculture), the manufacture of food products, and the wholesale trade of agricultural raw materials, live animals, wood, food, and beverages;
- Extraction of mineral resources, the manufacture of basic metal products, other non-metallic mineral products and fabricated metal products (except machinery and equipment), and the wholesale trade of mineral resources, basic and intermediate mineral products (including metals and metal ores, construction materials, fuels, chemicals and other intermediate products).
(2) For a company that is formed outside the EU, the Directive will apply if it also meets one of the following criteria:
a) Generated a net turnover of more than €150 million in the EU in the financial year preceding the last financial year; or
b) Generated a net turnover of more than €40 million but less than €150 million in the EU in the financial year preceding the last financial year, provided that at least 50% of its net worldwide turnover was generated in one or more of the sectors listed above.2
What Specific Obligations Are Placed on Companies?
The Directive places obligations on Member States to ensure that companies conduct human rights and environmental due diligence by carrying out a number of actions, including:3
- Integrating due diligence into their corporate policies, and to have in place a due diligence policy (updated and published annually) containing a description of the company’s approach to due diligence (including in the long term), a code of conduct for employees and subsidiaries, and a description of the processes in place to implement due diligence;
- Identifying actual or potential adverse human rights and environmental impacts arising out of their own operations or those of their subsidiaries, and where related to their value chains, from their established business relationships;
- Preventing and minimizing potential adverse impacts and bringing actual adverse impacts to an end and mitigating their extent. The Directive sets out of number of actions companies should take to this extent. For example, such actions may include seeking contractual assurances from business partners to ensure their compliance with the company’s code of conduct, and so on through the value chain; or to suspend or terminate commercial or business relationships with partners in their value chain in connection with adverse impacts that have arisen, as permitted by governing law;
- Establishing and maintaining a complaint procedure;
- Monitoring the effectiveness of their due diligence policy and measures; and
- Publicly communicating on due diligence by publishing an annual statement on their website.
What Will Be the Consequences for Non-Compliance?
The Directive requires Member States to establish sanctions for non-compliance with the national provisions adopted in accordance with the Directive, and will leave it to Member States to determine the rules governing such sanctions.4 When determining whether to impose sanctions and to what extent, due account must be given to the company’s efforts to comply with any remedial action required of them by a supervisory authority (a Member State designee charged with the supervision of compliance with the obligations laid down in the national provisions adopted pursuant to the Directive), any investments made and any targeted support provided pursuant to the requirement to prevent potential adverse impacts and to end actual adverse impacts, as well as collaboration with other entities to address adverse impacts in its value chains, as applicable.
Furthermore, the Directive also requires that Member States make civil liability mechanisms available to find companies liable for damages where they have failed to comply with their obligations to prevent potential adverse impacts, and to end actual adverse impacts, and where, as a result of this failure, the adverse impact that should have been identified, prevented, minimized, brought to an end, or its extent mitigated, occurred and led to damage.5
When Will the Directive Come into Force?
There is no set date for the Directive to come into force, particularly as it is not yet in its final form. It must work its way through the EU Parliament, and then passed to the EU Council.
Once finalized and entered into force, Member States will have two years to transpose the Directive into their local law.6 The provisions of the local law will apply to the companies outlined in 1(a) and 2(a) above two years from the entry into force of the Directive, and to the companies outlined in 1(b) and 2(b) above four years from the entry into force of the Directive.7
Update on Other Human Rights Due Diligence and Transparency Mandates:
Norway’s “Act Relating to Enterprises’ Transparency and Work on Fundamental Human Rights and Decent Working Conditions”
While the EU Directive is still being debated and finalized, many EU countries have, for years, been developing and implementing their own corporate human rights due diligence and transparency obligations.8 One country that has done so recently is Norway.
On July 1, 2022, Norway’s Act relating to enterprises’ transparency and work on fundamental human rights and decent working conditions was entered into force (the “Norwegian Act”). More information about the obligations imposed on companies under the Norwegian Act is outlined in our previous Insight.
The Netherland’s Responsible and Sustainable International Business Conduct Act
While still under review, The Responsible Sustainable International Business Conduct Act (the “Dutch Act”) is proposed to enter into force on January 1, 2023 (with the exception of Sections 3.2 to 3.6 (provisions in relation to supervision and enforcement),9 which are intended to enter into force at later dates).
What Specific Obligations are Placed on Companies?
The Dutch Act imposes a duty of care applicable to every “enterprise”10 that knows, or can reasonably suspect, that its activities may have negative impacts on human rights, labor rights, or the environment on countries outside of the Netherlands. All enterprises must (a) take all measures reasonably required to prevent such impacts; (b) to the extent such impacts are not preventable, mitigate or reverse them to the extent possible and, where necessary, enable remediation; and (c) to the extent that such impacts cannot be limited sufficiently, refrain from the relevant activity, insofar as may reasonably be expected from the enterprise.
Certain enterprises (which meet the criteria outlined below) must adhere to additional due diligence obligations, including:
- Publishing and implementing a policy document that outlines the enterprise’s commitment to the obligation of due diligence in their value chain(s), and the enterprise’s due diligence plan.
- Conducting a risk analysis and developing an action plan to prevent, mitigate and address potential and actual negative impacts.
- Ceasing activities that cause or contribute to negative impacts on human rights, labor rights, or the environment.
- Monitoring the application and results of due diligence measures.
- Reporting annually on the due diligence policy and measures.
- Ensuring an appropriate remediation mechanism is in place, and remediation (or contribution to remediation) of negative impacts caused (or contributed to) by the enterprise.11
These obligations apply only to enterprises that (a) engage in activities outside of the Netherlands, and (b) exceed at least two of the three following criteria on their balance sheet date: (i) balance sheet total of €20 million; (ii) net revenue of €40 million; or (iii) an average of 250 employees during the financial year.
Switzerland’s New Human Rights Due Diligence and Transparency Requirements
While the EU and a number of its Member States are developing their own approaches to human rights due diligence, transparency, and corporate social responsibility, other countries are also doing the same. Two of the most recent jurisdictions to do so are Switzerland and Japan.
In January 2022, the Swiss Code of Obligations (“CO”) was amended to introduce two new categories of corporate human rights reporting obligations: (1) annual reporting obligations on “non-financial matters,” including environmental matters, CO2 goals, social issues, employee-related issues, respect for human rights, and combating corruption,12 (“Non-Financial Reporting Obligations”) and (2) supply chain and reporting obligations with respect to minerals and metals from conflict-affected areas and child labor (“Conflict Area and Child Labor Reporting Obligations”).
To Which Companies Do the Non-Financial Reporting Obligations Apply?
- Companies of “public interest” (as defined in Article 2 letter c of the Auditor Oversight Act of 16 December 2005);13
- the Swiss or foreign companies that they control with at least 500 full-time equivalent positions on average over two successive financial years; and
- the Swiss or foreign companies that they control that exceed (a) a balance sheet total of 20 million francs, and/or (b) sales revenue of 40 million francs, in two successive financial years.
These reporting obligations do not apply to companies controlled by another company that is a company of “public interest,” or that must prepare an equivalent report under foreign law.14
What are the Specific Non-Financial Reporting Obligations Placed on Companies?
The report on non-financial matters must cover the above-aforementioned topics, and contain the information required to understand the business performance, the business result, the state of the company and the effects of its activity on the non-financial matters. In particular, the report must include:
- A description of the business model;
- A description of the policies adopted in relation to the matters referred to in paragraph 1, including the due diligence applied;
- A presentation of the measures taken to implement these policies and an assessment of the effectiveness of these measures;
- A description of the main risks related to the matters referred to in paragraph 1, and how the company is dealing with these risks; in particular, the risks (a) that arise from the company’s own business operations; and (b) provided this is relevant and proportionate, that arise from its business relationships, products or services; and
- The main performance indicators for the company’s activities in relation to the matters referred to in paragraph 1.15
The report must be published online and remain publicly accessible for at least 10 years.16
To Which Companies Do the Conflict Area and Child Labor Reporting Obligations Apply?
Companies whose seat, head office or principal place of business is located in Switzerland must comply with obligations of due diligence in the supply chain and report on this if (a) they place in free circulation or process in Switzerland minerals containing tin, tantalum, tungsten or gold or metals from conflict-affected and high-risk areas; or (b) they offer products or services in relation to which there is a reasonable suspicion that they have been manufactured or provided using child labor.17
What Are the Specific Conflict Area and Child Labor Reporting Obligations Placed on Companies?
Companies must maintain a management system, which must stipulate the following:
- The supply chain policy for minerals and metals that potentially originate from conflict-affected and high-risk areas;
- The supply chain policy for products or services in relation to which there is a reasonable suspicion of child labor; and
- A system by which the supply chain can be traced.
Companies are required to identify and assess the risks of harmful impacts in their supply chain(s), and develop a risk-management plan and take measures to minimize the risks identified. Compliance with the due diligence obligations in relation to minerals and metals must be audited by an independent specialist.18
Companies are required to prepare an annual report on compliance with due diligence obligations. The report must be published online within six months of the end of the financial year and remain publicly accessible for at least 10 years.19
Japan’s Draft Guidelines on Respect for Human Rights in Responsible Supply Chains
Partly influenced by the EU Directive that will apply to certain non-EU companies, the Japanese government has also published guidelines for companies to detect and prevent human rights violations in their supply chains.
Japan’s “Guidelines for Respect for Human Rights in Responsible Supply Chains” (the “Guidelines”) are not legally binding, but are presented as guidance to all business enterprises, regardless of size or sector, engaging in business activities in Japan. Under the Guidelines, business enterprises are urged to establish a human rights policy, conduct human rights due diligence (based on the United Nations Guiding Principles on Business and Human Rights) and provide a remedy when business enterprises cause or contribute to adverse human rights impacts.20
These legislative developments add to the clear trend towards the global development of legislation addressing corporate human rights due diligence and disclosure obligations. As these developments increase in number, multinational employers should take stock of their global operations, and identify areas in those operations where there is a high risk of human rights violations, including forced labor and other modern slavery practices. Where such risks are identified, those employers should take appropriate action to address those risks and implement procedures to ensure that new and existing relationships remain free of such activities. Because this due diligence process can be complex, it is recommended that employers engage the expertise of experienced counsel.