On July 12, 2021, the European Commission ("Commission") and the European External Action Service ("EEAS") issued guidance on due diligence for European Union (“EU”) businesses to address the risk of forced labor in their operations and supply chains ("Guidance").1 The non-binding Guidance is intended to provide European companies with practical advice on the use of existing international due diligence instruments and does not create any new legal obligations.2
Human rights due diligence ("HRDD") requirements imposed on EU companies are one of the measures the EU is contemplating to address forced labor concerns. The Commission had been expected to adopt a proper legislative proposal on sustainable corporate governance—which would cover mandatory HRDD as well as mandatory environmental and labor rights due diligence—in the first half of 2021.3 However, the presentation of the legislative proposal was delayed following a negative opinion from the Commission's internal regulatory scrutiny board.4 Regardless of its non-binding character, the Guidance may shed light on the potential content and scope of the Commission's planned HRDD proposal.
1. Which entities are covered by the Guidance?
All EU companies are addressed by the Guidance. However, this does not mean that the entire content of the Guidance is relevant for all companies. Indeed, the document clearly states that due diligence should be appropriate to the circumstances of an individual company, including the specifics of its upstream supply chain and its size.
The notion of due diligence as provided for in the Guidance extends to the negative impact caused by business relationships, including those with subsidiaries, suppliers and contractors, thereby giving the Guidance a broad scope. This implies that due diligence procedures should not be limited to the level of a single company but should extend to relevant business partners.
2. What should be covered by due diligence procedures?
In terms of the content of due diligence procedures in respect of forced labor, the Guidance provides specific factors to consider at all stages of the due diligence process, from the design of internal policies (referred to as the "policy and management system" of a company) to remediation when forced labor obligations were violated.
When creating or implementing its policy and management system, an EU company should:
- Stipulate a "zero-tolerance policy" for forced labor as well as other relevant policies;
- Clarify that management and staff will not face reprisals for reporting risks or instances of forced labor; and
- Build awareness with key company staff.
Regarding the implementation phase of a due diligence procedure, the Commission and EEAS note a number of "red flags" that companies should be mindful of when analyzing their operations and supply chains:
- Country risk factors (for example, countries that did not ratify the International Labour Organisation ("ILO") fundamental conventions, have prison labor policies and programs, or outlaw peaceful strike actions);
- Migration and informality risk factors (for example, employment of migrant workers, recruitment via third parties, absence of written employment contract); or
- Debt risk factors (for example, existence of credit arrangements and debt schemes for workers, restrictions on the free disposal of wages, no access to identity and residency documents).
The Guidance also mentions that specific or enhanced forced labor risks exist for women and ethnic or religious groups. These differences should be reflected in the design and implementation of due diligence procedures by EU companies.
Finally, the Guidance identifies practical considerations for in-depth risk assessment when high-risk suppliers or supply chain segments exist. These considerations include the strengthening of checks (for instance in recruitment agencies), enhancing staff training, carrying out workplace assessments and interviewing workers.
3. How should risks relating to forced labor be addressed by companies?
The document identifies two possible options for companies faced with risks relating to the use of forced labor: (i) disengagement or (ii) continuation of the business relationship while working to "prevent or mitigate the adverse impact of forced labour practices in terms of influencing government policy and factory hiring practices."5
Disengagement from a supplier or business relationship refers to the severing of the (contractual) relationship and should be done in a responsible way according to the Guidance. To this end, the Commission provides a list of practical recommendations to mitigate the adverse impacts of a decision to disengage. Specific advice is also provided for situations in which disengagement is not possible in the short term for legal or technical reasons.
If the company decides to continue the business relationship, the Guidance stipulates that it must provide support to business partners to implement a corrective action plan. Such a plan can take the form of financial support and/or support for social dialogue and can include a credible threat of disengagement.
4. What should a company do if forced labor concerns are identified?
If a company has caused or contributed to an adverse impact relating to forced labor, it should provide for remediation proportionate to the significance and scale of the adverse impact. Adverse impacts can be caused not only by a company's own activities but also through its products or services or through its business relationships. As forced labor is defined as a crime under relevant international instruments, remediation notably includes the reporting of forced labor violations that were caused, or contributed to, by EU companies to relevant local authorities.6
5. How should companies act in light of the new EU Guidance?
While non-binding, the Guidance constitutes a "go to" guide for companies. It is a source of practical information to help organizations tailor their own due diligence systems (in particular, small and medium-size companies). At the same time, it does not replace existing due diligence obligations that may exceed the scope of the Guidance.7 The Guidance could also shed light on the implementation of certain EU-wide legal instruments such as the EU Conflict Minerals Regulation, as it provides practical advice relating to raw materials of unknown or high-risk origin.8
The publication of the EU Guidance mirrors the increased focus on forced labor issues in the United States (“US”) as we have commented on in on our Legal Updates “US Bans Imports of All Products Containing Cotton and Tomatoes from China’s Xinjiang Region” (January 19, 2021), “CBP Issues First Ruling Under Amended Forced Labor Statute, Denying Protest of Apparel Importer and Affirming Exclusion of Shipment of Cotton Garments for Violation of Xinjiang Production and Construction Corps Withhold Release Order on Cotton and Downstream Products” (May 20, 2021) and “US Customs Issues WRO on Silica-based Products Produced by Xinjiang Manufacturer” (June 24, 2021).
Generally, a businesses can position itself for the proposed EU-wide mandatory HRDD law and other HRDD laws emerging at the domestic level by:
1. Integrating human rights into group policies and strategic planning processes;
2. Disclosing how human rights considerations are integrated into strategies, policies and procedures;
3. Carrying out a human rights impact assessment and taking proportionate countermeasures as well as communicating internally and externally on what measures have been taken;
4. Reviewing and reinforcing complaints mechanisms and its speak-up program;
5. Ensuring the business is well equipped to deal with “crises”;
6. Reviewing the extent to which its board is equipped to address supply chain risks; and
7. Reviewing the role, resources and expertise of the legal and compliance functions, who should play a key part in addressing these new challenges.
(Read more of our Business and Human Rights perspectives on human rights issues facing business.)
Mayer Brown has extensive experience advising companies on due diligence and compliance issues arising in both the EU and the US. We help businesses develop their due diligence systems and help them ensure compliance with EU and US obligations, avoid criminal prosecution and protect their commercial reputation.
With its worldwide presence, Mayer Brown also stands ready to help non-EU companies understand EU due diligence obligations, increasing their appeal to EU companies as business partners and avoiding any risk of disengagement from current EU business relationships.