The proposal highlights the growing global focus on companies’ human rights obligations not just towards employees but also towards workers in their supply chains.
On 14 September 2022, the European Commission (the Commission) introduced a proposed Regulation (the Proposal) which seeks to ban products made using forced labour from being produced in or imported into the EU. The Proposal is the latest example of the increasing amount of legislative requirements being developed in relation to ESG considerations in companies’ supply chains, particularly concerning human rights issues.
The Proposal would prohibit “economic operators” in the EU from placing products made using forced labour on the EU market or from exporting products made using forced labour. Forced labour itself is defined by reference to definition of forced or compulsory labour in the International Labour Organization’s Convention on Forced Labour.
Responsibility to enforce the prohibition would fall on EU Member States, which would be tasked with designating competent authorities with responsibility in this area. The Proposal sets out a two stage process that competent authorities are required to take to determine whether a product runs afoul of the prohibition: a so-called preliminary phase set forth in Article 4 of the Proposal, followed by (if necessary) an investigation set forth in Article 5 of the Proposal.
In the first phase of any investigation, the competent authority, based on all information available to them, would need to determine whether there is a “substantiated concern” of a violation of the prohibition.
In order to make such a determination in respect of the particular product under assessment, the competent authority would request from the entity under assessment information on what actions that entity has taken to identify, prevent, mitigate or bring to an end risks of forced labour in their operations and value chains. The entity’s actions may be on the basis of other applicable EU or Member State legislation, the due diligence guidelines to be issued by the Commission (see below) or guidance that has been issued by an international organisation, or any other due diligence processes.
Entities would be required to respond to such a request within 15 days of it being made, and the competent authority would then have a further 30 days from the date of receipt of such information to make its determination.
The Proposal specifically notes that competent authorities are to follow a risk-based approach when conducting preliminary phase investigations, and focus on the economic operators involved in the value chain of the product as close as possible to where the risk of forced labour is likely to have occurred and taking into account the size and economic resources of entities. While the Proposal would therefore seemingly apply equally to small and medium-sized enterprises as it would to larger corporations, it appears that the enforcement process would be where competent authorities would be able to make allowances in relation to available resources.
Article 5 Investigation
Should the competent authority determine that there is a substantial likelihood of violation of the prohibition, it may then request further information and carry out a full investigation. This includes carrying out investigations in countries outside the EU, provided that the company under investigation gives its consent and the government of the country in which the inspection is to take place does not raise objections.
Should the competent authority find a violation of the prohibition, it would issue a decision prohibiting the placing of the product on the EU market or export out of the EU, and for any products on the market to be withdrawn and destroyed. Companies would be permitted to challenge any such decisions by introducing new evidence.
The Proposal would also require the Commission to issue guidelines, no later than 18 months after the Proposal enters into force, that include guidance on due diligence in relation to forced labour, which take into account guidelines and recommendations from international organisations, as well as the size and economic resources of companies. Compliance with these guidelines will then be one method by which companies would be able to prove they have followed the correct processes in order to avoid putting products on the market that would breach the prohibition.
The Proposal was introduced at a time when the EU has already introduced, or is in the process of introducing, legislative requirements on companies with respect to their supply chains. In February 2022, the Commission issued a proposal for a Corporate Sustainability Due Diligence Directive (CSDDD), which would require companies to implement a number of processes and initiatives to conduct due diligence to discover any “actual and potential adverse impacts” on the environment and/or human rights in their supply chains (see more about the proposed CSDDD in this Latham blog post). The latest Proposal specifically note that, while the CSDDD addresses corporate behaviour and due diligence processes for the companies within its scope, it does not provide for measures specifically intended to prevent the placing onto the market of products made with forced labour.
In addition, the EU’s Corporate Sustainability Reporting Directive (CSRD), which will expand EU companies’ requirements to publicly report on ESG-related information, will also likely contain reporting requirements with respect to the human rights issues. The draft European Sustainability Reporting Standard (ESRS), which was published for consultation in March 2022 and is intended to describe the specific disclosures required under the CSRD, included requirements for companies to disclose policies that are relevant to ensuring respect for human rights of workers both at the company, and in the company’s supply chain.
Most notable with respect to forced labour however, was the enactment of the Uyghur Forced Labor Prevention Act (UFLPA) in the US in December 2021. The UFLPA introduced, as of 21 June 2022, a “rebuttable presumption” that all goods mined, produced, or manufactured wholly or in part in the Xinjiang region of China were produced using forced labour and therefore, unless proven otherwise by the importer of record, ineligible for import into the US (for more information in relation to the UFLPA, please see Latham’s blog posts here and here).
Unlike the UFLPA, the Proposal does not specifically target Xinjiang Province or China, and instead applies across the board to all products, whatever country they were produced in (including countries within the EU). It is understood that this modification was made with the EU’s obligations under international trade law in mind, and it marks a key difference to the resolution adopted by the European Parliament in June 2022, which focused on imports only and (while applying to imports from any country) specifically referenced the situation in Xinjiang in the associated press release.
As a proposal of the European Commission, the Proposal now requires consideration by the European Council and European Parliament, which will negotiate a compromise agreement as part of the EU’s ordinary legislative process. This is likely to mean that the Proposal, in its amended form, is unlikely to be enacted until the second half of 2023. As currently drafted, economic operators will be subject to the Proposal’s prohibition from the date two years after the Proposal enters into force.