After long and exhaustive discussions, the responsible German federal ministries, namely the Ministries of Economics ("Bundeswirtschaftsministerium"), Labour ("Bundesarbeitsministerium") and Development ("Bundesentwicklungsministerium"), have agreed on human rights due diligence requirements in the supply chain. In an early consultation on 3 March 2021, the Federal Cabinet adopted the draft bill on the Supply Chain Act ("Gesetz über die unternehmerischen Sorgfaltspflichten in Lieferketten").
The final law intended to be voted on by the Bundestag in the current legislative term.
Previously existing guidelines and standards in the context of human rights, in particular the UN Guiding Principles on Business and Human Rights (UNGPs), the aim of which is to implement human rights protection worldwide in the form of National Action Plans (NAPs), were all based on the principle of voluntary self-commitment.
However, the German legislator did not consider this to be efficient enough: German monitoring in 2020 showed that not even 20 percent of companies with more than 500 employees complied with the due diligence obligations set out in the "National Action Plan on Human Rights". The Supply Chain Act now makes compliance with human rights due diligence obligations in supply chains mandatory.
The bill also covers environmental protection, where environmental risks can lead to human rights violations.
When and who?
From the planned entry into force of the law on January 1, 2023, initially only large partnerships and corporations under German and foreign law which are domiciled in Germany with 3,000 employees will be covered; from January 1, 2024, also companies with more than 1,000 employees will also be covered.
In regard to counting of employees, all group entities are included in the calculation, while temporary workers are only included in the calculation if the duration of the assignment is longer than 6 months
In a nutshell:
The Supply Chain Act demands that all affected businesses have to make reasonable efforts to ensure that no violations of human rights occur within their own business or within their supply chain.
The "supply chain" within the meaning of this Act covers all elements ("Beiträge") used by a business to produce a product or provide a service, from the extraction of the raw materials to the delivery to the final customer, and covers
1. the actions of an enterprise in its own business,
2. the actions of a contractual partner, insofar as they are necessary for the manufacture of the product in question or for the provision and use of the service in question (direct supplier), as well as
3. the actions of other suppliers (indirect suppliers).
In regard to indirect suppliers the companies must only (but immediately) carry out a risk analysis and preventive and remedial measures if they receive substantiated knowledge of possible human rights violations or violations of environmental obligations.
What to do?
Central element of this legislation is the performance of a risk analysis, by which the risk of a violation of human rights or environmental obligations must be analysed. The Supply Chain Act conclusively lists the human rights and environment-related obligations covered, including in particular, fair and favourable working conditions, compliance with adequate living standards, freedom from child and forced labour, and protection against torture.
The risk analysis must be comprehensive. It must take into account all of a company's sites, all business processes in the supply chain from raw material extraction to the end product, and contextual factors such as political framework conditions.
Based on the risk analysis, the second step is to take appropriate preventive measures or - if the risk has already materialized - remedial measures, all of which in light of
(a) the nature and scope of its business,
(b) the company's ability to influence the direct causer,
(c) the expected severity of the breach,
(d) the reversibility of the breach,
(e) the likelihood of the breach occurring,
(f) the nature of the causation contribution.
In Particular, the following due diligence obligations were specified in the draft bill:
- Establishment of a risk management system and definition of internal responsibility or a human rights officer (§ 4)
- Conducting regular risk analyses (§ 5)
- Adoption of a policy statement on human rights (§ 6(2))
- Establishment of preventive measures within the own business unit and vis-à-vis direct suppliers (§ 6)
- Taking remedial action in the event of violations of human rights (§ 7(1) to (3))
- Establishment of a complaints procedure (§ 8)
- Implementing risk due diligence with indirect suppliers (§ 9)
- Documentation requirements (§ 10(1))
- Reporting requirements (§ 10(2))
The Federal Office of Economics and Export Control ("Bundesamt für Wirtschaft und Ausfuhrkontrolle") will be responsible for monitoring the Supply Chain Act.
In the event of failure to comply with the outlined due diligence obligations, the Supply Chain Act provides for sanctions in the form of
- fines of up to 800,000 euros,
- in the case of companies with an annual turnover of more than 400 million euros, fines of up to two per cent of the worldwide turnover,
- up to three years exclusion from public contracts if a fine of at least 175,000 euros has been imposed.
While the draft bill refrains from introducing special provisions on civil or criminal liability, a derivative rights of action ("Prozessstandschaft") will be introduced, allowing victims of human rights violations to be represented by non-governmental organisations (NGOs) or trade unions before German courts, if and to the extent that they can claim to have been injured in one of their paramount legal rights as defined in the Act by a breach of a corporate duty of care within the meaning of this Act.
With the Federal Government's advance, it is very likely that the Supply Chain Act will be passed in the near future. After the cabinet decision, the Bundestag and Bundesrat must now debate the law.