The Dutch Senate has approved the Child Labor Due Diligence Act, which had been pending for more than two years. This soon-to-be addition to the growing global body of corporate human rights legislation is intended to address child labor in supply chains. The Act will require supply chain due diligence and reporting by a significant number of foreign-based multinationals providing goods or services in the Netherlands. In this Alert, we provide a detailed overview of the Act and suggested near-term action items for multinationals. An unofficial translation of the published version of the Act commissioned by Ropes & Gray also is included as an Appendix to this Alert.
The Legislative Process
In the Netherlands, new legislation generally is initiated by the government. However, in rare instances, Parliament exercises its right to put forward its own legislative proposal. This is how the Act was introduced into the Dutch parliamentary system.
The Act was approved by the Parliament on February 7, 2017, but with severe criticism that it interfered with the standing policy of the Dutch government to promote the OECD Guidelines for Multinational Enterprises and the UN Sustainable Development Goals through voluntary sector-specific covenants or “IMVOs.” IMVOs are essentially agreements between companies in a sector and the government regarding a particular corporate social responsibility topic, providing a means of self-regulation instead of government regulation. Typically, if an IMVO is concluded on a topic, the Dutch government only will introduce additional regulation if an evaluation of the IMVO indicates that it is not effective.
There are IMVOs in place that, among other things, cover child labor and that are in the process of being evaluated. In recognition of the concerns of opposing members of Parliament and the Dutch government, Attje Kuiken, the member of Parliament who drafted the Act and initiated the legislative proposal, requested suspension of the parliamentary process in the Senate until after these evaluations were completed. However, the evaluations have taken longer than expected and are still not complete.
The Dutch Senate elected not to wait for the IMVO evaluations and approved the Act on May 14, by a slim three-vote margin. The next step is for the Act to be published in the State Gazette, after which it will be submitted to the King for approval. After approval by the King, the Act will be submitted to the designated regulator, which is expected to be Consumer and Market Authority or an entirely new government agency, for implementation.
By its terms, the Act will enter into force on a date to be determined by Royal Decree, but not prior to January 1, 2020. However, the initiating Parliament members indicated in their last meeting during April 2019 the expectation that the Act will become effective sometime in 2022. According to Ms. Kuiken, this three-year period would allow the government to prepare a General Administrative Order that appoints the regulator and fleshes out the obligations of companies under the Act in more detail.
Companies will be subject to the Act if they sell or supply goods or services to Dutch end-users, regardless of where the company is based or registered or its legal form. For purposes of the Act, an end-user is the natural person or legal entity using or consuming the goods or purchasing the service.
The Act does not contain an exemption for particular categories of companies. However, categories of companies may be exempted by General Administrative Order. In legislative debates in both the Senate and the Parliament, there appears to be a consensus that the size of a company will not necessarily determine whether it is exempt. The absence of a general exemption for small and medium-sized enterprises would be inconsistent with analogous legislation in several other countries.
The Act contains a transitional provision, which provides that it will not apply to goods or services to the extent the obligation to supply the goods or services was entered into prior to the publication of the Act. The transitional exemption will sunset not later than five years after the effective date of the Act.
The Act provides that a company that transports goods is not considered a supplier of those goods. Although the Act is silent on the point, the transportation of the goods will presumably be a covered service under the Act.
Child Labor Defined
For purposes of the Act, child labor includes any form of work performed by persons under 18 and that is included among the worst forms of child labor referred to in Article 3 of the Worst Forms of Child Labor Convention, 1999. Under the Convention, this comprises (1) all forms of slavery or practices similar to slavery, such as the sale and trafficking of children, debt bondage and serfdom and forced or compulsory labor, including forced or compulsory recruitment of children for use in armed conflict; (2) the use, procuring or offering of a child for prostitution, for the production of pornography or for pornographic performances; (3) the use, procuring or offering of a child for illicit activities, in particular for the production and trafficking of drugs as defined in the relevant international treaties; and (4) work which, by its nature or the circumstances in which it is carried out, is likely to harm the health, safety or morals of children.
If the work takes place in the territory of a state that is party to the Minimum Age Convention, 1973, in addition to the foregoing, child labor will include any form of work prohibited by the laws of that state in implementation of the Convention. If the work takes place in the territory of a state that is not a party to the Minimum Age Convention, child labor will further include (1) any form of work performed by persons who are subject to compulsory schooling or who have not yet reached the age of 15 and (2) any form of work performed by persons under 18 if the work, by virtue of its nature or the conditions under which it is performed, may endanger the health, safety or morality of young persons, except that child labor will not include light work (as defined in the Minimum Age Convention), carried out for a maximum of 14 hours a week by persons who have reached the age of 13. “Light work” is defined in the Minimum Age Convention as work by persons 13 to 15 years of age which is (1) not likely to be harmful to their health or development and (2) not such as to prejudice their attendance at school, their participation in vocational orientation or training programs approved by a competent authority or their capacity to benefit from the instruction received.
Exercising Due Diligence
In contrast to corporate modern slavery legislation in many other jurisdictions, the Act imposes an affirmative due diligence obligation. Subject companies must investigate whether there is a reasonable suspicion that the goods or services to be supplied to Dutch end-users have been produced using child labor. Due diligence is to be based on sources that are reasonably known and accessible to the subject company. Due diligence also can be satisfied by obtaining goods or services from companies that have issued declarations that they exercise due diligence (declarations are discussed in more detail below).
If the subject company has a reasonable suspicion of child labor in the production of the goods or services, it must adopt and implement a plan of action. A joint action plan aimed at ensuring that affiliated companies exercise due diligence that is developed by or among one or more social organizations, employees’ organizations or employers’ organizations and approved by the Minister for Foreign Trade and Development Cooperation will satisfy this requirement.
Further requirements pertaining to due diligence and the plan of action will be specified in a General Administrative Order, which will take into account the ILO-IOE Child Labour Guidance Tool for Business. The Child Labour Guidance Tool was created jointly by the International Labour Organization and the International Organisation of Employers as a resource for companies to meet the due diligence requirements indicated in the UN Guiding Principles on Business and Human Rights, as they pertain to child labor.
A company that is subject to the Act generally must prepare a declaration indicating that it exercises due diligence in order to prevent the goods and services that its sells or supplies to Dutch end-users from being produced using child labor.
Companies that already are registered in the trade register will be required to submit the declaration to the designated regulator within six months after the Act takes effect. If a company is not already registered in the trade register, it will be required to submit its declaration immediately after it is registered. A company that is not registered in the European part of the Netherlands and that is not registered in the trade register will be required to submit a declaration within six months after the company supplies goods or services to end-users in the Netherlands for the second time in a given year.
Declarations will be published in an online public register to be established by the designated regulator. The Act indicates that further rules may be established pertaining to the content and form of declarations.
If a company only receives goods or services from other companies that have issued a declaration, it is not required to issue its own declaration. Other exceptions to the reporting requirements of the Act may be established by General Administrative Order.
Enforcement and Penalties for Non-compliance
A regulator will be appointed to oversee compliance with the Act.
Any natural person or legal entity whose interests are affected by the actions or omissions of a subject company relating to compliance with the Act may submit a complaint to the designated regulator. The complaint must contain a concrete indication of non-compliance by an identifiable party.
In the first instance, an aggrieved party must work with the subject company to resolve the complaint. The regulator only may address a complaint after it has been dealt with by the company, or six months after the submission of the complaint to the company without it having been addressed.
A company can be fined up to €8,200 for failing to submit a statement declaring that it exercises due diligence. If a company fails to carry out due diligence in accordance with the Act or to draw up a plan of action, or to comply with any further requirements that are established pertaining to due diligence and the plan of action, a fine of up to 10% of the worldwide annual turnover of the company can be imposed. However, the Act provides that a fine will not be imposed until after a binding instruction has been issued to the company. A time limit may be set for complying with the instruction.
In addition, the company can incur additional fines and a director may even be imprisoned for up to two years if, in the prior five years, a fine previously had been imposed for violating the same requirement of the Act and the new violation is committed under the order or de facto leadership of the same director.
Next Steps for Multinationals
As noted earlier in this Alert, further rulemaking will be required to address some of the compliance details not covered in the Act. Among other things, additional rulemaking is expected to further flesh out the form and content of declarations and due diligence and plan of action requirements. In addition, the effective date of the Act will be indicated in the Royal Decree.
The Act will require companies to put in place substantive compliance measures to address child labor. In contrast, disclosure-only modern slavery legislation, such as the California Transparency in Supply Chains Act, UK Modern Slavery Act and the federal and New South Wales Modern Slavery Acts in Australia, requires companies to each year publicly disclose what they are doing to address modern slavery, but do not require companies to put in place policies, procedures or substantive compliance programs.
It is premature to establish a compliance program, or enhance an existing compliance program, specifically to comply with the Act, until there is further visibility on some of the Act’s requirements. Furthermore, we expect the effective date will be set far enough out to give companies enough time to address the Act’s requirements.
However, we recommend that multinationals take the following preparatory steps in contemplation of the Act:
- Conduct a preliminary applicability assessment. Assess whether group companies are providing goods or services to end-users in the Netherlands and, if so, which companies, the extent of those activities and the nature of the products or services involved.
- Even if not providing goods or services to end-users in the Netherlands, assess whether products or sub-contracted services are being provided to companies that are likely to be subject to the Act. As is the case with other legislation that requires supply chain due diligence, such as the U.S. Conflict Minerals Rule and the U.S. Federal Acquisition Regulation anti-human trafficking rule, companies that are subject to the Act are likely to put significant pressure on their supply chains, in particular their tier-1 suppliers, to support their compliance requirements.
- Assign responsibility for monitoring further developments under the Act and for compliance oversight. As we have noted in prior Alerts, multinationals are moving toward more centralized human rights compliance. Increasingly, policies, procedures and disclosures are being developed and coordinated by a centralized, group-wide steering committee comprising of representatives from relevant corporate functions, business units and geographies. This approach is being taken both to increase compliance efficiency and reduce risk.
- Continue up the learning curve on child labor risks in the supply chains of applicable goods and services. Among other things, consult publicly available resources, such as those published by the U.S. and other governments, NGOs and other comparable companies, as well as trade group resources.
- Assess the adequacy of existing child labor due diligence procedures and conduct a gap assessment against the ILO-IOE Child Labour Guidance Tool for Business. Part C of the Guidance Tool contains recommended steps for preventing and addressing child labor impacts.
- Based on all of the foregoing, develop a preliminary, high-level project plan for addressing the requirements of the Act and/or commercial customers that will be subject to the Act. This will provide a framework for developing a more detailed compliance plan and facilitate an efficient approach to compliance when the effective date of the Act has been set and the compliance requirements under the Act have been further fleshed out.