The German government is planning to introduce a national Supply Chain Act. A corresponding draft bill was approved by the cabinet on 3 March and is expected to be passed before the end of this legislative period. That timeline could mean that the act could come into force on 1 January 2023.
Which companies would be affected?
Companies based in Germany with more than 1,000 employees are covered by the current bill. Medium-sized companies would not be affected.
- From 1 January 2023, the act would apply to companies with more than 3,000 employees.
- For companies with more than 1,000 employees, the act would apply from 1 January 2024.
It shall be assessed by 30 June 2024 whether the bill should also apply to companies with less than 1,000 employees.
What would this mean for affected companies?
Companies affected by the bill would be obliged to take appropriate measures to ensure that their suppliers also comply with environmental and human rights, in particular forced labor, child labor, discrimination, violation of freedom of association, violation of occupational health and safety, problematic employment and working conditions (working hours, wages, vacations, etc.), violation of land rights, damage to health and soil or air pollution.
- The act would introduce the obligation to conduct a documented risk analysis to identify risks in their supply chain. A layered level of responsibility would apply:
- For their own business operations and direct suppliers, companies under the draft bill must conduct a risk analysis and take appropriate measures to prevent human rights violations. Companies would further have to provide access to a reporting mechanism and issue a declaration of principles on respect for human rights. They would have to demonstrate that they are fulfilling their due diligence obligations by submitting a risk report to the Federal Office of Economics and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle) that would also have to be published on the companies’ websites.
- For indirect suppliers in the chain down to the raw material supplier, a risk analysis would only be required if the German company became aware of potential violations. According to the draft bill, an indirect supplier is any supplier that is not a direct supplier and whose supplies are necessary for the manufacture of the company’s product or the provision and use of the relevant service.
- If companies became aware of a human rights violation, they would have to take appropriate remedial actions immediately. Such remedial actions can include the duty to conduct investigations or terminate business relationships.
- Companies would also be subject to a reporting obligation: Companies would have to report to the Federal Office of Economics and Export Control whether supply chain risks were identified. If companies identified risks, they would have to provide further detail on how they analyze supply chain risks, incorporate prevention measures into business policy and take remedial actions and establish a reporting mechanism. They would also have to provide information on their declaration of principles.
Consequences for violations
The act does not plan on introducing a new or stricter concept of civil liability for companies. In that regard, the current rules of liability would continue to apply. However, companies must expect heavy fines of € 100,000 to € 800,000. Companies with an annual turnover of more than € 400 million must expect fines of up to 2% of their annual turnover.
Additionally, companies receiving a fine of more than € 175,000 may be excluded from public tenders for up to three years.
Furthermore, the draft bill intends to simplify the possibility of legal actions in case of a human rights violation. Specifically, according to the draft bill, individuals claiming human rights violations shall be able to entrust NGOs with the judicial enforcement of their rights.