The German Parliament adopted a human rights due diligence law called the “Supply Chain Act” (Act) on 11 June 2021. The Act aims to ensure companies to comply with human rights standards in relation to their business activities throughout their global supply chains. The Act is expected to enter into force in 2023 and apply initially only to companies which have their headquarters, business, administrative or registered office in Germany and have more than 3,000 employees. In 2024, it is expected to apply to companies with 1,000 or more employees, which provide goods and services to Germany. In order to ensure compliance with the Act, companies need to take urgent and rapid actions in order to eliminate actual human rights risks in their supply chains and prevent any potential human rights risks. Indeed, German companies are expected to guard against risks of adverse human rights impacts in their supply chains around the world, ensure fair working conditions, prevent child and forced labor or any modern slavery-like practices at each tier of their supply chains
Against adverse human rights impacts that may occur in relation to their commercial activities, products or services, Germany-based companies are expected to establish a risk management system (human rights due diligence), conduct regular risk analyzes and take appropriate measures. Companies are expected to fulfill following requirements within the scope of their due diligence obligations under the Act:
- Preparation of a policy statement on respect for human rights;
- Performing risk analyses to identify potential adverse human rights impacts;
- Building a risk management system including remedial processes to prevent potential adverse impacts on human rights;
- Establishing a supply chain wide grievance mechanism that allows reporting potential human rights violations;
- Carrying out periodic reporting to the public
Under the current law, victims of adverse human rights impacts and their representatives, such as non-governmental organizations or trade unions, have the right to initiate legal action in German courts such as filing a claim for compensation. While the Act does not provide a basis for civil law liability in the event of a breach, it provides substantial fines for companies that commit a breach. It should be noted that in case of a violation, companies will face significant fines to be determined based on their turnover and may be barred from public tenders for up to three years.
Although the Act is one of the recent mandatory human rights due diligence initiatives, including at the European Union level, it is criticized by civil society for not being as comprehensive as the European Union directive expected to come into force soon and for its inability to meet international standards because of excluding indirect suppliers from the scope, not providing legal remedies for victims and not providing legal sanctions except fines, not envisaging any environmental due diligence obligation and covering a small number of companies only.
Along with such criticism, it is expected that German companies will make a significant legal and organizational effort to comply with the legal requirements under the Act as well as under the EU directive once the Act becomes effective. With establishing and coordinating internal procedures for compliance with human rights standards, contractual arrangements and audits of direct suppliers may also be necessary to ensure the appropriate flow of information necessary to fulfill these new due diligence obligations. In addition, businesses will need to undertake a human rights impact assessment, review key compliance functions and resources, and strengthen internal grievance mechanisms.