SCOPE OF APPLICATION
The Act will apply from 01.01.2023 to all companies that have their head office, principal place of business or branch office as well as their administrative or statutory seat in Germany and employ at least 3,000 workers. Employees posted abroad are counted as well as the employees of all group companies of a parent company. The legal form of the company is irrelevant for the applicability of this law, see § 1 LkSG.
As of 01.01.2024, the threshold will be lowered from 3,000 to 1,000 employees. In 2024, it will also be discussed whether the scope of application of the Supply Chain Act should be further extended to include companies with less than 1,000 employees. This means that from 2024 at the latest, a not inconsiderable proportion of small and medium-sized enterprises (SMEs) may also be covered by the scope of application of the Supply Chain Act.
CATALOGUE OF OBLIGATIONS FOR COMPANIES
Companies that fall within the scope of the Supply Chain Act are obliged to take human rights and environmental due diligence obligations into account in their supply chains in an appropriate manner. To this end, the Supply Chain Act contains an exhaustive list of human rights and environmental prohibitions with reference to underlying conventions under international law, see § 2 LkSG. These include:
– The prohibition of child labour, forced labour and slavery,
– The prohibition of disregard for labour protection and freedom of association,
– The prohibition of unequal treatment and discrimination,
– Compliance with environmental standards and other environmental prohibitions.
The term supply chain is understood broadly in this context. It includes all products and services of a company at home and abroad, as well as in particular the actions of direct and indirect suppliers. The due diligence obligations to be complied with include in particular:
– Establishment of a risk management system,
– Conducting regular risk analyses,
– Adoption of a policy statement on human rights strategy,
– Establishing preventive measures,
– taking remedial action,
– ongoing documentation and reporting.
However, the companies concerned are not obliged to guarantee compliance with human rights and environmental prohibitions. Rather, the companies are obliged to make an effort. The requirements for the fulfilment of these due diligence obligations are subject to an appropriateness proviso. Criteria for the concretisation of appropriateness are: Type and scope of the entrepreneurial activity, the company’s ability to influence the direct perpetrator of a violation, the typically expected severity of the violation, the reversibility or probability of a violation, as well as the type of entrepreneurial contribution to causation. The further the source of risk in the supply chain is away from the responsible company, the less influence the company is able to exert. Therefore, human rights and environmental risks caused by direct suppliers are subject to stricter due diligence requirements than those caused by indirect suppliers. Comprehensive due diligence obligations for indirect suppliers explicitly only apply if a company obtains substantiated knowledge of a violation of a protected legal position, section 9 LkSG. According to the explanatory memorandum to the law, such knowledge can already be considered if the respective supplier is active in a region or industry with generally existing human rights or environmental risks.
POSSIBLE SANCTIONS
Compliance with the Supply Chain Act is monitored by the Federal Office of Economics and Export Control. In the event of violations of the provisions of the Supply Chain Act, fines of several hundred thousand euros or up to 2% of the average annual turnover may be imposed. In addition, companies can be excluded from the award of public contracts for a period of up to three years.
Contrary to what was initially discussed in the legislative process, a breach of the provisions of the Supply Chain Act does not give rise to any civil liability of its own, e.g. of injured parties for damages. It remains to be seen whether the courts will accept this restriction or whether the Supply Chain Act will not introduce a new standard of due diligence, which will indirectly lead to a higher civil liability burden for companies.
EUROPEAN OUTLOOK
Efforts are also being made at EU level to harmonise Member State regulations on human rights and environmental protection in supply chains. In January 2021, the Legal Affairs Committee of the European Parliament presented a comprehensive list of demands and recommendations to the Commission and at the same time submitted a proposal for a directive. The proposal of the EU Parliament largely coincides with the LkSG, but also goes beyond it in part. According to the proposal of the EU Parliament, small and medium-sized enterprises that are listed on the stock exchange or are active in risky sectors should also fall within the scope of application. The proposal also does not distinguish between indirect and direct suppliers.
CONCLUSION AND RECOMMENDATION
The Supply Chain Act is a long-announced legislative step towards securing human rights and environmental standards in supply chains. At the same time, however, it also presents companies with challenges: For example, the wording in the LkSG, which is kept very open on several occasions – e.g. with regard to the question of whether a company has made adequate efforts to comply with due diligence obligations – is for the time being almost incalculable for the companies concerned. Clarification through official practice, administrative regulations, legal provisions and ultimately judicial decisions will gradually take place, but this makes it difficult for companies to plan ahead. In view of the high fines, specialist literature questions the extent to which the legislator has fulfilled its obligation resulting from the principle of certainty, Article 103 II of the German Constitution. Companies with a workforce of more than 1,000 employees are well advised to deal with the requirements of the Supply Chain Act now and to implement them in their compliance systems quickly. This is particularly advisable as work is already underway on an EU-wide regulation, in some cases with even stricter rules.
