Germany Becomes the Latest Country to Adopt Mandatory Human Rights Due Diligence Legislation | King & Spalding & More Trending News


The German Supply Chain Due Diligence Act: what does it imply for firms with a presence in Germany or doing enterprise with German prospects?

On 1 January 2023, the German Supply Chain Due Diligence Act (“Gesetz über die unternehmerische Sorgfalt in Lieferketten”, or “Lieferkettensorgfaltspflichtengesetz”) entered into pressure. It requires massive German firms (together with some German subsidiaries of international multinationals) to conduct far-reaching due diligence on human rights and environmental points of their provide chain. In this shopper alert, we think about what this may imply in apply (together with for firms who aren’t instantly caught by the Act). We additionally examine the German Act to different obligatory human rights due diligence mechanisms and the underlying worldwide requirements.

(1) To which firms does the Act apply?

The Act applies to all firms, no matter their authorized construction, which have their headquarters, foremost department, centre of administration or registered seat in Germany and have greater than 3,000 staff on 1 January 2023 (falling to 1000 staff on 1 January 2024).

In extra element:

  • The Act will apply to the German subsidiaries of non-German multinationals, offered that the subsidiary meets the headcount threshold.
  • The headcount threshold is calculated on a “bottom-up” foundation. This implies that staff of subsidiaries rely in the direction of the father or mother firm’s headcount. However, staff of a father or mother firm don’t rely in the direction of the headcount of a subsidiary.
  • Neither momentary employees nor short-term fluctuations in the work pressure are taken under consideration when figuring out headcount.

Even the place the Act doesn’t instantly apply to a specific firm, it could nonetheless have an oblique impact (no matter the place that firm relies or its headcount). For instance, the place a international firm provides a purchaser firm caught by the Act, the purchaser might look to cascade its due diligence obligations (see beneath) by means of contractual provisions. A failure adequately to implement such obligations may lead to contractual legal responsibility. This is a pattern seen in apply following the introduction of the Norwegian Transparency Act in 2022 (see our shopper alert right here).

(2) What are firms inside the scope of the Act required to do?

The Act imposes “due diligence obligations” (“Sorgfaltspflichten”), which require firms to confirm, doc and monitor that suppliers adjust to fundamental human rights and environmental requirements. These obligations embody, amongst others:

a) Setting up a danger administration system that enables it to establish dangers of human rights or environmental requirements violations, to forestall such violations and to mitigate their impression, ought to they happen (if the firm has, at the very least partially, brought on them);

b) Performing common danger evaluation, so as to establish dangers of human rights and environmental normal violations, at the very least annually and every time the danger publicity alters, e.g., by way of the introduction of latest merchandise or the growth of a brand new enterprise subject;

c) Should it establish a danger, taking preventive measures like adopting an organization coverage that addresses the human rights and environmental requirements, implementing the coverage throughout the provide chain, coaching related personnel and organising a management mechanism;

d) Taking corrective motion, ought to a violation happen or be imminent, so as to cease the violation or to mitigate its penalties;

e) Establishing a reporting system which permits concerned individuals throughout the provide chain to report dangers or violations to a impartial physique inside the firm confidentially and shielded from retaliation or discrimination;

f) Documenting the success of the due diligence obligations and preserving the information in the firm for seven years, making ready an annual report and publishing it on the firm’s web site.

These obligations broadly align with the requirements for provide chain human rights due diligence beneath the UN Guiding Principles on Business and Human Rights and OECD Guidelines for MNEs, in addition to beneath obligatory human rights due diligence laws already in pressure in France and Norway and anticipated to come into pressure at a European degree.

However, a key distinction is that the due diligence obligation beneath the German Act is restricted to provide chains. Unlike beneath the Norwegian Transparency Act or proposed EU Directive, for instance, firms aren’t obliged to conduct due diligence on their operations or downstream worth chains. Further, the due diligence obligation is restricted to tier-one suppliers and extends to sub-tier suppliers solely in instances the place there’s “substantiated knowledge” of a human rights or environmental impression. There isn’t any such qualification in the underlying worldwide requirements, which require motion to be taken in relation to sub-tier impacts to which an organization contributes or is instantly linked by way of its operations, services or products, no matter precise information.

(3) What are the deadlines for compliance, and so on.?

Companies should publish their annual reviews for every year at the finish of April of the following 12 months. This implies that the first spherical of annual reviews for firms with greater than 3,000 staff for fiscal 12 months 2023 shall be due at the finish of April 2024.

(4) How is the Act enforced and what are the sanctions for non-compliance?

The Federal Office of Economic Affairs and Export Control (often known as “BAFA”) is permitted to confirm that the annual report has been made, demand enhancements on it and take all essential actions to guarantee compliance with the due diligence obligations, both by itself initiative or if an affected particular person recordsdata a request to this impact. Companies are obliged to cooperate, for instance by producing paperwork of their custody (or that of their suppliers) or by permitting entry to their premises.

Should an organization not adjust to an enforcement measure, the competent authority might impose a high-quality (“Zwangsgeld”) of up to EUR 50,000.00. An organization that deliberately or negligently violates the Act itself is, relying on the violation, topic to a high-quality (“Bußgeld”) of up to EUR 8 million. For firms with a median annual turnover of greater than EUR 400 million the high-quality can quantity to up to 2 % of their common annual turnover. The actual quantity of the high-quality depends upon how important the violation is, what the motives of the offender have been and the penalties of the violation. In addition to a sanction and relying on its severity, firms could also be excluded from public tenders for up to three years.

Unlike different obligatory human rights due diligence laws, the German Act expressly excludes civil claims arising out of a failure to conduct due diligence.

Germany Becomes the Latest Country to Adopt Mandatory Human Rights Due Diligence Legislation | King & Spalding

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