Germany Passes Supply Chain Due Diligence Act

Germany Passes Supply Chain Due Diligence Act

July 21, 2021, Covington Alert

Germany’s Supply Chain Law—not yet available in English— was approved by the Parliament’s second chamber (Bundesrat) on 25th June. As the remaining legislative steps are formalities, further changes to its scope are not expected.

The law will create new obligations and liability risks for many multinational companies active in Germany and may serve as a model for the European Union as its legislative process toward mandatory environmental and human rights due diligence progresses.

Key Aspects of the Law

1. Covered entities and phase-in timing: From January 2023, the law will apply to companies that have their head office, principal place of business, administrative headquarters, or any registered branch office in Germany and have at least 3,000 employees in Germany. From January 2024, the law will apply to all companies in the foregoing categories with at least 1,000 employees in Germany. For companies with their head office, principal place of business, or administrative headquarters in Germany, employees that are posted abroad will be included in the count. As the law requires the covered companies to ensure that their often smaller-sized suppliers comply with the new requirements, the new law will also be indirectly relevant for many companies with fewer than 1,000 employees.

2. Covered human rights and environmental risks:

• Human rights risks: The law defines human rights risks to include, among other things, risks relating to forced and child labor, occupational risks and environmental damage affecting human rights, and any other act or omission of a company that can result in a “particularly serious violation” of a human right.
• Environmental risks: The law sets forth three environmental risks that are within its scope: risks caused by persistent organic pollutants; mercury; and hazardous waste.

3. Scope of due diligence requirement:

• Company’s own operations and first-tier suppliers:
  • Identify risks: Covered entities will be required to assess the human rights risks and environmental risks in their operations and in the first tier of their supply chains. The risk analysis will need to be updated annually and whenever the company’s risk profile changes—for example due to the introduction of new products, projects, or business activities.
  • Prevent and mitigate risks and violations: Companies must act promptly (“without undue delay”) to mitigate identified risks. The law provides that mitigation steps may include, for example, obtaining assurances from direct suppliers that they will adhere to human rights and environmental standards and conducting risk-based audits of suppliers’ operations. If a violation in the supply chain has already occurred or is imminent, the covered entity must promptly take appropriate remedial action to prevent, stop, or mitigate the violation, which could in certain circumstances include termination of the business relationship with the supplier.
• Risks in lower tiers of supply chains: If a company obtains “substantiated knowledge” of a violation of human rights or environmental standards by one of its indirect suppliers, it must carry out a risk analysis, establish appropriate preventive measures vis-à-vis the indirect supplier, and develop and implement a plan to address the violation.
• Grievance mechanism: Covered companies must establish a complaints procedure that is accessible to their own workers and suppliers’ workers throughout the supply chain.
• Report: Covered entities will be required to report annually on due diligence activities in the previous fiscal year and make reports available on their websites for seven years. The reports must provide information on: any risks or violations the company has identified; measures taken to fulfill the due diligence obligations; the company’s assessment of the effectiveness of those measures; and intended future actions.

4. Penalties and enforcement: Failure to comply with the law’s obligations may result in administrative fines against the company ranging from EUR 100,000 to EUR 8 million for each violation.

For companies with average annual turnover of more than EUR 400 million, the law will allow for fines of up to 2 percent of average annual global turnover for failure to take remedial actions where a violation of human rights or covered environmental obligations has occurred in its own business operations or those of a first-tier supplier. Non-compliance with the law can also result in exclusion from public tenders for up to three years.

The German Federal Office for Economic Affairs and Export Control (“BAFA”) will be responsible for enforcement. BAFA will have the authority to take enforcement actions on its own initiative and will be required to act on substantiated requests of any person claiming that his or her human rights have been or will soon be adversely impacted by a covered company’s failure to comply with its due diligence obligations.

Civil liability: Individuals alleging a violation of a “particularly important” human right (e.g., the right to life) may authorize trade unions or German-registered NGOs that meet specified conditions to bring claims for damages on their behalf against a company in the German courts. Although it is expressly clarified in the law and in the explanatory document that the law is not introducing a new cause of action, this procedural feature will likely increase the number of lawsuits for alleged human rights violations in German courts.

Potential Impact on the EU Due Diligence Law

Meanwhile, the EU’s human rights and environmental due diligence legislative file has been the subject of intense lobbying and political maneuvering, which has contributed to the EU Commission’s publication of its legislative proposal—originally slated for the Summer of 2021—being delayed to the Fall. Certain German politicians and business groups are now urging the Commission to align the EU proposal with the German law, though opinion in Germany is divided.

Next Steps

Whatever the outcome in Brussels, businesses caught by the German Supply Chain Law should begin to prepare for its entry into force by reviewing and updating their human rights and environmental due diligence frameworks, including the adequacy of their risk assessment and mitigation processes, grievance mechanisms, and due diligence reporting. Other companies might also consider benchmarking their programs against the German law as one indication of what may soon come in the EU and elsewhere.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Business and Human Rights practice.