Germany Update: Increased due diligence for the benefit of people and the environment – the supply chain law is coming!

After long preparations, the draft law on corporate due diligence in supply chains , the so-called Due Diligence Act , was discussed in the Bundestag on April 22, 2021 (BT-Drs. 19/28649). Following the debate in the Bundestag, the draft was referred to the responsible committee for labor and social affairs for further discussion. In public discourse, one usually speaks of the “supply chain law”.

Background and objectives of the draft law

The aim of the Supply Chain Act is evidenced by the reasons for the law to improve the international human rights situation. This is to be achieved by defining requirements for the responsible management of supply chains for certain companies.

With the draft law, the German government is fulfilling an obligation from the 2018 coalition agreement. In this agreement, it committed itself to introducing a corporate due diligence for supply chains by law if the majority of German companies do not voluntarily commit themselves by 2020 to carry out processes in accordance with the UN Establish guiding principles for business and human rights. A review of this voluntary commitment showed that only 20 percent of the companies surveyed met these requirements in 2019 and only 17 percent in 2020. The target value of at least 50 percent set by the federal government was thus clearly missed. With the Supply Chain Act, the UN’s guiding principles for business and human rights are now to be implemented in a binding manner.

For whom and from when?

From 01.01.2023, the requirements of the Supply Chain Act according to the current draft will apply to companies with head office, main branch, administrative headquarters or statutory seat in Germany if they have at least 3,000 employees in Germany. From 01.01.2024 this threshold will be lowered and the regulations will then apply to companies with more than 1,000 employees in Germany. Temporary workers are taken into account at the hiring company if their duration of employment there exceeds 6 months. In affiliated companies, employees of all group companies are assigned to the parent company.

Introduction of due diligence requirements

The companies concerned are essentially obliged by the Supply Chain Act to determine the extent to which their business activities lead to human rights violations or the violation of certain environmental obligations. The duties of care contained in this basically extend to the entire supply chain. In particular, they include the establishment of a risk management system and the implementation of regular risk analyzes. Within the company, the obligation to comply with the due diligence obligations is to be adopted within the framework of a declaration of principle and compliance with this is to be ensured by means of suitable preventive measures. However, these are not only to be met in your own business area, but also with direct suppliers. With regard to direct suppliers, it is particularly important to ensure that the contractual partner is carefully selected. Suitable contractual arrangements are also to be made that oblige the contractual partner to comply with all requirements and grant the company control powers in this regard. If there is a breach of law or duty in its own company or with immediate suppliers, the company is obliged to take remedial measures. If companies become aware of possible violations by indirect suppliers, they are required to take the necessary preventive measures against the perpetrator. which oblige the contractual partner to comply with all requirements and grant the company control powers in this regard. If there is a breach of law or duty in its own company or with immediate suppliers, the company is obliged to take remedial measures. If companies become aware of possible violations by indirect suppliers, they are required to take the necessary preventive measures against the perpetrator. which oblige the contractual partner to comply with all requirements and grant the company control powers in this regard. If there is a breach of law or duty in its own company or with immediate suppliers, the company is obliged to take remedial measures. If companies become aware of possible violations by indirect suppliers, they are required to take the necessary preventive measures against the perpetrator.

Furthermore, companies have to set up a complaint procedure that offers those affected a contact point and are subject to a documentation requirement. An annual report on the fulfillment of the due diligence obligations in the past financial year must be prepared. It is essential that this report does not only have to be submitted to the competent authority. It must also be made available to the public free of charge on the company’s website for a period of seven years. It can be assumed that these reports will be of great interest to business partners and customers, but also to competitors, investors, potential employees and the press.

Failure to comply with the due diligence requirements can be sanctioned with a fine, which can amount to up to 800,000 euros and in individual cases up to 2% of the annual turnover. In addition, companies can be excluded from procurement procedures. The responsible control authority will be the Federal Office of Economics and Export Control (BAFA).

Conclusion

The draft of the supply chain law was viewed critically in various respects. While some critics sometimes consider the due diligence requirements to be insufficiently intensive, others see unnecessary bureaucracy in the measures imposed. Although the supply chain law is to be passed in this legislative period, it cannot be ruled out that changes will still be made and that the process will be further delayed. Companies that could fall within the scope of the law should nevertheless take precautions at an early stage for possible application from 2023 or 2024. In particular, it makes sense to review the existing contractual relationships. This can possibly Possible risks in the supply chain are identified at an early stage and suitable measures are taken to avoid a breach of the duty of care. For example, through contractual obligations or, if necessary, by changing a contract partner.

By Daniela Riedinger, MELCHERS, Germany, a Transatlantic Law International Affiliated Firm.  

For further information or for any assistance please contact germany@transatlanticlaw.com

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