Supply Chain Act: New due diligence obligations for companies

Supply Chain Act: New due diligence obligations for companies

It was April 24, 2013 in Bangladesh. Like every day, thousands of people work in textile production for giants like Benetton, Kik and Walmart in the factory building called Rana Plaza. Far more than eight hours a day for a wage that is just enough to survive. Critical structural damage had been discovered in the previous days. No matter: the (largely female) workforce is forced to continue working. Suddenly the building collapses. 1,100 people are killed and another 2,000 injured.

On June 11, 2021, more than eight years later, the German Bundestag - not least in response to Rana Plaza - passed a law on corporate due diligence in supply chains (Supply Chain Due Diligence Act, LkSG), which is intended to prevent the recurrence of such disasters and inhumane work worldwide. This has far-reaching consequences for the economy. 

Through the law, which is often just called the Supply Chain Act, German companies (those that have their headquarters or even just a branch in Germany) with over 3,000 employees are obliged from January 1, 2023 to ensure compliance with certain standards regarding human rights and environmental regulations in their supply chains. From January 1, 2024, the law will apply from a threshold of 1,000 employees. 

What the Supply Chain Act requires

But what exactly does the law on due diligence in relation to the supply chain regulate? International agreements within the framework of the UN already require compliance with certain minimum standards, such as the ban on child labor or slavery. However, since these did not have the desired success, the German federal government was forced to act. It now obliges larger companies by law not only to adhere to these standards with regard to human rights and environmental regulations themselves, but also to influence their suppliers so that they also fulfill their due diligence obligations. This also includes ensuring compliance with local labor law.

This is what needs to be done in terms of due diligence

Ultimately, there should be appropriate care along the entire supply chain, hence the full legal name: Supply Chain Due Diligence Act. For this reason, companies are obliged to obtain contractual assurances from suppliers. Training and further education as well as control measures must be introduced. It is important to set up documentation, reporting, prevention and organizational measures as well as an independent complaints procedure (a type of “whistleblowing hotline”).

If the company now becomes aware of violations, it must establish preventive measures against the perpetrator and create and implement a concept for prevention, termination or minimization. This can sometimes be complex and costly. A violation of the legal regulations can cost the company concerned dearly: penalties of up to two percent of the company's average annual turnover can be imposed. Not to mention the reputational damage that would result from such violations and possible civil law claims. In addition, there is a ban on participating in public tenders.

Obligations also for Austrians 

The new law – even if it was initiated by the federal government in Germany and passed by the Bundestag there – also affects companies in Austria. Those companies that are suppliers to the affected German companies and therefore have a business relationship with them will have a lot to do themselves - because these German companies will try to pass on their obligations under the Supply Chain Act to their direct suppliers, as far as this affects the further supply chain. And these in turn to their suppliers and so on.

"In Germany there are around 600 companies with more than 3,000 employees and over 3,000 that employ more than 1,000 people," explains Roland Falder, partner at Emplawyers in Munich: "However, they again have a large number of suppliers. So the risk of being part of the supply chain of an affected company is not that low, even if your own customer only has a few workers."

But what exactly is a “supply chain”? This includes all steps at home and abroad that are necessary to manufacture the products and/or to provide the services of the company concerned. This applies to raw materials or components of a product, services that are necessary for production, but also those that are only indirectly necessary, such as insurance, logistics or consulting services (e.g. tax advice or legal advice). 

In this respect, the supply chain is more of an inverted “supply tree” with many branches. And they have to be identified first. And they don't stay constant because the suppliers change every now and then.

Suppliers should act now

What do Austrian suppliers who are part of a German company’s supply chain have to do now? "Well, that depends to a certain extent on what obligations are imposed on you by your customer. But it can be assumed that these will be very extensive obligations," says Dominik Leiter, lawyer and partner at Weisenheimer Legal in Vienna. 

In order to fulfill the obligations of their customers, a process must be carried out in which their own supply chain is analyzed. Internal responsibilities must be determined, processes and guidelines implemented and employee training carried out to ensure control and response to identified compliance violations.

But what happens if you are unable to remedy a violation of these standards that you have become aware of, for example because the sub-sub-sub-supplier in the Far East is not cooperating? Then you will probably have to end the supply relationship before the German company does the same with the business relationship with you. Weisenheimer Legal advises companies to quickly and proactively address the issue. You could use this in marketing.

By the way, a European supply chain directive is already in the works at the EU level. According to experts, it is not yet possible to estimate when the European Union will actually implement this, but it will probably happen sooner or later. This is one of the reasons why it is worthwhile for businesses to take action now and deal with the Supply Chain Act initiative. Dominik Leiter presents further arguments for this: “You can find out important things about your own suppliers without much additional effort and gain a competitive advantage over other providers.”

A supply chain directive is already in the works at the European level, which will also require companies in Austria to take care of fundamental rights and environmental standards in their supply chain. It is not yet known when this directive will have to be implemented.

Supply Chain Act: Approval from Austria

There is understanding for such laws in politics. Gerald Loacker, environmental and economic spokesman for Neos, said when asked by KFZ Wirtschaft: "Even if restrictions on the global economy always have to be weighed up very carefully, regulations that prevent social and environmental dumping are to be welcomed." Of course, he adds the following caveat: “As long as such regulations are not excessive and make entrepreneurs responsible for things that are simply outside their sphere of influence.”

Of course, such regulations should not be excessive and make companies responsible for things that are simply outside their sphere of influence. This danger does not exist due to the new supply chain law, especially since German law does not require companies to be successful, but only to make reasonable efforts. But with emphasis. 

Summary: 

With the new supply chain law, the federal government in Germany is making advances in the interests of human rights: the Bundestag is holding corporations responsible for exercising corporate due diligence. Across their entire value chains. Larger companies have a duty to ensure the protection of human rights and compliance with environmental standards along their supply chain and to obtain relevant information. Since the general due diligence obligations include business relationships with suppliers, Austrian companies are also affected by the law - if they are suppliers to large German companies. Experts advise these companies to actively exercise due diligence obligations and take appropriate measures - from information and documentation to training employees and implementing preventative measures.