In March 2021, the German Federal Cabinet – the chief executive body of Germany – adopted the Due Diligence Act which aims to encourage companies to better protect human rights in their domestic and international supply chains.
The draft, also known as Supply Chain Act, outlines the duty holders’ obligations and defines the areas where companies are expected to actively intervene. While still subject to discussions and expected to be amended, the German Human Rights Due Diligence Act is scheduled on the agenda of this summer’s legislative session.
If passed, the Act will add to the list of human rights European compliance programs like the Modern Slavery Act of 2015 (UK), the Corporate Duty of Vigilance Law of 2017 (France), the Dutch Child Labour Due Diligence Law (Netherlands) due to enter into force in 2022, and the Mandatory Policy on Human Rights (EU) expected to be adopted this year.
German Human Rights Due Diligence Act Timeline
Ever since the UN’s Guiding Principles on Business and Human Rights were published in 2011, countries all over the world have developed due diligence compliance standards designed to eliminate human rights abuse and child labor from global supply chains. The German Act results from a national plan that didn’t quite work as expected, prompting legislators to explore a regulatory program or law.
2014 – 2016
The National Action Plan on Business and Human Rights studied the viability of voluntary due diligence programs for German companies. NAP was eventually abandoned in 2020, due to a lack of satisfactory engagement.
February 12, 2021
The German government reached an agreement to implement a Supply Chain Act.
March 3, 2021
The Act is adopted. Some clarifications will be released in the future, such as details on requirements, the introduction of control and enforcement procedures, provisions on administrative fines, and official general guidelines.
January 2023
The Act is binding for companies of 3,000 employees or more (total number of employees, including temps and subsidiaries).
January 2024
The threshold is lowered to 1,000 employees.
Companies Obligations Under The Act
Unlike many compliance programs, companies do not carry the burden of proof under the German Human Rights Due Diligence Act. There is no obligation of result; instead, businesses are expected to demonstrate they have implemented appropriate measures to protect human and environmental rights and processes to mitigate and remediate risk within the direct value chain. For indirect suppliers, businesses shall exercise due diligence obligations proportionate to risk levels in a case-by-case approach.
Affected Companies
Companies in the scope of the Act are defined as those:
- Having their head office in Germany, or
- Having their principal place of business in Germany, or
- Having their administrative headquarters in Germany, or
- Having a registered seat in Germany
Due Diligence Obligations
The Act requires companies to implement various measures, including:
- A policy statement on respect of human rights and appropriate preventive measures
- Define the company’s human rights strategy
- Demonstrate evidence of how obligations will be carried out
- Implement contractual standards and other measures actively engaging suppliers
- A risk management system to prevent adverse impacts on human rights
- Annual risk analysis
- Identify human rights risks
- Enforce legal protection
- Remediation processes
- Take action to minimize or stop abuses
- Grievance mechanism allowing reports of violations at the direct and indirect levels
- Documentation and reporting made available to the public
Defining Human Rights
For all intents and purposes, the Act defines abuses of human rights as:
- forced labor and slavery,
- child labor,
- non-compliance work safety and health hazards,
- disregard of freedom of coalition
- unfair, unequal treatment and discrimination
- damage to the environment that puts people’s livelihoods at risk or is harmful
- manufacture of mercury-added products and production and use of certain banned chemicals.
Enforcement Of The German Human Rights Due Diligence Act
Per the Act, enforcing compliance obligations will be the responsibility of The Federal Office of Economics and Export Control. It shall have powers to investigate if necessary and impose fines in averred cases of violation. In the event of serious infringement, violators may be excluded from public tenders (up to three years).
Penalties will be based on the company’s turnover and vary depending on the type of violation, from €800,000 to €8 million or up to 2 percent of global average turnover when more than €400 million.
How To Prepare For The Supply Chain Act Law
Compliance with the Act will require companies to reassess their legal efforts and potentially implement changes in their organizational processes. At a minimum, human rights corporate policies and procedures will be necessary in conjunction with supply chain monitoring systems.
Source Intelligence has an industry-leading supply chain compliance solution that gathers the supplier data you need and can be customized to the specifics of national laws. Our platform is built to simplify processes so there is no gap in the flow of information. Additionally, our unique risk-mapping capabilities improve your mitigation and remediation strategies.
Request a demo to see how you can:
- Collect supplier data
- Automate workflows
- Validate supplier documentation with AI
- Conduct virtual audits
- Rate suppliers per risk level
- Flag behaviors based on location, historical data, documentation, and more
- Easily roll out data into reports
- Benefit from documented insights
- Review key compliance functions
- Set up a complaint mechanism
The German due diligence act may become a law, giving you less than two years to get ready. Should it not pass, the likelihood is that the EU legislation will.
Either way, the time to adopt human rights protection standards is now. To be completely effective, transparency in your supply chain is paramount.
