»Supply Chain Act« will enter into force in Germany on January 1, 2023

On July 22, 2021, the Act on Corporate Due Diligence in Supply Chains (Supply Chain Due Diligence Act) was published in the German Federal Law Gazette. The act will enter into force on January 1, 2023 (hereinafter: the »Act«). The Act’s objective is to safeguard human rights and the environment in the global economy more effectively.

The Act will apply to companies that have their central administration, principal place of business, administrative headquarters, registered seat, or branch office in Germany and have 3,000 or more employees in Germany. Starting January 1, 2024, the number of employees requirement will be reduced to 1,000.

The Act will apply to the protection of human rights and the environment, in particular in the areas of:

  • labour law matters (e.g. child labour, prohibition of slavery or similar relationships, respect for health and safety at work, prohibition of discrimination in employment and pay, etc.);
  • pollution (e.g. environmental impacts of company operations, prohibition of the use of mercury and its derivatives, handling of hazardous waste, etc.).

According to Article 3 of the Act, companies will be obliged to observe human rights and environmental protection due diligence obligations in their supply chain in an appropriate manner. This is to ensure that companies fulfil their responsibility to protect human rights.

Accordingly, companies will need to put in place a range of complementary and interlinked measures, including:

  • setting up a risk management system;
  • appointing an internal human rights representative;
  • conducting regular risk analyses;
  • adopting human rights policies;
  • establishing preventive measures in its business area and with its direct suppliers;
  • taking corrective action in the event of a breach of a protected legal position;
  • establishing a complaints procedure for reporting human rights violations;
  • implementing due diligence measures in relation to risks with indirect suppliers;
  • documenting due diligence procedures, risks identified and actions taken, and publishing an annual report on their website, which must be free and publicly available.

The Act will require companies to conduct a risk analysis with regard to their own activities and business relationships within the supply chain. Companies will further have to ensure to define a person within the company who is responsible for monitoring risk management by appointing a human rights representative. The identification of risks serves as the basis for the subsequent definition of preventive and remedial measures with the aim of identifying, preventing, ending or at least minimising human rights risks and violations of rights along the supply chains.

One of the objectives of the Act is to stop human rights violations in the supply chain. If this is not possible, companies must develop a plan to reduce negative impacts. First, companies should work with each other to find a common solution with their suppliers, which may require the signing of a remedial action plan. As a last resort, termination of business relations may be required, while suspension of business relations may be considered as a less severe remedy.

The Act sets out a framework of obligations that will have to be implemented, while creating a uniform standard for all German companies.

Slovenian companies will also be affected by the provisions of the Act if they are suppliers of services and/or products to larger German companies. Slovenian companies can expect more checks or the establishment of new bilateral contracts by their German partners in the areas of labour law, environmental management and waste management. 

An EU Directive is also being prepared which will cover similar matters and will apply to all EU Member States.

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