Business and Human Rights – Germany passes Mandatory Human Rights Due Diligence Law

On June 11, 2021, the German parliament passed the “Law on corporate due diligence in supply chains” (“Supply Chain Law”) (“Lieferkettensorgfaltspflichtengesetz”). It requires companies to take steps to prevent human rights violations in their supply chains. This builds on the global growing momentum for mandatory human rights due diligence.

Under the new Supply Chain Law:

• companies must ensure that human rights are being respected throughout their entire supply chain;
• companies must establish complaint mechanisms and report on their due diligence activities;
• companies with more than 3,000 employees will have to meet the new due diligence obligations as of 1 January 2023 (and companies with more than 1,000 employees as of 2024);
• violations of the obligations under the Supply Chain Law will not give rise to a civil liability of the company;
• however, companies violating their obligations under the Law will be sanctioned with fines which can amount to up to 2% of the average annual turnover for companies with more than EUR 400 million annual turnover.

In order to implement the UN Guiding Principles on Business and Human Rights in Germany, the government had relied on voluntary engagement for many years and adopted the National Action Plan on Business and Human Rights.¹ However, surveys had revealed that the target of 50% of companies fulfilling the obligations set forth in the UN Guiding Principles was clearly missed. In response to this and in accordance with the coalition agreement between the currently governing political parties, the government proposed a draft bill for a mandatory human rights due diligence in March 2021.

As a first step, the Law will apply to and establish due diligence obligations for companies with more than 3,000 employees, which includes employees posted abroad. The Law also applies to German subsidiaries of foreign companies. As of 1 January 2024, companies with employees with more than 1,000 will have to adhere to the new obligations.

A company’s obligations will extend to the entire supply chain, with more stringent obligations where a company has greater opportunity to exert influence. i.e. in its own business activities as well as vis-à-vis their direct suppliers. Indirect suppliers are included if the company has substantiated knowledge of human rights violations by the supplier.

A company’s due diligence obligations under the Supply Chain Law involve the analysis of human rights-related risks, the taking of measures to prevent and mitigate human rights violations and the establishment of complaint mechanisms. Furthermore, companies will have to report on their due diligence activities.

The new Law furthermore covers environmental protection insofar as environmental risks can lead to human rights violations. It requires companies to comply with environmental obligations as set out in the certain environmental conventions.²

Although the government initially had considered to establish a civil liability in case of violations of obligations under the Law, the final wording of the Law explicitly excludes a civil liability based on the violation of due diligence obligations. However, German trade unions and non-governmental organisations are allowed to support foreign claimants affected by human rights violations in representing their rights before German courts. The new Law also provides for the possibility to file a complaint with the competent German authority in case of human rights violations.

The Supply Chain Law provides for fines if companies fail to meet their new due diligence obligations. Companies with an average annual turnover of more than 400 million euros could face fines of up to 2% of their annual turnover for certain violations. In addition, companies can be excluded from public procurement for up to three years in the event of serious violations.

The Supply Chain Law will come into force on 1 January 2023.

How can your organisation prepare for the upcoming due diligence obligations under the new Supply Chain Law?

Companies should now start preparing for their due diligence obligations by:

1. Integrating human rights into group policies and strategic planning processes;
2. Disclosing how human rights considerations are integrated into strategies, policies and procedures;
3. Carrying out a human rights impact assessment and taking proportionate counter-measures, as well as communicating internally and externally on what measures have been taken;
4. Reviewing and reinforcing complaints mechanisms and speak-up programmes;
5. Ensuring the business is well equipped to deal with ‘crises’;
6. Reviewing the extent to which their board is equipped to address supply chain risks; and
7. Reviewing the role, resources and expertise of the legal and compliance functions, who should play a key part in addressing these new challenges.