Supply Chain Act
Advice on the LkSG - help with unanswered questions
The new law on corporate due diligence to prevent human rights violations in supply chains (LkSG) comes into force on January 1, 2023. You should inform yourself in good time, know your new obligations well and prepare accordingly in good time.
We will be happy to assist you with this new topic and advise you on the Supply Chain Act (LkSG). Our lawyer and engineer Donato Muro, LL.M. (Compliance and Corporate Security), will be happy to answer any questions you may have and go through the significance of the new law for your company if your company belongs to the following sectors:
- Architect's offices
- Construction companies
- Chemical or petrochemical plants
- Craft enterprises
- Engineering firms
- Recruitment agencies
- Manufacturing industry
- and similar
There is a draft for an EU supply chain law that is set to become EU law in the foreseeable future. This will then apply equally to all EU member states. However, it must first be adopted into national law in all member states, a process that will take a long time.
Germany is first introducing its own German supply chain law at national level, which is initially less far-reaching. As soon as the EU Supply Chain Act is ratified, Germany will also have to improve its national supply chain law.
The European draft stipulates that companies in the European Union above a defined size must check all suppliers and all global supply chains as well as all indirect and direct business relationships with other companies for compliance with human rights.
This is intended, for example, to prevent child labor worldwide and to integrate respect for human rights into corporate cultures worldwide.
Such a European law would affect far more German companies than the German law, which comes into force at the beginning of 2023.
Such a law had become necessary because it had previously not been possible to establish human rights as a valid and integral part of the value chain in all companies worldwide on the basis of individual responsibility. There had been repeated human rights violations in textile factories, for example. For example, many female employees lost their lives in a factory collapse due to inhumane working conditions and inadequate occupational health and safety. The industry's voluntary commitment was unable to put an end to the abuses.
Contents of the Supply Chain Sustainability Act (LkSG)
The primary aim of the law is to outlaw and prevent child labor or environmental crimes worldwide, for example, as around one in ten children worldwide has to work. Overall, it is intended to help uphold and protect human rights and also protect the environment to the extent that it prevents human rights violations and supports people's health.
As the most important requirement, the law places responsibility on companies for the entire supply chain to consistently respect basic human rights.
What exactly needs to be done depends on the area:
- Own company
- Direct supplier
- Indirect supplier
as well as additional criteria such as the business sector, the scope of business, what the company has contributed to the human rights violation, the usual severity of the violation and the extent to which the company was able to influence the human rights violation or its perpetrators.
Compliance with the law is checked by the Federal Office of Economics and Export Control (BAFA). It checks the company reports and clarifies incoming complaints.
The BAFA can also impose sanctions in the event of serious violations.
German non-governmental organizations and German trade unions can support the legal representation of people affected abroad before German courts. Those affected abroad can now also lodge complaints with the Federal Office of Economics and Export Control (BAFA).
Companies are obliged to make a binding declaration of respect for human rights for themselves and their direct suppliers. They must conduct a risk analysis, i.e. identify negative impacts on human rights, and minimize and prevent these negative impacts as part of a risk management system. In addition, companies must set up a complaints management system that allows affected parties, stakeholders and customers to submit complaints. Furthermore, all measures must be reported on publicly and transparently.
Any human rights violations identified in the company's own domestic operations must be stopped immediately. If the human rights violation at a direct supplier cannot be remedied in the short term, the company is obliged to draw up a detailed plan to prevent and reduce it to a minimum.
The new law does not contain any new liability regulations, but the applicable German and foreign laws continue to apply.
Business relationships with suppliers who commit human rights violations do not have to be terminated. Rather, the aim of the law is to ensure that the supplier can be influenced to end the human rights violations immediately.
Entry into force / transition periods
The Act on Corporate Due Diligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtengesetz - LkSG) was promulgated in the Federal Law Gazette on July 22, 2021. Individual provisions have therefore already been in force since July 23, 2021. The remaining provisions will largely come into force on January 1, 2023.
The law will therefore take effect on January 1, 2023 for around 900 companies in Germany with more than 3,000 employees.
Only one year later, on January 1, 2024, will the approximately 4,800 companies in Germany with up to 3,000 and more than 1,000 employees also be covered.
Who is affected and how
Every company is more or less called upon by the new law to establish a permanent place for human rights in its own corporate culture.
The new Supply Chain Due Diligence Act (LkSG) only applies to larger companies with 1,000 or more employees. Companies with more than 1,000 employees and up to 3,000 employees will be granted a transitional period until January 1, 2024.
For groups, the number of employees is the sum of the respective employee numbers of all parts of the group. Temporary and agency workers are expected to be included.
Small and medium-sized enterprises (SMEs) would therefore not be the direct focus of the law. However, the LkSG imposes responsibility for the entire supply chain on larger companies. This means that even for smaller suppliers, larger companies will be interested in the human rights situation in small and medium-sized enterprises.
This means that SMEs also have a responsibility and must live up to it, for example by ensuring sufficient transparency in their supply chains and reporting abuses.
The overall aim is to strengthen human rights and to uncover and end human rights violations. Consumers at the end of the chain also share responsibility for this. They are called upon to make use of their rights, demand information, make responsible decisions, report violations and, if necessary, lodge complaints.
