In June 2021, Germany’s Federal Parliament [Bundestag] adopted the German Act on Corporate Due Diligence Obligations in Supply Chains [Lieferkettensorgfaltspflichtengesetz – LkSG], which is due to enter into force on 1 January 2023. This new Act imposes an obligation on companies to ensure compliance with human rights standards in their supply chains.
The LkSG will apply directly to companies based in Germany with 3,000 or more employees. From 1 January 2024, it will apply to companies with at least 1,000 employees. Foreign companies fall within the scope of the Act if they operate a branch with 3,000 or more employees (or at least 1,000 employees from 1 January 2024) in Germany. Subsidiaries and affiliated companies must be included in the calculation of the total number of employees.
However, the LkSG will also affect small and medium-sized enterprises not exceeding the employee number thresholds for direct application of the Act, if they are part of the supply chains of larger companies and due diligence obligations are imposed on them contractually; such a cascading effect of the obligations under the Act along the entire supply chain is specifically intended by the LkSG and thus an inevitable consequence of the Act. Accordingly, the LkSG will indirectly apply to all companies that supply goods or provide services to a company that falls directly within the scope of the Act.
The LkSG requires companies to determine and evaluate the risks of human rights breaches along the supply chain, to take appropriate action where human rights are breached and to report any such breaches. There is a staggered model of responsibility: the primary responsibility of companies is for their own field of business and for their immediate suppliers. If, however, a company attains “substantial knowledge” about human rights breaches elsewhere in the supply change, the responsibilities reach down the supply change and include the obligation to examine and evaluate indirect suppliers.
If companies do not comply with these obligations, they run the risk of incurring administrative fines, being excluded from public procurement procedures or being held liable for damages. In this context, the responsibility of a company for human rights breaches is considered higher the closer its relationship is to the supplier concerned. The authority responsible for monitoring compliance with the obligations under the LkSG is the German Federal Office for Economic Affairs and Export Control [Bundesamt für Wirtschaft und Ausfuhrkontrolle – BAFA].
A right for parties injured by human rights breaches to sue in Germany that goes beyond current legal action possibilities under German law and that was originally intended to be introduced into the Act, was not included in the final version. Neither does the Act intend to introduce new elements of civil liability for human rights breaches under German law. However, injured parties may instruct NGOs or trade unions to conduct law suits in German courts on their behalf [Prozessstandschaft].
Even though the LkSG has not yet come into force, German companies are already known for their commitment to upholding high standards on human rights in their international supply chains. The purposes pursued by the new Act are legitimate, but since it is a national act, it puts German companies in a more difficult competitive position in comparison to EU and other international competitors. It is hard to tell at this point what effects the Act will have on their business; however, there is reason to assume that companies will be exposed to additional risks. On the other hand, the LkSG is an opportunity for companies to actively advocate sustainable business practices in their field of business and within their supply chain and set a new standard for sustainable business practices.
Our supply chain experts have followed the legislative process closely and continuously kept clients and other companies informed about current developments. Now that the legislative process has been completed, we continue to be available to answer questions about the LkSG. Whether you are looking for information events, need an appraisal report or expert opinion, or have to update your compliance standards – we are here to assist you with solutions tailored to suit your needs surrounding the LkSG. We help companies incorporate human rights standards into their international supply chains at an early stage. In doing so, we not only consider national and European law but – through our international partner firms – also the legal framework of other EU Member States and third countries.