The Supply Chain Duty of Care Act, commonly referred to as the Supply Chain Act, has been in force in Germany since the beginning of 2023. What is the purpose of this law? Which companies does it apply to? What obligations arise from the Supply Chain Act?
The Supply Chain Act obliges companies based in Germany to observe certain due diligence obligations along the supply chain and to take appropriate precautions to fulfil their legal obligations. The Supply Chain Act is primarily concerned with compliance with Human rights and compliance with legal standards in the area of Occupational safety and environmental protection.
To which companies does the Supply Chain Act apply?
The German Supply Chain Act came into force on 1 January 2023. It initially applied to all companies based in Germany with at least 3,000 employees in Germany. The threshold was lowered on 1 January 2024: the law now applies to all companies with at least 1,000 employees in Germany. Employees temporarily posted abroad are included in the calculation of the company size - as are temporary workers who work for the user company in Germany for longer than six months.
What is the purpose of the Supply Chain Act?
For example, the Supply Chain Act is intended to help prevent or eliminate child and forced labour and strengthen the right to fair wages. Improved working conditions and safety standards are intended to reduce occupational health hazards and accidents at work. The law is also intended to ensure that environmental protection standards are adhered to along the supply chain.
What does "supply chain" mean?
The supply chain comprises all the steps in Germany and abroad that are required to manufacture a company's products and provide its services - from the extraction of raw materials through to delivery to the end customer.
The obligations under the Supply Chain Act do not only apply to business activities in the supply chain. own business divisionbut also on the actions of direct and indirect suppliers.
Due diligence obligations in accordance with the Supply Chain Act
The Supply Chain Act obliges companies to fulfil certain obligations within their supply chain. Duties of care must be observed. Firstly, companies must identify and assess the risks relating to human rights and environmental protection in their supply chains. Based on this, the following preventive and organisational measures must be taken:
- Submission of a policy statement on the company's human rights strategy
- Establishment of operational risk management
- Regular performance of a risk analysis
- Determining who is responsible within the company for implementing the due diligence obligations
- Establishment of a company complaints procedure (in accordance with the requirements of the Supply Chain Act)
- Implementation of preventive measures in our own business area and vis-à-vis direct suppliers
- Ongoing documentation that the due diligence obligations have been fulfilled (the documents must be kept for at least 7 years)
- Preparation of an annual report on the fulfilment of due diligence obligations in the past financial year
Set up risk management
The establishment of a risk management system aims to achieve this, Human rights and environmental risks and to prevent, end or minimise the extent of violations of human rights or environmental obligations. This includes regularly carrying out a risk analysis.
Carry out remedial measures
If a company discovers that a violation of a human rights or environmental obligation has already occurred in its own business area or at a direct supplier, or that such a violation is imminent, the company is legally obliged to immediately appropriate remedial measures to prevent, end or minimise the extent of the violation. If the violation of a human rights or environmental obligation at a direct supplier is such that the company cannot end it in the foreseeable future, it must immediately draw up and implement a plan to end or minimise it, whereby the plan must include a concrete timetable.
Please note: Companies must be able to prove that they are implementing the legal obligations of the Supply Chain Act in an appropriate manner. What "appropriate" means in this sense depends, among other things, on the company's ability to influence the perpetrator of the breach and how serious the breach is.
EU Supply Chain Directive
In April 2024, the EU Parliament adopted a European Supply Chain Directive. This differs in some respects from the provisions of the German Supply Chain Act. For example, the EU directive provides for liability for damages if a company fails to fulfil its due diligence obligations and this results in damage. The German Supply Chain Act does not yet include such civil liability. According to the current legal situation in Germany, fines are possible for violations of due diligence obligations under the Supply Chain Act. In the event of serious violations, companies can be excluded from public procurement for up to three years.
The EU member states are obliged to transpose the Supply Chain Directive into national law within 2 years (after publication of the Directive in the Official Journal of the EU).
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