The Supply Chain Act comes into force on January 1, 2023. For companies and management, this means that further obligations will arise for them in the new year.
The Supply Chain Act, or the Supply Chain Due Diligence Act (LkSG) as it is officially named, initially applies from 2023 to companies with at least 3,000 employees, and from 2024 also to businesses with at least 1,000 workers. The aim of the act is to regulate corporate responsibility for compliance with human rights in supply chains. For managers and boards, this means they must implement and enforce new corporate due diligence obligations, according to attorney Michael Rainer, MTR Legal.
According to the LkSG, the company’s due diligence obligations extend throughout the entire supply chain from raw materials to the end product. The requirements for companies are graded and depend, among other things, on the company’s ability to influence a perpetrator of human rights violations and on the different stages in the supply chain. Essentially, the due diligence obligations concern the company’s own business operations, the actions of direct business partners, and suppliers. The responsibility under the Supply Chain Act does not end there. If grievances within the supply chain become known, companies must take action.
The Supply Chain Act includes a catalog of eleven internationally recognized human rights conventions. These include, among others, prohibitions on child labor, slavery and forced labor, disregard of labor and health protection or withholding of fair wages.
If companies do not fulfill their due diligence obligations, fines of up to 8 million euros or 2 percent of the worldwide annual turnover may be imposed. Additionally, companies can be excluded from the award of public contracts if the fine exceeds a certain amount.
Under the Supply Chain Act, companies are required to implement risk management in order to be able to fulfill their due diligence obligations. Such a risk management system is intended to recognize and prevent potential human rights violations or environmental damage at an early stage.
Companies are therefore required to conduct a risk analysis with appropriate control measures. If a risk is identified, preventive measures must be taken. If protected rights have been violated, companies must promptly take suitable remedial action within their own business operations.
The Supply Chain Act significantly increases the requirements for efficient compliance and also the liability risk. Experienced attorneys provide advice.
