The Supply Chain Due Diligence Act: HR and labour law in focus

published on 26 November 2023 | reading time approx. 6 minutes

As the majority of the human rights risks protected by the German Act on Corporate Due Diligence to Prevent Human Rights Violations in Supply Chains (Lieferkettensorgfaltspflichtengesetz - hereinafter: " Supply Chain Act" or "LkSG") are directly related to labour and occupational health and safety law and the LkSG also has direct individual and collective labour law implications, HR departments will not be able to avoid familiarising themselves with the regulations.

A short overview »
Which companies are actually affected by the Supply Chain Act »
The Supply Chain Act in the light of labour law »
Conclusion and perspective »

A short overview

On 1 January 2023, the Supply Chain Act came into force, which obliges a large number of German companies based in Germany and foreign companies with branches in Germany to assume responsibility for human rights and the environment along their supply chains. Meeting these requirements poses unprecedented compliance challenges, particularly for multinational German companies with business activities in countries with a high risk of legal violations.

Finally, pursuant to sec. 3 para. 1 LkSG, companies are obliged to comply with the human rights and environmental due diligence obligations set out in this section in their supply chains in an appropriate manner with the aim of preventing or minimising human rights or environmental risks or ending the violation of human rights or environmental obligations. Companies must fulfil the following due diligence obligations:

the establishment of a risk management system (sec. 4 para. 1 and 3 LkSG),
definition of internal responsibility for monitoring risk management (sec. 4 para. 1 and 3 LkSG),
the performance of regular risk analyses (sec. 5 LkSG),
issuing a declaration of principles (sec. 6 para. 2 LkSG),
anchoring preventive measures in its own business area (sec. 6 para. 1 and 3 LkSG), and vis-à-vis direct suppliers (sec. 6 para. 4 LkSG),
taking corrective measures (sec. 7 para. 1 to 3 LkSG),
the establishment of a complaints procedure (sec. 8 LkSG),
the implementation of due diligence obligations with regard to risks at indirect suppliers (sec. 9 LkSG) and
documentation and reporting (sec. 10 para. 1 and 2 LkSG).

Pursuant to sec. 3 para. 2 LkSG, the appropriate manner of acting in accordance with the aforementioned duties of care is determined by (i) the nature and scope of the company's business activities, (ii) the company's ability to influence the direct polluter, (iii) the typically expected severity of the injuries and (iv) the company's contribution to the cause. According to the legislative explanatory memorandum, two factors apply (see BT Drs. 19/28649, p. 42): The greater the company's ability to influence, the more serious and probable the expected violations and the greater the company's contribution to causation, the greater the efforts the company must make to fulfil the requirements of the due diligence obligations. The more susceptible a business activity is to human rights risks by product and production site, the more important it is to monitor the supply chain.

The LkSG therefore only establishes a duty to endeavour and not a duty to succeed or guarantee liability (see also: BT Drs. 19/28649, p. 2). Nevertheless, the requirements for such endeavours are likely to be quite high and incalculable in individual cases and cause headaches for some companies.

The fact that the Federal Office of Economics and Export Control ("Bundesamt für Wirtschaft und Ausfuhrkontrolle" – hereinafter: "BAFA") has set up a multilingual (German, English, French and Spanish) online complaint form that can be used to report imminent or existing violations, even anonymously, shows just how seriously the legislator takes the implementation of the LkSG and the prosecution of violations of it.

Which companies are actually affected by the Supply Chain Act

The Supply Chain Act initially applies directly to German companies based in Germany and foreign companies with branches in Germany (hereinafter collectively referred to as "Companies") with generally at least 3,000 employees in Germany and, from 1 January 2024, also to Companies with generally at least 1,000 employees in Germany – in each case including employees posted abroad.

When determining the number of employees, all domestic employees of all group Companies belonging to the parent company are added to the number of employees posted abroad. Furthermore, temporary workers are included in the calculation of the number of employees of the hiring company if the period of employment exceeds six months.

As the Companies directly covered are also required to reduce or completely eliminate human rights and environmental risks at their suppliers, Companies that employ workers below the respective threshold but are part of a supply chain will also be indirectly affected by the due diligence obligations of the LkSG. After all, Companies directly affected by the LkSG would be ill-advised if they did not pass on their due diligence obligations to their suppliers.

The Supply Chain Act in the light of labour law

1. Protected interests of the LkSG characterised by labour law

The Supply Chain Act contains a detailed catalogue of protected human rights and environmental legal positions in sec. 2 para. 2 and 3 LkSG, along with references to the relevant international conventions (e.g. Convention C138 – Minimum Age Convention of the International Labour Organisation of June 26, 1973 ).

A large number of the legal positions protected by human rights relate directly to working life and are determined - both nationally and internationally - by labour and occupational health and safety legislation. The legal positions protected under human rights law include (i) the prohibition of child and forced labour as well as any form of slavery, (ii) compliance with occupational health and safety at the place of employment, (iii) the prohibition of disregard for freedom of association, (iv) protection against discrimination and (v) the payment of an appropriate wage.

2. The new roles of the economic committee and the works council

With the introduction of the LkSG, the catalogue of information obligations in sec. 106 para. 3 of the German Works Constitution Act ("Betriebsverfassungsgesetz " – hereinafter: "BetrVG") was expanded. Now the Economic Committee - if and insofar as the scope of application of the LkSG is opened up - must also be informed in a timely and comprehensive manner about "questions of corporate due diligence obligations in supply chains in accordance with the Supply Chain Due Diligence Act" (Section 106 (3) No. 5b BetrVG).

It is true that no changes or additions were made to the BetrVG as part of the introduction of the LkSG with regard to the involvement of the works council. Nevertheless, employers should pay particular attention to the existing co-determination rights. This is because, depending on how the duties of care are organised in each individual case, a large number of co-determination rights come into question. In detail:

When setting up a risk management system, employee co-determination pursuant to sec. 87 para. 1 BetrVG may already apply. This is the case if the regulatory behaviour in the company and not the work obligation is regulated by a works agreement. The regulatory procedure and thus mandatory co-determination of the works council would then be assumed if a standardised procedure for behaviour when reporting violations of the law is regulated.
The works council also has a right of co-determination in certain constellations as part of the risk analysis pursuant to sec. 5 LkSG. Such a right of co-determination may exist in the form of sec. 94 para. 1 s. 1 BetrVG, according to which personnel questionnaires require the consent of the works council. The legislator leaves open the form in which a risk analysis pursuant to sec. 5 LkSG must be carried out, so that a risk analysis using a standardised personnel questionnaire is also possible. However, it should be noted in this context that the right of co-determination pursuant to sec. 94 para. 1 s. 1 BetrVG does not apply if participation in the survey is only on a voluntary basis.
If a risk has been identified in accordance with sec. 5 LkSG and preventive measures therefore have to be taken in accordance with sec. 6 para. 1 LkSG, the co-determination right in accordance with sec. 98 para. 6 BetrVG must be observed, according to which the works council must have a say in the implementation of other training measures. Such other training measures are likely to be in the case of the organisation of training courses in the relevant business areas in accordance with sec. 6 para. 3 no. 3 LkSG.
As part of the remedial measures to be taken (sec. 7 LkSG), a right of co-determination pursuant to sec. 87 para. 1 no. 7 BetrVG arises if and insofar as it concerns specific regulations for the prevention of accidents at work and the protection of health.
Finally, a right of co-determination pursuant to sec. 87 para. 1 no. 6 BetrVG comes into consideration if an electronic complaints management system is implemented and the employee making the complaint must send the complaint in the form of an online input mask, for example.

3. Implementation of the declaration of fundamental principles under labour law

The implementation of the declaration of fundamental principles on the human rights strategy to be submitted by the company pursuant to sec. 6 para. 2 LkSG and the behavioural expectations of employees contained therein is not already carried out by the catalogue of obligations of the Supply Chain Act. After all, it is not the company's employees but the company itself that is the addressee of the LkSG.

Therefore, in order to be binding on employees, a corresponding code of conduct must be introduced into the employment relationship through (i) the employer's right to issue instructions, (ii) an employment contract provision or (iii) a works agreement.

The charming thing about implementing a code of conduct by concluding a works agreement is that many of the aforementioned participation rights of the works council can be taken into account.

4. The LkSG - an opportunity for HR departments

As previously emphasised, the majority of protected goods under the LkSG are related to working life. In view of this, we believe that it makes sense to utilise the expertise available in HR departments when dealing with the current challenges relating to risk management and preventative measures. It would therefore be obvious and an opportunity for all parties involved to implement the appointment of a human rights officer in the HR department as proposed by law within the framework of risk management.

Conclusion and perspective

The LkSG represents an important step towards the global protection of human rights and the environment, which smaller suppliers should also take into account due to the indirectly applicable duty of care.

Although the LkSG explicitly obliges companies, without direct reference to the employment relationship. However, a closer look at the implementation of the due diligence obligations under the LkSG reveals more than just "points of contact" under labour law, which HR departments should be aware of and prepare for in the future. In particular, the due diligence obligations addressed to the company should be implemented in the respective employment relationship as work obligations - e.g. by introducing or updating the Code of Conduct. This is the only way to ensure that the due diligence obligations are actually complied with.

If a works council exists, particular attention should be paid to the specific form of the due diligence obligations. This is because, depending on the structure, some of the works council's co-determination rights may come into consideration.

All in all, we believe that the Supply Chain Act is an opportunity for HR departments to (i) utilise their expertise in this area to the benefit of companies, (ii) position themselves early on with regard to ESG (Environmental - Social - Governance) issues and (iii) initiate or successfully continue the change process towards "Green HRM", i.e. sustainable human resources management.