The German Supply Chain Law and its impact on Europe.

by Vanessa Guzek

On 11 June 2021, Germany passed the much-debated law on human rights compliance in global supply chains. 

For the first time, a law obliges companies to take responsibility for people in their supply chains. Respect for human rights is to be ensured through the application of certain due diligence obligations to protect the aforementioned legal positions. In this context, the legislator requires a comprehensive risk analysis as well as mutually supportive and interrelated preventive and corrective measures, all in order to avoid child and forced labor, inhumane working conditions and environmental destruction in production.

From 2023, all companies, regardless of their legal form, that have their registered office, head office or principal place of business as well as a branch office in Germany with more than 3,000 employees, and from 2024 companies with more than 1. 1,000 employees, will be obliged to identify risks of human rights violations and environmental destruction in their direct supply chains and, if necessary, also in those of indirect suppliers, to take countermeasures and to document them to the Federal Office of Economics and Export Control (BAFA).

Companies must apply far-reaching obligations in terms of organization, auditing and performance, as well as documentation and reporting. The question of whether a company has fulfilled its due diligence obligations is decided within the framework of an individual risk assessment and requires the inclusion of various factors such as the conditions and legal framework at the place of production (e.g. child labor in third world countries, occupational safety in textile production).

If due diligence obligations are not implemented, there is a risk that administrative infringement proceedings may be initiated. In particular, due to the highly formalized procedure associated with the various reporting obligations, it can be assumed that late or incomplete implementation will result in penalty proceedings with fines of up to EUR 800,000. Separate civil liability for damages was not excluded from the law. The general liability rules remain in force.

The industry associations, above all the Association of the German Textile and Fashion Industry (Gesamtverband der deutschen Textil- und Modeindustrie), have long criticized a national law and the timing of its introduction in the midst of the Corona crisis, but they also see the need for it. But the introduction of a purely national law seems questionable to them, as they see in it a risk that it will thus weaken the competitiveness of their medium-sized industry and impose new additional bureaucratic burdens on domestic companies. “The law could lead to German companies becoming uncompetitive and having to leave the market. This would serve no one, least of all the inhabitants of the producing countries,” explains Uwe Mazura, Managing Director of the German Textile and Fashion Association.

Many companies also feel indirectly affected by the law, for example through price increases or their role as suppliers to large companies. Companies furthermore fear legal risks in terms of liability and doubt the practical possibility of effectively controlling the production standards of their suppliers. The law covers too few companies and makes too many exceptions to due diligence obligations. It denies those affected the right to compensation and, unfortunately, does not set a signal for climate protection in supply chains.

Across Germany, 600 companies are initially affected by the law. In the fashion sector, there are far fewer. Puma is one of them: “We support the intention of the Supply Chain Protection Act to ensure transparent and fair supply chains. The sports company Puma has been working on fair labor conditions with its suppliers for more than 20 years. For example, we have been an accredited member of the Fair Labor Association since 2007,” said the company’s headquarters in Herzogenaurach (Germany) in response to an inquiry from the German publisher Textilwirtschaft. 

Although the German supply chain law signifies a success for civil society and good news for all those who work under exploitative conditions in the supply chains of German companies, a European solution that covers all companies equally, regardless of their headquarters, is still awaited. “This would mean an unification of legislation at European level and would guarantee the validity of these rules for all market participants,” said a Puma spokesperson.

The German Supply Chain Act will be followed by other regulations. The European legislator has already come out in favor of a much stricter supply chain law. The European Commission’s proposal for a directive goes beyond the German Supply Chain Act and also provides for civil liability, among other things. The aim is to implement it in 2024.

In the fight against human rights violations and environmental destruction in supply chains, we are still a long way from reaching the goal, but with the German Supply Chain Act a first step is being made in the right direction.

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