German Supply Chain Due Diligence Act: Impact on subsidiaries of foreign companies and foreign suppliers

The Act on Corporate Due Dilligence Obligations in Supply Chains (Lieferkettensorgfaltspflichtengesetz) came into force on Jan. 1, 2023, and requires German companies to conduct appropriate human rights and environmental due diligence in their supply chains.

The law applies to companies with at least 3,000 employees from January 1, 2023. From January 1, 2024, companies with at least 1,000 employees will be affected. The law also applies to foreign companies operating subsidiaries or branches in Germany if they have at least 3,000 or 1,000 employees, respectively.

What are the due diligence obligations under the Supply Chain Due Diligence Act?

The companies concerned must make reasonable efforts to comply with comprehensive due diligence obligations. Due diligence obligations include, among others, the prohibition of child labor, protection against slavery and forced labor, freedom from discrimination, protection against unlawful land confiscation, occupational health and safety, prohibition of the withholding of a fair wage, the right to form trade unions, prohibition of causing harmful soil or water contamination, and protection against torture. Certain environmental risks must also be taken into account.

What precautions must affect companies take?

The due diligence obligations of companies include:

  • Establishing a risk management system and conducting a risk analysis.
  • Adopting a policy statement of corporate human rights strategy
  • Anchoring preventive measures
  • Immediately taking corrective action in the event of identified violations of the law
  • Establishment of a complaint’s procedure
  • Documentation and reporting requirements for compliance with due diligence obligations.

What does the new law mean for foreign suppliers?

If smaller companies are direct suppliers to companies covered by the law, then they may be contractually obligated to implement due diligence processes.

However, many obligations under the Supply Chain Due Diligence Act cannot, by their nature, be passed on. For example, even if a large buyer covered by the Act requires a smaller supplier to analyze risks to some extent, it is not subject to reporting and disclosure obligations to the authority and the public. Nor would he have to reckon with control measures or sanctions.

Author: Adriana Grau

Grau Rechtsanwälte PartGmbB offers legal support in day-to-day business, especially for foreign companies operating in Germany or suppliers of German companies – the whole spectrum of German business law, starting with corporate and commercial law, distribution law, labor law, insolvency law and debt management.

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