In February 2019, the German Federal Ministry for Economic Cooperation and Development (“Development Ministry”) introduced a draft law (the “Draft Law”) that seeks to mandate human rights due diligence for German companies and their global business partners, including suppliers.  Specifically, the Draft Law requires German companies to monitor their own operations as well as those of their global business partners to ensure they meet certain environmental and social standards, including fair working conditions.¹ This legislative development is the latest addition to the increasing number of national laws that place obligations on certain companies to report on or conduct efforts to identify and mitigate human rights risks such as human trafficking, child labor, and other forms of forced labor from their global operations.  For example, France took a similar legislative step in 2017 by enacting a law that mandated comprehensive human rights due diligence requirements for certain companies.²  

Why did the Development Ministry Draft this Law?

The Draft Law appears on the scene against the backdrop of Germany’s recent adoption of a National Action Plan (“NAP”) to implement the UN Guiding Principles for Businesses and Human Rights.³ The NAP included a provision on voluntary corporate action on effective human rights due diligence.  Later this year, the German government intends to take stock of how effective this provision has been in spurring voluntary corporate compliance.  Indeed, the government has committed itself to legislative measures by 2020 if fewer than 50 percent of German companies with over 500 employees have introduced an effective human rights due diligence process.⁴ Thus, the Draft Law appears to be an indication of the potential legislative steps the government intends to take in the event of insufficient voluntary corporate compliance.

What Companies are Covered under the Draft Law?

The Draft Law, if enacted in its current form, will apply to companies:

• that have their statutory seat, headquarters or main branch in Germany; and
• have over 250 employees and an annual turnover of more than 40 million euros, or a balance sheet total of more than 20 million euros, or to companies in high-risk sectors – including agriculture, energy, mining, textile, leather and electronics – as well as in areas of armed conflict, weak governance, or weak security arrangements.

What do Covered Entities Need to do?

The Draft Law lays out the human rights obligations of a covered company with regard to its own operations and those of its global business partners. In particular, covered companies must assess the risk of corporate actions contributing to human rights abuses or environmental degradation, and take appropriate preventive actions with regard to procuring global business partners. The company must also appoint a compliance officer to monitor compliance. 

The Draft Law also requires establishing an effective complaint mechanism for workers of the company as well as of the company’s business partners. Critically, this complaint mechanism could also be made available to any person who is directly or indirectly affected by the company's business activities, particularly in the company's value or supply chain. The complaint mechanism can either be administered internally, or by a non-governmental organization. The mechanism must protect from retaliation those individuals who make complaints.

The Draft Law also imposes stringent documentation and reporting requirements. A covered company must document its efforts in complying with the Draft Law and publish that documentation on its website and in its non-financial statement, if required under the German Commercial Code. The company must preserve this documentation for five years. 

The Draft Law envisions a designated governmental supervisory body dedicated to enforcing and monitoring corporate compliance under the law. This body will likely be located within the Ministry of Labour, Family and Social Affairs or the German Federal Institute for Occupational Safety and Health.

What are the Consequences for Non-Compliance?

Penalties for violations are severe. These include fines of up to five million euros, imprisonment, and exclusion from public contracts with the German government. 

The Draft Law certainly does not represent the final version that the German government will potentially adopt. Indeed, currently, several committees of the German parliament (the “Bundestag”) are in the process of critiquing the Draft Law, suggesting that it may be subject to significant changes. There is significant public interest in the Draft Law, with the media reporting extensively on it. 

Littler will continue to monitor this development in Germany and report on any significant developments. In the meantime, companies should prepare for this law by first taking stock of their own operations and those of their suppliers and other business partners, and identifying areas in those operations where there is a high risk of forced labor and other modern slavery practices. Where such risks are identified, companies should take appropriate action to address those risks and also implement procedures to ensure that new and existing relationships remain free of such activities. Because this due diligence process can be complex, it is recommended that employers engage the services of experienced counsel.