Important Expansion of the German Supply Chain Duty of Care Act – including applicability to non-German Companies

Germany’s Supply Chain Duty of Care Act (the German Supply Chain Act) is currently the strictest supply chain law globally. In force since 2023 (mainly) for large companies based in Germany, it also now applies to smaller companies with at least 1,000 employees. In order to monitor the roughly 5,400 companies this covers, the responsible supervisory authority, the Federal Office of Economics and Export Control (BAFA), has a team of around 100 employees on staff. Here we take a look into what lies ahead in 2024, with a focus on its applicability to non-German companies.

Increased relevance for foreign companies in 2024

As a result of contractual obligations and cascading practices by companies falling within the law (obligated entities) many non-German companies have already set up similarly designed human rights compliance systems as required under the German Supply Chain Act. The relevance of the German Act for foreign companies will be significantly increased in 2024 with the expansion of obligated entities. One group of companies in scope of the German Act that so far received little attention are foreign companies with registered branches in Germany that meet the relevant employee thresholds and therefore directly have obligations under the German Supply Chain Act. The lower employee threshold starting in 2024, for example, is particularly relevant whereby branches with only 1000 employees will be included.

For foreign companies that meet the employee thresholds at the branch level, the scope of the obligations under the German Supply Chain Act is not entirely clear: how should obligations be implemented at foreign companies, which ultimately has to be based (as well) on the locally applicable law of the company? Will foreign companies be obliged in their entirety, i.e. will all of their subsidiaries, regardless of whether there is any connection to Germany, be covered, for example through sector affiliation or via certain matrix structures that involve personnel interdependencies? Though not provided explicitly by the text of the Act, one reasonable interpretation would be that the Act would apply to those entities of a foreign group of companies that are linked in some manner to the business of the German branch, for example, through shared supply chains. However, precise interpretation of the existing language will remain ambiguous until the German supervisory authority (the BAFA) provides specific guidance. Some foreign companies are already designing their own implementation plans regarding the coverage of the Act, but they should also pay attention to the practical advice already published by BAFA. 

Further BAFA publications

BAFA regularly publishes guidance papers, i.e., information and recommendations on compliance with the German Act from the perspective of the supervisory authority. Five guidance papers are currently published (one is discussed in an earlier blog here) and further ones will reportedly follow shortly related to environmental due diligence obligations, child labour risks, dealing with indirect suppliers and the logistics sector. These are equally useful for companies not currently falling under the scope of the German Supply Chain Act. 

The forthcoming guidance on the economically important logistics sector and indirect suppliers are (in part) a response to the so-called ‘Gräfenhausen case’. This case involved truck drivers from a Polish transport company who, in 2023, went on hunger strikes at a service station in Germany to claim better wages – or for being paid at all. In the aftermath, BAFA initiated investigations against certain companies that would fall under the scope of the German Supply Chain Act by tracking them based on the loaded goods on the trucks. The new BAFA guidance paper is eagerly awaited to hopefully clarify the legal concept of so-called ‘substantiated knowledge’ that triggers obligations towards indirect suppliers under the German Supply Chain Act.

End of December 2023, BAFA published an overview of the sources it uses to identify relevant human rights and environmental risks (risk database). This includes sources on (i) human rights and environmental risks (such as Save the Children's Childhood Index); (ii) socio-political contexts (e.g., Transparency International's Corruption Perception Index and the World Bank's Voice and Accountability Index); (iii) sector risks (including the IFC’s Environmental and Social Assessment Tool); and (iv) raw material risks (e.g., the List of Goods Produced by Child Labor or Forced Labor by the US DOJ). This could indicate that BAFA will soon verify and monitor implementation of risk assessments undertaken by companies under scope of the German Supply Chain Act, its most fundamental element of compliance (as with most other supply chain laws). In this respect, the risk database can provide valuable assistance for abstract risk analyses of companies, regardless of whether they are obliged to comply under the German Supply Chain Act or not. 

BAFA’s website also offers a comparison of the requirements and processes of its complaint procedure vs. the procedures of the OECD National Contact Points (NCPs). OECD complaints to an NCP can result in a (voluntary) mediation procedure to assess compliance with the OECD’s Guidelines for Multinational Enterprises on Responsible Business Conduct, which were recently updated. On the other hand, the BAFA procedure has scope to initiate BAFA investigations against obligated entities. The published comparison emphasises that a complaint to the OECD’s NCP does not preclude any complaint procedures with or any action by BAFA. Even though this clarification is self-evident, it confirms that, despite the increase of ‘hard’ supply chain laws (and public enforcement mechanisms), the OECD complaints before NCPs remain an important way to apply ‘soft law’ to corporate behaviour.

In summary, companies – whether they clearly fall under the scope of German Supply Chain Act or not – should monitor BAFA’s guidance and recommendations as it will continue to spearhead enforcement in this expanding area of supply chain law.