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Freshfields Sustainability

| 4 minute read

What to expect from the new European Forced Labour Regulation

The European co-legislators have reached a provisional agreement on the Forced Labour Regulation, which has since been adopted by the working body of the Council (COREPER) and the two relevant committees of the European Parliament. The regulation, forming part of a broader EU-wide but also international development, marks a significant milestone for corporate sustainability standards with wide-ranging implications, not least for international companies with complex value chains.

The key provisions and implications of the draft regulation follow below: 

Scope of Application 

The draft regulation prohibits the sale and export of products made with forced labour. The proposed ban on forced labour would be particularly broad, applying to 

  • the distribution within the EU or export outside the EU (online sale will be covered if it is targeted at end-customers in the EU) of
  • all products made inside or outside the EU in whole or in part with forced labour, by
  • all companies, regardless of their legal form, size, or production location, and
  • across all sectors (with the exemption of transport services).

Forced labour is defined as any form of work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered him or herself voluntarily. This definition, derived from the ILO Convention on Forced Labour, aligns with the one in the German Act on Corporate Due Diligence Obligations in Supply Chains (“Lieferkettensorgfaltspflichtengesetz”).

Investigation and enforcement 

The proposed regulation introduces robust mechanisms for investigation and enforcement to ensure compliance across the internal market. 

De facto authority of the Commission

Under the proposal, each Member State is required to designate a competent national authority responsible for monitoring and investigating violations of the regulation. The European Commission will act as a coordinating authority, and will also lead investigations where the risk of forced labour is outside of EU territory. Presumably, this will lead to a de facto exclusive authority of the Commission in most cases. 

Investigative measures

When identifying potential violations, the competent authorities must adopt a risk-based approach. The criteria for assessing a potential violation include

  • the scale and severity of the alleged forced labour
  • the quantity and volume of products made available or placed on the EU market
  • the proportion of parts made using forced labour in the final product
  • the size and economic resources of companies.

To assist Member States and companies with this exercise, the Commission will establish a public database of forced labour risks (Forced Labour Single Portal), identifying products or product groups in specific economic sectors and from specific geographic areas which present a high risk of forced labour. This risk-based approach is intended to counterbalance the broad scope of the regulation and to mitigate the impact on small and medium-sized enterprises. The European legislator thereby acknowledges the difficulties for globally active companies to detect and mitigate forced labour risks in complex value chains. 

In cases where forced labour is suspected, the competent authority will initiate a preliminary phase of investigations. The competent authority will only initiate an ‘official’ investigation if the preliminary phase of investigations suggests that there is a significant risk of forced labour. 

Enforcement and remediation

Upon confirming forced labour in the value chain, the authority is empowered to detain, seize, or order the withdrawal of a product. The competent authority can demand that the goods are confiscated and then donated, recycled or destroyed. In cases of strategic or critical importance for the EU, products may instead be withheld until the company can demonstrate that it has eliminated forced labour from its value chains.

The decision of the authority including the findings of the investigation, will be made publicly available. 

Banned products may be allowed back on the market if the company successfully eliminates forced labour from its value chain. Companies that do not comply may be subject to penalties determined by the national law of Member States. The initial proposal that companies should provide financial and non-financial compensation to affected persons (so-called remediation) was not kept in the final agreement. However, the Commission will provide best practices for remediating forced labour. 

Burden of proof

The competent authorities bear the burden of establishing that forced labour took place in the production, manufacture, harvest or extraction of a product. While the European Parliament’s negotiating position provided for a reversal of the burden of proof in cases where state-ordered forced labour is suspected, that provision was not accepted in the trilogue process. The initial draft clearly drew inspiration from the US-American Uyghur Forced Labor Prevention Act (UFLPA) that is in force since 21 June 2022 and imposes an import ban (into the United States) on goods entirely or partially manufactured in Xinjiang or by companies listed by US authorities due to suspected forced labour. The UFLPA contains a presumption that such products were made using forced labour, which means that companies would need to demonstrate that their value chains are free from forced labour. In contrast, in the draft regulation it is the competent authority which must prove the existence of forced labour in the value chain. If a company refuses to cooperate during the investigation, the competent authority may consider any kind of relevant and verifiable information gathered during the preliminary phase and the investigation. 

Interplay with the CSDDD

The proposed regulation is intended to complement the Corporate Sustainability Due Diligence Directive (CSDDD), which, after a lot of debate, is finally proceeding into force. It imposes due diligence obligations on companies, requiring them to assess and address any kind of human rights risks, which includes forced labour risks, in their value chains. In turn, it does not include measures specifically preventing the sale of products made with forced labour. In other words, violations of the CSDDD may result in administrative penalties (such as fines) and civil lawsuits by affected parties, which indirectly discourages the sale of products made with forced labour. In contrast, a ban on the product itself is only provided in the proposed Forced Labour Regulation.

Unlike the CSDDD, there is also no threshold of company size or turnover for the regulation’s applicability, except for the principle of proportionality under the risk-based approach.

Outlook  

The current draft version is expected to be final and any further changes to be formalities. The Parliament’s plenary will vote on this version on 22 April 2024. Ministers are expected to formally adopt the text in the following weeks, most likely during the Competitiveness Council of 23‑24 May 2024. The primary obligations outlined in the regulation will take effect 36 months from its entry into force (which is the day after its publication in the Official Journal). This should happen still before the summer break, thus, the application date is expected to be around mid-2027. 

Tags

human rights, corporate governance, manufacturing