Is your supply chain free from human rights abuses?
A 2012 report by the International Labour Organization (ILO) estimated that nearly 21 million people worldwide are victims of forced labour, with the highest concentrations found in countries in central and southeastern Europe and in Africa. With complex global supply chains the main vehicle of global trade and commerce, regulators face a stiff challenge policing against workplace abuse, especially given the pattern of outsourcing production to jurisdictions where labour standards and their enforcement are weaker than at home.
An evolving legal framework
In recent years, we have seen an increase in mandatory reporting laws that require businesses to disclose how they respect human rights. The UK, for example, brought in the Modern Slavery Act 2015, which requires organisations with a global turnover greater than £36 million to publish an annual slavery and human trafficking statement. Non-compliance risks a finding of contempt of court and an unlimited fine. Home Office guidance describes how each statement must state the steps taken to ensure that human trafficking is not taking place in its supply chains and businesses.
The UK’s Act is largely modelled on the California Transparency in Supply Chains Act, which requires companies with at least $100 million of gross worldwide receipts doing business in California to “disclose [their] efforts to eradicate slavery and human trafficking from [their] direct supply chain[s] for tangible goods offered for sale,” so that consumers might make better purchasing decisions. Similar to the UK, companies are required to report publicly on their efforts, but are not obliged to undertake any particular activities. Denmark also implemented mandatory policy disclosure requirements, covering approximately 1,100 large businesses, which must report on their CSR policies including human rights, and an inquiry into the adoption of similar laws began in Australia this year. In addition, EU-based banks and listed companies caught by the Non-Financial Reporting Directive must publicly disclose how they respect human rights.
There are also targeted disclosure measures, such as the Dodd-Frank Act in the US, which obliges companies to undertake due diligence processes and publicly report on the level of traceability of their supply chain where minerals have originated from the Democratic Republic of the Congo or adjacent countries. Moreover, the European Parliament voted in May 2015 in favour of a strengthened proposal on the traceability and mandatory monitoring of supply chains that involve conflict minerals.
Importantly, legal requirements are no longer limited to disclosure. Newly enacted or planned laws in EU member states (such as the French Duty of Care Law, the Dutch Due Diligence Child Labour Law, and the pending Swiss Responsible Business Initiative) require business to actually conduct due diligence on their supply chains, backed up by stiff penalties for non-compliance (fines of up to EUR30 million in France and EUR820,000 in the Netherlands). More laws can be expected in other Member States – various European national governments have either adopted National Action Plans on Business and Human Rights or are in the process of consultation towards adoption of a plan, or are undertaking baseline assessments.
How to avoid human rights abuses within the supply chain
With new EU laws signalling a shift towards a legal requirement for business to conduct human rights due diligence, businesses are advised to adopt standard policies and procedures for undertaking supply chain human rights due diligence. To assist the development of such policies and procedures, some simple steps can be undertaken which include mapping the supply chain, conducting risk assessments, targeting efforts in high risk/impact areas, and looking at what needs to be done to prevent human rights abuses and to improve working conditions across the supply chain, whether direct or indirect. Those responsible for supply chain contracting in an organisation should consider the following, imposing flow down requirements from supply chain partners to their subcontractors as necessary:
Publishing a corporate statement of human rights and labour principles. This statement should communicates the business’s commitment to protecting workers’ human rights throughout the entire supply chain. Reference to the statement should be made within the supply chain contract; and depending on how it is drafted, the business may require contractual compliance by the counterparty and its subcontractors.
Conducting risk assessments of suppliers’ and contractors’ recruiting and labour practices. Each supply chain partner should be subject to a thorough assessment of recruiting, hiring and employment practices. Such risk assessments (which should identify potential issues regarding the use of forced labour in any form) should be completed prior to embarking on a contractual relationship with the supply chain partner, backed up by appropriate contractual commitments.
Carrying out independent – in the field – auditing of actual labour practices. Ongoing supply chain partner compliance should be regularly (at least annually, and more frequent in the case of an actual or anticipated incident) verified through audits conducted by independent, qualified third parties. Audit rights need to be carefully considered and spelt out in the supply chain contract.
Clear consequences for non-compliance. The supply chain contract should clearly state the consequences of violation of a business’s human rights principles. These can cover a range of possible outcomes from governance review and reporting, to implementation of a remediation plan, to immediate termination, depending on the seriousness of the incident.
Ongoing training and education. Communication to supply chain partners of company’s statement of principles should be reinforced through training programs in order to facilitate an understanding of how such principles are applied in practice. Supply chain partners should commit in their contract to disseminating the customer’s communications and polices to relevant workers and to facilitating or providing the required training programs.
About the Author
Tim Wright is a partner in Pillsbury Law’s Global Sourcing practice.