Comprehensive German Due Diligence Act on the horizon

Following intense discussions between different ministries and an intervention of Chancellor Angela Merkel, the German government has reached an agreement on legislation that obliges German companies to carry out due diligence regarding human rights and environmental issues in supply chains globally. The Federal Ministries of Labour and Social Affairs and for Economic Cooperation and Development are taking the lead on this legislative project, but had to make concessions to the Ministry for Economic Affairs, which wants to avoid competitive disadvantages for German companies.

However, even on the basis of the compromise that has now been reached, the German Due Diligence Act (Sorgfaltspflichtengesetz – the “Act”) may become one of the most significant human rights due diligence statutes that have thus far been passed by legislators worldwide. If these plans are – as envisaged – realised shortly, companies will find themselves exposed to broad obligations and new liability risks.

Obligations of companies under the planned Act

The purpose of the Act and the new duty of care introduced by it is to protect human rights as expressed in the International Bill of Human Rights and the International Labour Organization’s eight core labour conventions. The content of the duty of care shall be closely aligned to the due diligence obligations as outlined in the UN Guiding Principles on business and human rights and the respective 2016 German National Action Plan.

Companies shall have to:

• publish a basic declaration on their respect for human rights;
• regularly perform risk analyses;
• implement preventive measures;
• mitigate risks;
• implement a complaint system; and
• document their processes.

Scope

The Act is supposed to apply to companies, regardless of their legal form, that have their head office, principal place of business or registered office in Germany. It shall apply to more than 600 companies that employ at least 3,000 staff from 2023 and to around 2,900 companies with more than 1,000 staff from 2024. For the purpose of this staff count, employees of affiliated companies within the meaning of Section 15 of the Stock Corporation Act (Aktiengesetz) are taken into account, even if they have their head office, principal place of business or registered office outside of Germany. Beyond this aspect, the planned Act would cover indirectly foreign affiliated companies via the duty of care of the German-based company.

The supply chain is understood to reach all the way from the raw material to the final product and to include services. Companies shall: (1) have to include in their diligence all of their own business activity and that of their direct suppliers; and (2) exercise diligence with regard to the rest of the supply chain if “prompted by circumstance”.

Enforcement

The German Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle – “BAFA”) shall enforce the Act. Companies will have to submit risk analyses to this agency. The BAFA shall be able to claim access to documentation and be entitled to access company premises, collect evidence and – most importantly – impose turnover-related fines. The amount of the fines that can be imposed is still unclear (the draft provides for a percentage of annual turnover, the amount of which is still open). Moreover, it is planned that a company may be excluded from public procurement for up to three years.

Contrary to earlier plans of the lead ministries, a new legal basis for bringing damages claims in German courts will not be introduced. However, victims shall be able to provide NGOs and unions with a power-of-attorney, so that they may formally represent them before court (besondere Prozessstandschaft).

Next steps

Following approval by the Federal Cabinet, which should take place in March at the latest, the draft will be referred to the Parliament (Bundestag). Since federal elections are scheduled for September, the Bundestag will only have a few months to pass it into law before its summer break, i.e. the next few months will be decisive.

Accordingly, affected companies should carefully follow these developments – as well as the parallel discussions at EU level (read more here) – in order to comply with any new obligations and avoid significant liability risks.

We are monitoring both legislative projects very closely and will keep clients posted on this blog, as well as on our dedicated German knowhow page.