As of January 1, 2023, the Supply Chain Act (Lieferkettensorgfaltspflichtengesetz, or LkSG) is in effect in Germany, ahead of the forthcoming Directive of the European Parliament and of the Council (EU) on corporate sustainability due diligence, which is expected to come into force in the European Union from 2024.
While human rights and environmental organizations have welcomed the law, entrepreneurs find it problematic and have raised concerns about the challenges of ensuring compliance with the newly imposed obligations which require companies to monitor and be legally accountable for compliance with human rights and environmental standards in their supply chains, both direct and indirect.
As of January 2023, the law only applies to companies with more than 3,000 employees that have their headquarters, main office or main branch in Germany. From January 2024, the personal scope will also extend to companies with at least 1,000 employees. It is noteworthy to point out here that the total number of employees also includes, for example, agency workers, but does not include freelancers.
Human rights protection obligations cover, for example, the prohibition of child or forced labor, discrimination, ensuring health and safety at work or the right to organize in trade unions, or ensuring adequate remuneration for work. The requirement to ensure minimum standards of environmental protection is based on international conventions.
The new obligations include, for example, establishing a risk system, conducting regular risk analyses and taking action to minimize or remedy any identified deficiencies. Due diligence reports are submitted to the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausführungskontrolle, BAFA) for review, which may enter business premises, inspect documents or impose fines in order to ensure compliance with the law.
Although this is a German law, it also applies to foreign companies, including Czech companies, which either operate on the German market or are a concerned member or a direct or indirect supplier of products or services.
The members of the group will thus have to meet essentially the same standards as the German parent company. Direct suppliers will also be obliged by the German buyer to adopt a code of conduct, and indirect suppliers, on the other hand, must be given the opportunity by the German company to lodge a complaint in a specially created system for breaches of minimum standards. In the event that violations of these standards by Czech business partners occur and are not remedied, the German company will be obliged to terminate the business relationship as a last resort. The Czech companies should therefore see fit to familiarize themselves with the German regulation and identify risks that may disrupt their business relationships with large business partners - also in relation to their subcontractors.