Obligations Imposed on Companies by the German Supply Chain Act

Under the German Supply Chain Due Diligence Act (“LkSG” or “Act”), which aims to protect human rights in global supply chains, German companies are specifically obliged to ensure that human rights are respected within their supply chains.

The law explains the obligations of the LkSG for German companies as a guide for natural and legal person suppliers of goods or services to German companies anywhere in the world. As a matter of fact, these obligations will also closely affect all suppliers operating outside Germany.

We can summarize them under five main headings:

Obligation to conduct a risk assessment
Reporting on the fulfillment of the due diligence obligation
Preparation of guidelines
Impact assessment
Protected human rights values

1.RISK ASSESSMENT

The Act requires German companies to identify and report on the risks of human rights violations in their supply chains in proportion to their size, business activities and position in the supply chain. To achieve this goal, companies must conduct due diligence on human rights, employment conditions and environmental issues. This obligation includes conducting risk analysis, taking preventive and remedial measures, and conducting relevant documentation and reporting. These obligations include appointing a human rights commissioner, drafting a policy statement and establishing a complaints mechanism.

2. REPORTING ON THE FULFILLMENT OF THE DUE DILIGENCE OBLIGATION

German companies will prepare an annual report on the fulfillment of their due diligence obligations for the previous financial year. This report shall clearly state

Which risks the company has identified
What measures are taken to fulfill the due diligence obligation, including those in the policy text
The Company’s assessment of the impact and effectiveness of the measures; and
An assessment of future measures will be included.

3. SANCTIONS FOR BREACH OF THE LAW

Fines ranging from €100,000 to €800,000 await German companies in case of breach of the obligations set forth in the Law. In addition, companies with an annual turnover of €400 million or more will be fined 2% of their average annual turnover. In addition, companies may be banned from participating in public tenders in the fields of procurement, construction or services for three years if they violate the Law.

4.GUIDING PRINCIPLES

Although it is not clear how the Law will be implemented, the draft law refers to the OECD (Organization for Economic Cooperation and Development) Guidelines on Due Diligence in Commercial Relations and the UN OHCHR (United Nations High Commissioner for Human Rights) Guidelines on Corporate Responsibility for Human Rights, which are considered to be important texts on how to establish the content and implementation of the due diligence obligation desired by the Law. Accordingly, human rights violations in trade can occur in the following 3 different ways:

• The company may violate human rights in the course of its business operations
• It may contribute to the breach directly through its own business operations or through a person (government, another company, etc.).
• It may be involved in a tender arising from the acts of a person because it has a commercial relationship with that person. Companies will therefore be expected to pay particular attention to these three groups of risk areas.

The human rights referred to within the scope of “corporate responsibility for human rights” are primarily the human rights set out in the Declaration of Human Rights (including the Universal Declaration of Human Rights and the International Covenant on Economic, Social and Cultural Rights and the International Covenant on Civil and Political Rights) and the International Labor Organization’s Declaration on Fundamental Principles and Rights at Work.

For this risk assessment, which should be carried out for the next steps of the supply chain, companies may ask their first-tier suppliers to carry out their own risk assessment and these first-tier suppliers to carry out the same risk assessment for their suppliers. Within the scope of this risk assessment, companies shall implement the following preventive measures against suppliers with whom they have a contractual relationship or are in the process of concluding a contract:

• Human rights expectations will be taken into account when selecting suppliers.
• Requiring suppliers to identify risks of human rights violations in their own business areas and supply chains
• A contractual control mechanism will be established to monitor the fulfillment of expectations set out to ensure that human rights are respected, and the necessary training will be provided to fulfill these expectations.
• A risk-based control mechanism will be established to monitor the compliance of direct suppliers with human rights strategies.

5. PROTECTED HUMAN RIGHTS VALUES

The human rights protected under the law are: the right to life, the right to health, the right to fair and favorable working conditions, the right to a life worthy of human dignity, the rights of the child, the right not to be subjected to slavery and servitude, the right not to be subjected to forced or compulsory labor, the right to association and collective bargaining, the right not to be subjected to torture and ill-treatment, the right not to be subjected to inhuman and degrading treatment…

Measures to be taken by Turkish companies under the German Supply Chain Act:

According to the law, the supply chain includes all processes in which all products and services of a company are involved. Therefore, the supply chain includes all steps, both domestic and international, necessary for the manufacture of products and the provision of services, from the extraction of raw materials to the delivery of the final product to the end customer.

Therefore, a Turkish company can be a direct supplier of a German company. According to the Law, a direct supplier is a person who is a party to a contract for the production of the company’s product or the provision of the relevant service and the delivery of the goods or the provision of the services that need to be supplied in order to benefit from this service.

However, a Turkish company may also be an intermediate supplier for a German company. According to the Law, an intermediate supplier is defined as a company that is not a direct supplier and whose supply activity is needed for the manufacture of the company’s product or the provision of the relevant service and the utilization of this service.

The Law also stipulates that in cases where a direct supplier is designated as an intermediate supplier for the purpose of avoiding audit obligations, the supplier designated as an intermediate supplier shall be deemed to be a direct supplier.

For the LkSG, the difference between a direct supplier and an intermediate supplier is reflected in the audit to be conducted by German companies. Accordingly, German companies are obliged to conduct risk analysis against their direct suppliers and take appropriate preventive and remedial measures through contractual mechanisms.

Obligations of Turkish Companies:

Compliance with the conditions for child labor in accordance with the Labor Code, the absence of slavery or slavery-like or domination or oppression through excessive economic or sexual exploitation and humiliation, the provision of workplace and work equipment, and measures to protect against chemical, physical or biological agents, taking measures to prevent excessive physical and mental exhaustion due to inappropriate work organization in terms of working hours and rest breaks, providing the necessary training to workers, not preventing workers from exercising their right to form and join trade unions, ensuring that the exercise of trade union rights by workers does not create discrimination and unfair practices, ensure the exercise of the right to strike and collective bargaining, ensure that persons are not treated unequally in employment on grounds such as ethnic origin, social origin, health status, sexual orientation, gender, age, political opinion, religion or world view, ensure equal pay for workers of equal value, ensure that workers are paid fair (reasonable) wages by paying at least the applicable minimum wage, preventing the destruction of soil, pollution of water and air, not causing air emissions or excessive water consumption, complying with the Mimata Convention on mercury, complying with the Stockholm Convention on persistent organic pollutants, complying with the Basel Convention on hazardous waste.

WHAT NEEDS TO BE DONE

German companies will pay particular attention to the following aspects when selecting and trading with their direct suppliers;

Whether they meet human rights and environmental expectations.
Contractual assurance that they will comply with the human rights and environmental expectations required by company management and that they will meet these expectations throughout the supply chain
Training for direct suppliers to fulfill the assurances mentioned in the previous article
Request the establishment and implementation of a contractual control mechanism to check compliance with their own human rights strategies 5) In addition, when the authority authorized by the Law requires German companies to share information and documents on subsidiaries, direct and intermediate suppliers for the purpose of monitoring compliance with the Law, companies may request such information and documents from the relevant supplier.

With regard to the above-mentioned obligations, it will be important for Turkish companies to take the following actions with respect to their commercial relations with German companies: Establish a written human rights policy, develop a human rights strategy in accordance with this declaration, conduct an assessment of current and potential future human rights risks, review their suppliers and procurement strategies, and implement risk-based control measures.

It is therefore advisable for a Turkish company that is a direct supplier to a German company to undertake and document the following processes with respect to its own operations and supply relationship

Conduct an internal assessment of human rights within its own areas of activity and within the company, conduct its own risk assessments of possible human rights violations
Notify all suppliers of their human rights policy
Commitment from their suppliers to conduct business in accordance with the above human rights values in line with their human rights strategies by reviewing their supply contracts
Establish control mechanisms commensurate with their ability to exert influence to monitor the fulfillment of these commitments through supply contracts (e.g. requesting information and documentation on compliance with occupational safety measures).
Commitment that the measures referred to in the first three points are also taken by their suppliers’ suppliers, according to their market position.