THE SUPPLY CHAIN ACT OF GERMANY: A STEP IN THE RIGHT DIRECTION?

On By eurohorizons_symbiosis_chapterIn Student Posts

Forced labour, slavery and such social evils are widely condemned, however, the International Labour Organization (ILO) still estimates that “24.9M people are subjected to it. Out of this huge number, 83% are exploited by the private economy, individuals or enterprises, whereas 17% by the state-imposed forms of forced labour. ILO reported that by 2022, over 9 million children could be pushed into child labour.”

When the world is at its most evolved state, the shackles of capitalism has captured every economy to the extent that annual worldwide profits through child labour is around US$150B, Asia-Pacific Region contributes the maximum – US$51.8Billion. The prevalence of child labour in rural areas is 3times higher than that of urban areas does not seem bizarre.

The enterprises seek for environment that is favourable for earning revenue and not for, thus, there is a significant decline in the investment of quality human resources. The concept of decent work that is embedded in the very preamble of ILO is not recognized by the companies. The 2012 documentary of H&M – “the company violated the norms of decent work to the extent that there was mass-fainting of workers due to exposure to chemicals, poor ventilation, exhaustion from working for unreasonably excessive hours in Cambodia.”

In order to address such issues, the recognition and responsibility of respecting the human rights and freedom, the framework of United Nations Guiding Principles on Business and Human Rights was introduced (UNGP).

Germany’s measures to curb exploitation of labour

Germany adopted a “National Action Plan on Business and Human Rights (NAP)” that embodied the principles laid down in the UNGPs. However, NAP failed to set the legal standards or the remedial course in case of breach. Thus, in the survey conducted post 10 years of the enactment, it was found that around only 15% of companies were ensuring their compliance under the NAP. The Plan was inefficient and failed to fulfill its very objective. Subsequently, the “Act on Corporate Due Diligence in Supply Chains (GSCA)” was published in Federal Law Gazette of Germany.

Principles envisaged by the Act

GSCA is set to come into force on 1st January, 2023. It is enacted with the legislative intent of protecting people from modern slavery, forced labour, human trafficking, hazardous work and exploitation, which resonates with the principles of the ILO. On the lines of protecting labour rights, it aims to set binding standards for the revenue-aimed enterprises to value their supply chains and workers involved therein.

Thus, the objective of the Act is to ensure the stringent compliance of the UNGP principles and thereby prohibit of child labour. The jurisdiction is extended to all the enterprises having their operation of business, administrative office, principal or branch office, or a registered seat in Germany. Moreover, it is applicable only to enterprises employing 3000 or more workers in Germany.

The enterprise is required to set up a system for risk management, frame an internal compliance policy for adhering with such system and regularly carry out the risk analyses at the level global supply chain.

Further, the Act has ameliorated the issues of the NAP by imposing fines upto €800,000. The strict compliance is further protected by incorporating imposition of 2% of worldwide turnover as fine for the enterprises having turnover over €400 million. There would be discretionary power to prohibit the companies that have been imposed with a fine of €175,000 from participating in public tenders for upto 3 years.

Loopholes in the Statute

The lacunae of this progressive Act which can impede it from achieving its objective are–

  1. Obligation is only with regard to direct suppliers

1. Within business operation

For the violation of the Act at the level of business operation, the remedial action has to be taken, immediately. This remedial action should be such that it guarantees to bring an end to the act of violation

Operations of direct supplier

For the violation of the Act at the level of operations of direct suppliers, the same recourse should be taken. However, if the act of violation cannot be curbed immediately, the companies should frame a plan that would ensure the minimization and prevention of such acts.

Operations of indirect supplier

The initial step of framing and regularly carrying out the risk analyses is not applicable on these operations. In the event of receiving “substantiated knowledge” of a human rights/labour violation, the analysis can be conducted on ad hoc basis. This non-inclusivity has left a huge component of the supply chain and majority of enterprises from beyond the ambit of the statute. Thus, the violation of principles of labour law embodied by the ILO would continue to be violated at a global level.

2. Civil liability

The non-compliance with the obligation does not create a cause of action for institution of a civil suit causing ambiguity which, in turn, has the potential to frustrate the purpose of employing the earmarked deterrence. 

Limited extent of application

The Act currently extends its applicability to only companies with 3000 employees in Germany which has restricted the number of companies that would fall into its purview. The small and medium sized companies would not be regulated by any strict legislation, thus, the human right violations, lack of decent work, forced labour, would continue to prevail.

Indian Context

It was reported in 2020 that the German companies are not taking effective measures to ensure that their foreign partners respect labour rights. Thus, the GSCA was designed to introduce transparency in the supply chains at global level.

This Act would be applicable on joint ventures or wholly owned subsidiaries. Further, the suppliers would be required to follow the system of risk management and support their Germany companies to follow the duty of care. It holds significant importance for India because Indian companies would form a part of the supply chain in many of the German businesses. The two countries have been involved in extensive bilateral-trade to the extent that it has grown to US$19.35Billion in 2019 and the German FDI in India amounts to US$13.4Billion. In 2021, India exported pharmaceutical products worth $316.05Million to Germany.

The labour laws in India have recently seen changes. The implementation of the Codes is not yet effectuated to its potential; thus, the laws are lenient and tolerant towards social evils. Although, the relaxed labour laws attract industries that increases the employment, as is seen in countries like, India, Bangladesh, Pakistan, etc. However, such relaxations give a leeway to exploitation and human rights violation. Further, owing to the pandemic, certain states had further relaxed labour laws in favour of enterprises – Uttar Pradesh had increased the daily working hours in factories to 10-12 hours a day which was beyond the 1919 ILO Convention; Gujarat changed the limit of permissible-hours of work because of which the worker would be paid the same minimal amount of wage for working overtime.

 In the era of burgeoning violation of labour laws, GSCA has come like ray of hope. The companies based principally in Germany would be required to ensure the protection of labour laws and human rights of the Indian companies coming within their supply chain.

The author believes that the German companies should evaluate and assess the compliance structure that is implemented to ensure decent work, fair-wage, social-justice, social-security, human-rights protection, prudent working-hours, and international-solidarity. The OSHC Code,2020 would be the key to ensure amenability. Further, the Factories Act addresses the risk of manufacturing sector and confers the rights of weekly holiday, cleanliness in the factories for protection of workers’ health, arrangement of clean drinking-water, proper urinals at suitable places, fencing of machineries, etc. Certifying these basic rights by the German companies (especially in the pharmaceutical and automotive industries) would, in turn, safeguard the adherence to the GSCA.

It is however important to note that for this Act to render notable and weighted impact in the Indian market, the suppliers should be direct suppliers in the chain.

Recommendations

Incorporation of self-certification mechanism

The legislative framework should incorporate the compliance-mechanism with the four pillars of labour law. It should be such that all the enterprises would be required to protect the basic work conditions, prevent child labour and forced labour. The failure of the same would render them incapable of receiving the benefits from registering the company and setting of affairs of business in India. Such compliance mechanism would improve life quality of the citizens and the due diligence in this arena would provide relaxation to the foreign countries with strict labour laws to invest in India.

Publication of compliance report to evince transparency

Once such compliance mechanism is made compulsory for all the enterprises (irrespective of the size), the compliance report should be published at a platform that is accessible to public at large. This step would account for transparency. It is important because a lot of countries are enacting statutes similar to the Supply Chain Act for addressing the mass exploitation in the chain. The instance wherein the laws are complaint with the residential laws of the foreign country, India would come out as a lucrative option for investment in the human resources.

Conclusion

Since time immemorial, the treaties that form the law of the land and the soft laws that obligates the companies to function in accordance with the standard principles of labour and human rights have been existing. These standards have not resulted in any substantial change. The workplaces in India called factories of death; carrying out of forced labour in the name of ‘ethnic unity’ by China; slavery due to debt that cannot be repaid even through debt in Pakistan are prime examples of inefficiency of soft laws.

Thus, the GSCA, wherein foreign compliance would come into play, the failure of which would significantly affect the export rate of India is believed to bring in the required progressive changes. The protection and the dignity of labour would be reinvigorated.

The Act is at its nascent stage, consequently, its implementation at a larger scale would not be seen, immediately. This would irrespective be seen beam of light in the darkness of incessant violations of labour rights.

– By Yashaswi Belani,

Symbiosis Law School, Pune

References

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