The California Transparency in Supply Chains Act: What German Companies Doing Business in the United States Should Know

Click here to view this article in German

Introduction

Recent reporting of inhumane labor conditions in certain areas around the world has brought modern slavery into renewed focus. There are already numerous legal efforts to combat forced labor, including, for example:

Germany: CSR Directive Implementation Act (implementation of EU Directive 2014/95/EU)

United States: California Transparency in Supply Chains Act 2010

United Kingdom: Section 54, UK Modern Slavery Act 2015

France: Corporate Duty of Vigilance Law; Amendments to the Law on Accounting PZE No. 51 (implementation of EU Directive 2014/95/EU)

Italy: Legislative Decree no. 254, 30 December 2016 (implementation of EU Directive 2014/95/EU)

Brazil: National Pact for Eradication of Slave Labour (voluntary initiative); “Slave Labour Dirty List” (List Suja do Trabalho Escravo)

Additionally, the EU recently published guidance on due diligence to help EU companies to address the risk of forced labor in their operations and supply chains, in line with international standards (New EU guidance helps companies to combat forced labour [europa.eu]).

Accordingly, it is important for larger multinational companies to monitor forced labor compliance requirements, which can range from simple disclosure requirements to requirements that may very well result at some point in the restructuring of a company’s global supply chain.

This German Practice Alert focuses on the California Transparency in Supply Chains Act 2010, which has recently been enforced more vigorously than it had been in the first few years. Somewhat surprisingly, it may affect a number of German companies, even if they do only very little business in California.

Background

California enacted the California Transparency in Supply Chains Act in 2010 with the purpose of ensuring that consumers are provided with information about the efforts of companies doing business in California to abolish human trafficking and slavery from product supply chains.

There are three requirements for the statute to apply. The company must:

1. Identify itself as a retail seller or manufacturer in its California state tax returns
2. Do business in the state of California
3. Have annual worldwide gross receipts that exceed $100 million

Any German manufacturer doing business in California will usually meet the first two conditions. Note, in particular, that with respect to manufacturers there is, unlike for sellers, no limitation to end user products.

As to the third condition, the emphasis is on “worldwide,” meaning that the $100 million in sales do not necessarily have to occur in California. It is sufficient if the business globally has aggregate sales in such amount.

Disclosure Requirements

If the statute is applicable, a company must: (i) disclose its “efforts to eradicate slavery and human trafficking from its direct supply chain for tangible goods offered for sale,” and (ii) post this disclosure with a conspicuous and direct link to the required information on the home page of the company’s website. The company does not have to take any particular action against slavery or human trafficking. Instead, by imposing the disclosure requirement, the statute encourages good “corporate citizenship.” There are five elements as to which a company must “disclose to what extent, if any,” it does the following:

1. Verification. Does the company engage in verification of product supply chains to evaluate and address risks of human trafficking and slavery? The disclosure shall specify if the verification was not conducted by a third party.
2. Audits. Does the company conduct audits of suppliers to evaluate supplier compliance with company standards for trafficking and slavery in supply chains? The disclosure shall specify if the verification was not an independent, unannounced audit.
3. Certifications. Does the company require direct suppliers to certify that materials incorporated into the product comply with the laws regarding slavery and human trafficking of the country or countries in which they are doing business?
4. Accountability. Does the company maintain internal accountability standards and procedures for employees or contractors failing to meet company standards regarding slavery and trafficking?
5. Training. Does the company provide to its employees and management who have direct responsibility for supply chain management training on human trafficking and slavery, particularly with respect to mitigating risks within the supply chains of products?

Remedies in the Event of Violation

The statute is enforced by the California Attorney General. However, at this time, remedies do not include fines or penalties. Instead, the statute authorizes the Attorney General to bring an action for injunctive relief directing compliance. Still, such litigation is public and may adversely affect a company’s reputation.

Conclusion

Many German companies with global business might, unbeknownst to them, already be covered by the California statute. Some of these companies may already have forced labor policy disclosures on their websites, be it as part of their voluntary “good corporate citizen” policies or to comply with other national statutes (such as the UK Modern Slavery Act 2015, which was closely modeled after the California law). In such event, it would be only a small step to add any required additional disclosures under the California statute to avoid the potential pitfall of enforcement actions in the future. For others, compliance with the California statute could become a first step in broader endeavors to address forced labor issues in their supply chains.