Recently, the EU proposed new legislation which will prohibit any products made with forced labor on the EU market. This blog post is a rundown of some of the key aspects of the proposal.
Existing proposal on corporate due diligence
The proposition can be viewed as a supplement to the proposed directive on corporate due diligence, which was adopted February 23rd this year. The due diligence directive sets out requirements for larger businesses operating in the EU to perform mandatory due diligence processes, in order to mitigate negative environmental and social impacts. In the case of such processes, ceasing production or business relations are seen as extreme measures, and the main functionality of the directive is to ensure that business have ongoing risk assessment and mitigation processes.
Prohibition and risk mitigation
The new proposed prohibition presents are more drastic measure than the due diligence directive - namely the direct ban of specific products in the case that they have been produced using forced slavery. This regulation will affect both companies that sell products in the EU market and those who export products from the EU - regardless of whether they are based there. While a due diligence process could call for mitigating measures, which could take many forms from compensating workers, providing education on worker rights, or positing stricter supplier demands, this new proposition calls for a direct hard ban on products if the use of forced labor is discovered. It should be noted though, that the OECD Guidelines for Corporate Due Diligence explicitly state that in situations where dramatic negative impacts are noticed, companies should consider halting production or switching suppliers. As the new proposition notes: “Disengagement remains the last resort where adverse impacts cannot be mitigated.” And while the Due Diligence directive does note sanctions if businesses do not follow the recommended processes, it does not call for direct prohibition of products as one of these.
The problem of forced labor
According to the ILO there are about 27,2 million people estimated to be caught in forced labor today. antislavery.org report that out of these around 16 million people can be linked to supply chains of international businesses. In context of this the EU proposal seems critical to combat a major breach of human and labor rights which affects millions of people. Prohibiting forced labor is already integrated into current EU legislature and the Charter of Fundamental Rights, and this proposal helps support this by cracking down on one of the major culprits when it comes to using forced labor, namely the long and complex supply chains of modern companies.
Ban on exports
What is additionally interesting about the prohibition proposal is that it highlights that the regulation will not only ban products on the EU market, but attempt to stop that banned products are rerouted to other markets. If a company operating in the EU become aware of a product range being produced with forced labor, not only are they prohibited from selling it in the EU, but if they attempt to export the products to other markets they are also non-compliant.
Who will be affected?
Critical is that while the currently drafted Supply Chain Act only applies to companies over a certain size, the forced labor prohibition, so far, applies to all companies operating in the EU. While the Due Diligence directive will only apply to large businesses, all businesses, both large and SMEs need to comply with the proposal for a regulation prohibiting products made with forced labor. The proposal notes, though, that special adjustments and considerations will be taken for SMEs as they often do not have the economic resources to ensure thorough due diligence processes. In practice, enforcement of the legislation if passed, will likely initially focus on specific industries or product categories, the EU Commission has expressed that industries such as textiles, mining, and agriculture are prioritizations as forced labor is frequently reported in these sectors.
What to watch for
The regulation references the ILOs 11 indicators for forced labor as reference points. The existence of any of these indicators at a supplier or workplace imply that forced labor might be present, but in many cases more have to present in order to define it as a forced labor case. When performing supplier audits and due diligence reviews, companies should be careful to uncover these indicators, and have a strict follow-up routine in the case that they are present to verify whether or not forced labor is being employed by a supplier or sub-supplier. The indicators are as follows:
• Abuse of vulnerability
• Restriction of movement
• Physical and sexual violence
• Intimidation and threats
• Retention of identity documents
• Withholding of wages
• Debt bondage
• Abusive working and living conditions
• Excessive overtime
What will the legislation entail?
Central to the proposal is that competent authorities will assess the risk that businesses have violated the ban on forced labor. Thus, national authorities will be allowed to initiate investigations if they have reasonable suspicion that products are being produced with forced labor in the supply chain. Before any such investigation, the competent authorities will request due diligence assessment information on the risk of forced labor in the supply chain, from the businesses they suspect are in violation.
According to the current draft of the proposal if a company violates the ban on forced labor competent authorities will not only be allowed to prohibit that the products are made available within the EU or exported out. Companies will also have to withdraw products if they are already on the market, and critically, dispose of all products concerned. Effectively, this would mean that non-compliant companies will have to destroy existing stocks of product if they are found to have been produced using forced labor.
At the same time, stakeholders have proposed multiple elements by way of feedback which have been included in the draft of the proposal regulation. Stakeholders have called for the inclusion of a complaint process to allow organisations and businesses to voice complaints about specific investigations. Businesses will be able to request a review of the investigation process and final decision, in order to appeal. Additionally, establishing a database which gives an overview of banned entities and products has also been suggested to make it easier for companies to avoid problematic suppliers, and increase transparency about problematic products. According to the proposal such a database will be made available within 2 years of the prohibition coming into effect.
Conclusion: An increased importance of due diligence
The regulation proposed in the EU is an important step towards securing human rights and fighting the global problem of forced labor and modern slavery. An important part of the investigatory process is that the competent authorities can end the investigation if the deem that the business have adopted and are carrying out suitable and effective measures for ending any suspected forced labor in a short period of time. This clause heightens the importance that companies in the EU implement thorough and proper due diligence processes in order to properly assess the social risks of their supply chains.