The LkSG is now in force!

The German Supply Chain Due Diligence Act (LkSG) came into force on 1 January 2023. What are the key elements of the law and which steps should companies be taking now to avoid potential sanctions? A brief overview.

The LkSG came into force on 1 January 2023. This law aims to further strengthen both human rights and environmental protection in global supply chains. Against this background, the LkSG obligates companies to protect human rights by implementing various due diligence obligations. These due diligence obligations apply both to the company’s own business operations and to the actions of direct as well as indirect suppliers. The responsibility of companies falling within the scope of the LkSG therefore now exists along the entire supply chain. Thus, supply chain management is becoming increasingly complex for companies and presents them with enormous challenges.

Which legal interests are protected by the LkSG?

As mentioned, the overarching aim of the LkSG is to protect both human rights and the environment within supply chains more strongly than before. To this end, the LkSG obliges the companies falling within its scope to observe human rights and environmental due diligence obligations in their supply chains in an appropriate manner. The legal positions protected by the LkSG cover, for example, the prohibition of child labour, slavery and forced labour, disregard for the protection of occupational health and safety, the withholding of a fair wage or the denial of access to food and water (list not exhaustive).

Which companies are affected by the LkSG?

In a first step (from 1 January 2023 onwards), the scope of application of the LkSG will be limited to companies employing at least 3,000 employees in Germany. In a second step (from 1 January 2024 onwards), the scope of application of the LkSG will be extended to companies employing at least 1,000 employees in Germany. By 2024 at the latest, therefore, a large proportion of companies based in Germany will fall within the scope of the LkSG.

However, the obligations laid down in the LkSG are certainly also relevant for companies that do not fall directly within its scope due to their size. The experience gained over the past months has namely shown that smaller and medium-sized companies are also affected by the LkSG because they are contractually obligated by companies that do fall within its scope (directly) to comprehensively comply with its legal provisions (so-called "trickle-down effect").

What are the key elements of the LkSG and what do companies need to observe?

Under the LkSG, companies are obliged to observe certain human rights and environmental due diligence obligations within their supply chain in an appropriate manner. For this purpose, the LkSG lays down various due diligence requirements, in particular the following:

  • Establishing a risk management system (section 4 LkSG) is at the heart of the LkSG. The company must establish appropriate measures in all of its relevant business areas to prevent or minimise environmental or human rights risks and to put an end to violations of obligations in this regard. A key component of risk management is, above all, a risk analysis (section 5 LkSG), which identifies risks and violations of protected legal rights in the supply chain.
  • If the company identifies any risks during the risk analysis, it must initiate appropriate preventive measures (section 6 LkSG). According to the LkSG, preventive measures include the issuing of and compliance with a policy statement, the implementation of appropriate purchasing practices, the training of own employees and/or suppliers, and agreement with contractual partners on contractual monitoring and protection mechanisms.
  • Should companies detect a violation of the legal interests protected under the LkSG during the risk analysis, appropriate remedial measures (section 7 LkSG) must be initiated without delay. In a worst-case scenario, this may even lead to the termination of the business relationship with the (direct) supplier.
  • Furthermore, the LkSG contains various due diligence obligations aimed at structuring and establishing compliance management systems in companies. These include, for example, the establishment of complaint channels, regular reporting on supply chain management and the designation of clear personnel responsibilities within the company.

However, the following should be noted: The due diligence obligations of the LkSG are (only) "best-effort obligations". Companies which are subject to the LkSG are therefore not automatically liable if the protected rights under the LkSG are violated in their supply chains. This is because companies are only required to ensure that they take appropriate and effective compliance measures to satisfy the obligations of the LkSG. Companies therefore have a certain margin of discretion when it comes to implementing the due diligence obligations.

What will companies be facing if they violate the LkSG?

If companies fail to comply with their legal obligations under the LkSG, they may be facing the imposition of fines. These can be as high as 8 million euros or up to 2 percent of global annual turnover. In addition, if a fine is imposed above a certain minimum level, companies may be excluded from being awarded public contracts. Finally, considerable reputational damage for companies is also conceivable.

In principle, the German LkSG does not provide for civil liability on the part of the company concerned for failing to comply with its due diligence obligations (in contrast to the proposal of the EU Commission, see below). However, liability under the general principles of German tort law (based on the violation of traffic safety obligations) does not appear to be excluded. In addition, there is a threat of contractual liability.

What should companies be bearing in mind now?

Even if the implementation of the LkSG and the revision of internal compliance structures involve (considerable) burdens both financially and in terms of personnel, companies should be checking now at the latest whether their compliance management systems and existing contractual relationships comply with the due diligence obligations of the LkSG and should be adapting these where necessary. Although the LkSG does not stipulate any strict deadlines by which companies must comply with the due diligence obligations, experience has shown that the implementation of suitable and appropriate compliance measures requires a significant amount of time, so that companies should avoid losing time by acting now. This is especially true regarding risk management (and especially to the implementation of risk analysis). In addition, the LkSG will also have an impact on corporate law (especially transaction business), employment law and public procurement law. Companies should therefore promptly conduct a comprehensive internal analysis to assess potential "stumbling blocks" in connection with the LkSG.

Importantly, the above also applies to smaller and medium-sized companies because, firstly, many of them are highly likely to fall within the scope of the LkSG in the medium term (also due to developments at the European level, see below). Secondly, most of these companies are also contractually obligated to comply with due diligence obligations in relation to human rights and environmental protection based on various provisions in their contracts.

Finally, companies should also keep an eye on developments at the European level in this context. On 23 February 2022, the EU Commission presented its proposal for a Directive on corporate sustainability due diligence in the supply chain, which is largely being discussed in Germany under the heading “European Supply Chain Act”. With its proposal, the EU Commission is pursuing the goal of obliging companies to comply with human rights and environmental protection both within their own business area and along the entire supply chain. In addition, competitive disadvantages at the European level are to be compensated. In several places, the proposal provides for significantly stricter regulations than the LkSG, which entered into force on 1 January 2023. Since the German government has explicitly committed itself to the project at the European level in its coalition agreement, it is to be expected that the LkSG will be tightened in the near future.

Further information on the LkSG and on the range of advice provided by our law firm in relation to it can be found in our current brochure on the LkSG.

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