Supply Chain Sourcing Obligations Act (LkSG)

Are you affected by the Act on Corporate Due Diligence Obligations in Supply Chains?

Since 01.01.2023, companies with 3,000 or more employees in Germany are obliged to comply with the regulations of the Act on Corporate Due Diligence Obligations in Supply Chains (LkSG). As of 01.01.2024, the threshold of employees will be reduced to 1,000.

However, the LkSG also affects small and medium-sized enterprises which, as suppliers, are required by their customers to comply with and demonstrate the compliance with the due diligence obligations imposed by the LkSG.

The LkSG requires compliance with human rights and environmental due diligence obligations and in doing so places high demands on corporate decision-making, which includes the selection of contractual partners and the investment decisions of all affected companies. These requirements apply not only to those companies directly addressed by the LkSG, but also to their suppliers, upon which contractual obligations to comply with aforesaid due diligence standards are being imposed by the former.

Compliance with legal requirements imposed by the LkSG not only affects existing business models of all those involved in the supply chain, but can also offer opportunities.

We advise companies directly affected by the LkSG as well as suppliers who also have to cope with the challenges associated with the LkSG and are at your side as a strong partner with our advisory team consisting of Ralph Weiss, Vivien Demuth, Jane Hohmann, Susanne Janssen and Elisa Scherg.

Our services regarding the LkSG

Co-determination of works council, participation of economic committee, contracts with human rights officers, working conditions and occupational health and safety, employee remuneration, collective bargaining law

Liability and delegation of duties, organization of information duties, structuring and implementation of processes in company

Advice on grounds for exclusion from public procurement in event of violations of provisions of LkSG and on possibilities of self-purification, representation in review procedures

Passing on of obligations imposed by LkSG in supply chain, a. o. in international setting, assurance of compliance from direct supplier, assurance from direct supplier on passing on of compliance obligation, code of conduct, agreement on contractual control mechanisms, creation and revision of GTCs, appropriate contractual enforcement mechanisms, contractual penalties

Support in risk analysis and risk management, training and counselling of human rights officers and suppliers, introduction and execution of complaints procedure

Advice and representation in administrative fine proceedings

FAQ on the LkSG

The obligations under the Act on Corporate Due Diligence Obligations in Supply Chains (LkSG) directly affect domestic companies with 3,000 or more employees. As of 01.01.2024, companies with at least 1,000 employees are also affected. For the purposes of determining the scope of application of the LkSG, employees of an affiliate company are considered employees of the parent company. Temporary workers are included in the calculation if the duration of employment exceeds 6 months.

Note: Companies that are not directly affected by the LkSG may be indirectly obliged to comply with the due diligence obligations. This can result from a position as a direct supplier of a company within the scope of the LkSG as well as from the position of an indirect supplier that is also being contractually obliged to comply with the regulations of the LkSG. The companies directly affected by the LkSG are dependent on the active support of the suppliers and will have this contractually assured, so that compliance with the requirements of the LkSG is of considerable importance also for suppliers.

Companies directly affected by the LkSG must make reasonable efforts to ensure that there are no violations of human rights and environmental obligations in their own business and in the supply chain.

The law lets serious and reasonable efforts suffice to discharge these due diligence obligations.

This results primarily in the duty to observe due diligence obligations in one’s own business and in the supply chain.

In their own business, companies must ensure that risk management and risk analysis are carried out and documented. The company must also take appropriate preventive measures and should, if necessary, agree on sanctions against its suppliers. In addition, there is a legal obligation to set up a complaints procedure and to fulfil documentation and reporting duties (including publication of an annual report on compliance with the due diligence obligations under the LkSG).

In the supply chain, when selecting its contractual partners, the company must first and foremost ensure that potential suppliers do not violate human rights or environmental obligations under the LkSG. If there are indications of such violations, the company must carry out a risk analysis and take preventive and remedial measures at its direct suppliers, if necessary. The company will seek to obtain contractual assurances from its suppliers that the due diligence obligations and, where applicable, other obligations will be complied with.

A distinction must be made here as to whether you are a direct or an indirect supplier. Direct suppliers are partners in a contract for the delivery of goods or the provision of services whose supplies are necessary for the manufacture of the company’s product or for the provision and use of the service in question, para. 2 (7) LkSG. An indirect supplier is any company that is not a direct supplier and whose supplies are necessary for the manufacture of the company’s product or for the provision and use of the service in question, para. 2 (8) LkSG.

The LkSG specifies a number of requirements that the company directly affected by the LkSG must observe when dealing with direct suppliers. It explicitly mentions the obligations of the company in relation to its direct suppliers with regard to the preventive measures to be taken. Among other things, a contractual assurance must be obtained from the direct supplier that it will comply with the human rights and environmental requirements itself and that it will address them appropriately along the supply chain.

The company must also oblige its direct supplier to participate in training and further education on compliance with due diligence obligations or to conduct such training. When agreeing on control measures (e.g. audits) and on-site visits with the direct supplier, it must be carefully checked that no unreasonable restrictions are imposed on the contract partner.

We will be happy to check the contractual conditions for you and help you protect your interests.

Suppliers must also take the due diligence obligations of the LkSG into account when selecting their suppliers or contractual partners and pass them on in the supply chain.

In addition, a supplier should be acquainted with its own business and the potential risks involved and regularly monitor those risks. This can also offer advantages in new customer business and in the acquisition of new orders from existing customers. Here, the MKM Compliance Audit Assistant can support you in effectively and purposefully presenting and auditing your business.

For suppliers, it is also advisable to have a contractual agreement on the assumption of costs for training and further education on the LkSG by the client, if the supplier carries this out independently. Finally, the supplier should also consider labour law aspects in order to comply with the due diligence obligations. A code of conduct or concrete instructions on compliance with the requirements of the LkSG can be used for this purpose.

You are welcome to contact us if you have any questions about the extent or the structuring of obligations under the LkSG.

The Act on Corporate Due Diligence Obligations in Supply Chains has its own administrative offence in para. 24 LkSG. In addition to breaches of due diligence, which include, for example, an incomplete or incorrect risk analysis, failure to implement a defined risk management system or non-compliance with inspection obligations, the legislator has included breaches of reporting obligations and enforceable orders in the administrative offence.

The legal consequences of violating the provision affect natural and legal persons. Although para. 24 of the LkSG, as an administrative offence, is initially directed against natural persons only, in particular against company managers and representatives, fines can, under certain legal conditions, equally be imposed on legal persons.

The range of fines for violations of the LkSG extends up to € 800,000.00 for natural persons, depending on the respective breach of duty. In the case of legal persons, the maximum fine can be increased tenfold to € 8,000,000.00. For certain violations, the legislature has established a further increase in the fine, i. e. up to 2% of the average annual turnover for legal persons whose average annual turnover exceeds € 400 million. The amount of the fine is at the discretion of the competent authority.

Companies having violated provisions of the LkSG are not only threatened with high fines, but can also be excluded from the awarding of public tasks. In addition to the high fines to be paid, the confiscation of proceeds from violations of the LkSG, even before a fine is imposed, could hit companies particularly hard.

Please do not hesitate to contact us if you have any questions about the legal consequences of violations of the LkSG.