European supply chain law passed

After tough negotiations and several adjustments, the EU Parliament approved the controversial Supply Chain Act on 24 April 2024. A watered-down version of the law was adopted.

After the original compromise failed, the bill was amended again. The German FDP criticised, among other things, the excessive bureaucracy and the additional burdens and legal risks for companies. In March, Germany abstained from the vote in the Committee of Permanent Representatives of the EU Member States, although government representatives from the SPD and the Greens were in favour of the proposal. 

Human rights and climate protection

The EU Supply Chain Act aims to strengthen human rights worldwide. Large companies are to be held accountable if they profit from human rights violations such as child labour or forced labour. They are also to draw up reports on the extent to which their business model is compatible with the goal of limiting global warming to 1.5 degrees. In this respect, the law also targets climate protection goals.

Large companies affected

The adopted law applies to companies with at least 1,000 employees and a turnover of 450 million euros, after a transitional period of 5 years. After three years, the requirements will apply to companies with more than 5,000 employees and more than 1.5 billion euros in turnover worldwide; after four years, these limits will fall to 4,000 employees and 900 million euros in turnover. In the previous version, companies with more than 500 employees and an annual turnover of at least 150 million euros were to be affected.

Company liability

The EU regulations only go beyond the existing German Supply Chain Act in some aspects, which has already applied to companies with 1,000 or more employees since January 2024, whereby turnover is not relevant. For Germany, this means that in the near future, around a third fewer companies will be affected by the EU directive than are currently affected by the German Supply Chain Duty of Care Act. However, the EU Supply Chain Act makes companies liable for violating their due diligence obligations, whereas the German law does not provide for direct liability. In order to be able to impose penalties on companies in the event of violations, the EU member states are to appoint a supervisory authority in future. Fines of up to five per cent of a company’s global net turnover should be possible. 

German industry has mixed reactions to the law. On the one hand, it is criticised for being impractical and increasing bureaucracy, while on the other, an EU version is seen as an opportunity to compensate for possible competitive disadvantages caused by the German Supply Chain Act. However, it sets out the direction of thought and approach that companies should consider in the medium term.

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