For many years, multi-national businesses have engaged with various voluntary international corporate social responsibility (CSR) initiatives in response to demands to operate in a socially responsible manner. Alongside these initiatives, businesses have been increasingly held to account by trade unions, non-governmental organisations (NGOs) and stakeholders for their ethical decision making. Whilst there have been many success stories, the view has formed that businesses could and should do more to respect and remedy human rights impacts arising from how they do business. This issue has gained increasing public awareness and the attention of governments and regulators.
The introduction of the Modern Slavery Act 2015 in the United Kingdom (the Act) reflects this growing global recognition of the role responsible business can and should play in tackling the crimes of modern slavery. “Modern slavery” encompasses slavery, servitude and forced or compulsory labour, and human trafficking. It is big business: the International Labour Organisation (ILO) estimates that forced labour by around 21 million people worldwide illegally generates US$150 billion annually.
While it clearly makes commercial sense for businesses to seek better prices from their supply chains, often directly from lower cost developing countries, the message from the new Act is clear: they can no longer ignore failures to protect human rights in their business dealings.
The Act provides that “commercial organisations” are organisations that carry on a business or part of a business in the UK and have a global turnover of not less than £36 million. These organisations are now required to produce a slavery and human trafficking statement every financial year (the statement). The statement must set out the steps that the organisation has taken that year to identify and eradicate modern slavery from both its own business and its supply chain (or state that no steps have been taken).
The definition of ”commercial organisation” is very wide. It includes companies, LLPs and partnerships, wherever they are incorporated or established. Equally importantly, there is no minimum level of business that must be carried on within the UK. The Act will therefore apply to a large number of organisations and groups that have some commercial presence in the UK.
For example, a UK subsidiary company, BigTech UK, has a turnover of £20 million. Its US parent company, BigTech Global, has a worldwide turnover of £300 million. BigTech Global will have to publish a statement, because it carries on business in the UK. BigTech UK will not have to publish a statement because it does not meet the turnover threshold.
All affected organisations will need to review their existing CSR and HR policies and practices to make sure they can comply with this requirement. Time is of the essence for those affected organisations with a financial year ending on or after 31 March 2016. This may prove more onerous for those affected organisations which are not already voluntarily reporting on human rights and slavery issues.
The Act will impact on the businesses’ suppliers too. Suppliers of goods and services can expect, at the very least, a number of requests for CSR related information. The need to meet new ethical procurement requirements may represent a steep learning curve for some.
There is no set form or content for the statement in the Act. The amount and type of information included will depend on the commercial context of each organisation: What sector does it operate in? How complex are its structure and supply chains? Does it have overseas suppliers? If so, what sectors and countries do those suppliers operate in? Are those countries considered high risk due to poor rule of national labor law and practices?
However, a statement should:
The expectation is the statement will be published on the commercial organisation’s website (where it has one). The homepage must contain a clearly marked link to the statement in a prominent place (potentially in a drop down menu). The UK Government’s guidance suggests using a link such as ‘Modern Slavery Act transparency statement’. Where an organisation has more than one website, each website should include the statement, or a link to it.
Organisations that do not have a website must provide a copy of their statement to anyone who requests it within 30 days of a written request being made.
Furthermore, the statement must be approved and signed off at a senior level, which means that those responsible for the business will want assurance that the statement is accurate. This will necessarily require both legal and PR input given the website transparency requirement and the subsequent possible scrutiny of the statement.
There are a number of questions which organisations should consider to ensure the business complies with the Act internally:
Perhaps the more difficult area to negotiate is whether an organisation’s suppliers and contractors conduct their business in a manner which complies with the Act.
Proactive businesses should consider:
Do existing practices influence and create a modern slavery risk? Key issues include working conditions (including health and safety); supplier ethics and transparency, and wages, benefits and working hours.
The Act undeniably carries a cost for businesses, which will vary depending on how they decide to react. It also has a likely domino effect throughout supply chains.
The decisions made as to the level of due diligence will inevitably translate into a cost for the suppliers. Suppliers can reasonably expect existing supplier codes of conduct to be reviewed and serious consideration given to whether commercial contracts for goods and services should be amended to cover the due diligence obligation. Suppliers will need to be ready to demonstrate how effective they are in ensuring that slavery and human trafficking is not taking place in their business or their supply chains.
The UK’s Secretary of State has the power to bring enforcement proceedings where a commercial organisation fails to comply with the Act. However, it is not altogether clear under the Act when a statement must be produced. The guidance indicates that the target is within six months of the end of the relevant financial year end. There is therefore some doubt as to when (or indeed whether) the Secretary of State could enforce.
That said, this ignores the court of public opinion for non-compliant businesses and the risks to their brand reputation. There is a clear direction of travel for businesses to promote high ethical standards. For example, the UK’s Committee on Standards in Public Life recommends implementing a publicly assessable code of conduct, together with training and performance reviews that take account of the organisation's ethical values. It is not yet clear whether such codes will be voluntary or obligatory.
Public procurement suppliers can expect to be asked for evidence of:
This mood is also reflected across the pond. In California, the State's Attorney General recently published guidance on complying with the Californian Transparency in Supply Chains Act (the California Act), and sent letters to companies covered that were not adequately disclosing their efforts to eradicate slavery and human trafficking from their direct supply chains. These developments are significant as the Act was in large part modelled on the California Act. However, the California Act applies only to retail and manufacturing companies with a US$100 million financial threshold, while the UK Act is much broader in scope: it applies to businesses that supply either goods or services, and has a lower financial threshold.
Socially responsible businesses will no doubt want to help governments tackle modern slavery and human trafficking around the world. But does the Act go far enough? After all, it does not require a business to take steps to eradicate slavery from its supply chain: the requirement is simply to provide a statement. Instead, the Act aims, by encouraging businesses to be transparent about what they are doing, to increase competition and drive up standards. The statements will, in theory, enable the public, consumers and investors to make informed decisions as to which organisations they do business with.
Regrettably, however, not all businesses are socially responsible. Will the Act, which is long on bark but short on bite, be able to achieve its aims simply through the publication of statements? It will certainly require a large amount of understanding and co-operation between those that procure goods and services and those that supply them, which may be particularly challenging across language and cultural barriers. Suppliers may be reluctant to put their supply chains too closely under the microscope for fear that they will suffer reputational damage and lose consumer confidence if slavery is discovered. This fear may be particularly potent in low margin businesses that may lack the expertise and/or resources to implement an effective global supply chain management system.
There are also some practical issues to address. For example, the Act does not require UK companies to report on all the supply chains in their groups overseas, such as those of wholly-owned subsidiaries abroad. While the business could state on its website that no steps have been taken to combat slavery and human trafficking, this is not likely to be an attractive option, given the reputational risks to the business associated with such a statement. There are inherent risk and compliance considerations given the linkages to anti-corruption, ethics, and whistleblowing policies and procedures.
The Act also brings with it legal risk. Legal campaigners will surely push legal boundaries more and more: we can certainly expect them to test legal definitions. Recent US class actions have claimed that alleged forced labour in global supply chains means that companies have breached California consumer fraud and unfair competition laws. These claimants argue that companies are liable for allegedly misrepresenting in various corporate declarations their efforts to eradicate forced labour from their global supply chains.
In summary then: businesses will ignore their obligations under the Act at their social and commercial risk. For instance, there are further legal obligations coming from the EU that will affect business with more than 500 employees. The real sanctions for a business for failure to comply with the Act may well be in damage to their reputation, which is likely to be far more expensive to recover from than litigation.
This article was published in International Litigation News in April 2016.