This article was originally published on March 22, 2022 and has been updated to reflect that BillS-211 has passed Second Reading in the Senate.
Canadian businesses are rapidly approaching a perfect storm of dynamic legal changes that will alter the way they manage the risks of forced labour and child labour in their operations and supply chains. The three vectors causing these dynamic changes are:
- Canada is now taking meaningful and impactful steps to address forced labour and child labour in supply chains of Canadian businesses.
- European governments have adopted mandatory human rights due diligence laws as their "go-to" legislative and regulatory tool to address these issues.
- The US government is targeting forced labour in supply chains as a critical component of its foreign policy and is moving with unprecedented robustness in its legislative and enforcement activities.
I have counseled clients that the issue of forced labour and child labour in the supply chains of Canadian businesses will continue to grow in importance for Canadian businesses. Canadian businesses should not be passive or reactive in managing these risks. Time is not on their side and tomorrow is not soon enough to be improving codes of conduct, supply agreements, procurement policies and procedures and ensuring that meaningful supply chain due diligence efforts have been implemented and/or are ongoing.
1. Canada's steps to addressing forced labour and child labour in supply chains
Bill S-211, Canada's Fighting Against Forced Labour and Child Labour in Supply Chains Act passed Second Reading in the Senate. It was then examined by the Senate Standing Committee on Human Rights. The Committee, in its report to the Senate, encouraged the federal government to adopt Bill S-211, with very minor amendments. This legislation, if passed, would require annual reporting by Canadian businesses that are subject to the Act as well as by all federal government institutions and departments. The annual reports would require disclosure of the steps taken by the reporting entity during the previous financial year to prevent and to reduce the risk that forced labour or child labour is used at any step of the production of goods in Canada or elsewhere by the entity or of goods imported into Canada by the entity. The report must be approved by the entity's board of directors thereby escalating these supply chain issues to the most senior level of the entity and would engage the directors' fiduciary duties. Bill S-211 would also amend Canada's Tariff Act to ban the import of goods made in whole or in part with child labour.
Unlike the UK and Australian modern slavery legislation, this proposed legislation would impose penalties of up to $250,000 if an entity subject to the Act does not file the required annual report, and also provides for personal liability of directors and officers in certain circumstances.
There may also be additional Canadian legislation to come. In December 2021, the Prime Minister issued mandate letters to the members of his Cabinet. The Minister of Labour was tasked to lead the federal government's efforts including the introduction of legislation to eradicate forced labour from Canadian supply chains. Three other Cabinet ministers were tasked with supporting the efforts of the Minister of Labour in that regard.
In late 2021, Canada Border Services Agency made its first and only publicized seizure of forced labour-made goods since the prohibition on imports of such goods came into effect on July 1, 2020. Given that in January 2022, the Federal Government and a supplier agreed to terminate a $224 million dollar supply contract for disposable gloves manufactured in Malaysia that were suspected of being produced with forced labour, Canadian businesses should expect more enforcement activities from the Canada Border Services Agency with respect to forced labour-made goods.
Potential impact on Canadian businesses: Not only could Canadian businesses have to begin preparing and posting annual reports on forced labour and child labour in their supply chains, but they must also map and understand what is happening in their supply chains in order to ensure that they are fully complying with the Tariff Act, and the Customs Act which requires import documentation to be true, accurate and complete.
2. Human rights due diligence legislation in Europe
Since 2017, more and more European countries have addressed the issue of adverse human rights impacts in supply chains by enacting mandatory human rights due-diligence legislation (HRDD), rather than supply chain reporting legislation. The first was France with its "duty of vigilance" law which requires France's largest companies to develop, disclose and effectively implement a vigilance (due diligence) plan with measures to adequately identify risks and prevent serious and adverse impacts on human rights linked to the activities carried out by a business and its subsidiaries and suppliers. The legislation includes a requirement to remediate adverse human rights impacts and makes available mandatory injunctions to force compliance, as well as access to civil remedy for harms resulting from a company's failure to observe its duty of vigilance.
- June 2021 – Norway – the Transparency Act imposes a due diligence obligation on businesses to take all necessary measures to identify, cease, prevent, mitigate and remedy large Norwegian adverse impacts on human rights throughout their entire value chains.
- June 2021 – Germany - Supply Chains Act impacting the biggest German companies beginning on January 1, 2023 will require mandatory human rights due diligence and risk management. One feature of this law is the very significant fines including in some circumstances, fines of up to 2% of the business' annual global turnover (revenue) as well as the potential of exclusion from public procurement for up to three years.
- December 2021 – Netherlands – Announced plans to introduce mandatory human rights due diligence legislation in addition to its existing child labour law which already requires due diligence to be carried out.
On Feb. 23, 2022, the European Union adopted a proposal for a Directive on mandatory corporate sustainability due diligence. The Directive, if it becomes law, would apply to companies (a) with 500+ employees and more than €150 million of turnover in the EU and (b) companies with 250+ employees and more that €40 million of turnover in the EU and operating in defined high impact sectors such as textiles, agriculture, and mining. The rules will apply to this latter group two years later than the former group. The Directive would apply to the business's own operations as well as its subsidiaries and their "value chains" (direct and indirect business relationships).
Under the Directive, businesses would be required to:
- Integrate due diligence into policies.
- Identify actual or potential adverse human rights and environmental impacts.
- Prevent or mitigate potential impacts.
- End or minimize actual impacts.
- Establish and maintain a complaints procedure.
- Monitor the effectiveness of the due diligence policy and measures.
- Publicly communicate on due diligence.
A duty to establish and oversee the implementation of the required due diligence processes and to integrate due diligence into corporate strategy will be imposed on directors. In addition, when directors act in the best interest of the business, they must consider the human rights, climate and environmental consequences of their decisions.
The Directive provides for the imposition of fines for non-compliance as well as a granting victims the right to bring legal action for damages that could have been avoided with appropriate due diligence measures.
Potential impact on Canadian businesses: Canadian businesses operating in the UK and Europe face a potential obligation to comply with the UK Modern Slavery Act, as well as current and upcoming mandatory human rights due diligence laws in other jurisdictions. As the EU Directive will require businesses to conduct due diligence on their entire global value chain, both upstream and downstream (all types of business relationships including suppliers, customers, investors, joint ventures, clients, licensees, franchisees, contractors, advisers, etc.), many Canadian businesses that are not operating in the EU will be required to report and certify (e.g., as a supplier or as a customer) to those EU businesses with whom it is doing business and that are subject to the EU Directive. For Canadian companies subject to the EU Directive, there is a risk of sanctions and civil liability.
3. Significant development in United States legislation
In the US, the primary tool to combat forced labour in supply chains is enforcement at the border. The Tariff Act prohibits the importation of goods made, manufactured, or produced with forced, prison or indentured labor. In the enforcement of this legislation, the Customs and Border Protection agency (CBP) can issue withhold release orders (WROs) when it receives information that reasonably but not conclusively indicates that the goods were produced with forced labour. A WRO gives the CBP the power to detain the goods at the border. Once the WRO is issued, the onus shifts to the importer to show, by clear and convincing evidence, that the goods were not made in whole or in part with forced labour. This can be a very difficult challenge for importers, especially if supply chain mapping and assembly of needed documentation has not undertaken on a regular basis, and could result in the goods being detained for many months. CBP also issues a press release whenever a WRO is issued causing rapidly heightened reputational risks.
A very significant development in US legislation and regulation is the Uyghur Forced Labour Prevention Act which became law in late December 2021. As required under this legislation, the Department of Homeland Security's Forced Labour Enforcement Task Force (FLETF) is formally seeking input from the public as it develops a strategy to prevent the import of goods mined, produced or manufactured in whole or in part with forced labour in China. By June 21, 2022, CBP must begin applying a rebuttable presumption that goods, wares, articles or merchandise mined, produced or manufactured in whole or in part in the Xinjiang Uyghur Autonomous Region (XUAR) and any goods produced by entities identified in the enforcement strategy developed by the FLETF are prohibited from importation into the US.
The rebuttable presumption the goods were made with forced labour will apply and CBP will ban imports unless the importer can demonstrate, by clear and convincing evidence, that the goods were not mined, produced or manufactured in whole or in part with forced labor. The strategy referred to above must also include guidance to importers with respect to due diligence; effective supply chain tracing; and supply chain management measures to ensure that they are not importing goods made by forced labour in China, as well as guidance with respect to the type, nature and extent of evidence that demonstrates that goods originating in China were not mined, produced or manufactured in whole or in part with forced labor.
Potential impact on Canadian businesses: For Canadian businesses that are exporting goods to the US market, more stringent American border controls will soon be in place and the onus on importers to prove that the goods from XUAR were not made with forced labour may be even more challenging when we see the CBP's new strategy in June. Until then, Canadian businesses exporting to the US or contracting with the US Federal government should be ramping up their supply chain due diligence efforts and be wary of goods diverted to Canadian markets that may have been produced in whole or in part with forced labour.
More in this series
For further information, watch Stephen's latest webinar on Forced Labour and Child Labour in Supply Chains or read the first thirteen parts of our Guide to addressing modern slavery in your business and supply chain for Canadian directors:
How we can help
To find out more about how Gowling WLG can help your business with:
- Supplier codes of donduct
- Directors duties and board education/training
- Updating supply contracts
- Supply chain mapping and due diligence
- Stakeholder Identification and Engagement
- ESG reporting
Please contact the author Stephen Pike.