A Missed Opportunity to Improve Workers’ Rights in Global Supply Chains

[Jeffrey Vogt is currently the Rule of Law Director of the Solidarity Center and co-founder and Chair of the International Lawyers Assisting Workers (ILAW) Network. Ruwan Subasinghe is Legal Director at the International Transport Workers’ Federation (ITF) and a practising solicitor. He sits on the Boards of the International Lawyers Assisting Workers (ILAW) Network, the Ethical Trading Initiative (ETI) and Cornell University’s New Conversations Project. Paapa Danquah is the Legal Director of the International Trade Union Confederation (ITUC). He has an LLM in international development law and human rights from Warwick Law School, University of Warwick, UK and was called to the Bar in Ghana in 2010.]

After two more robust mandatory human rights due diligence (HRDD) proposals were rejected by the European Commission’s (EC) Regulatory Scrutiny Board, revealing the influence of the business lobby, the EC finally issued its proposed directive on Corporate Sustainability Due Diligence on 23 February 2022. By the EC’s own admission, the proposed directive’s personal scope and provisions on directors’ duties, among other things, were significantly revised or reduced following reflection triggered by the Board’s comments. While the proposed directive is an important step, it nevertheless contains several serious flaws – many of which are significant deviations from Pillar II of the UN Guiding Principles on Business and Human Rights (UNGPs). If not addressed fully in the legislative process, the proposed directive’s effectiveness as a tool to promote human rights, environmental sustainability, and corporate accountability will be certainly diminished. This analysis will focus on the proposed directive as it relates to labour rights. We take as a point of reference the ITUC’s publication, Towards Mandatory Due Diligence in Global Supply Chains (ITUC Guidelines).

Article 1: Subject Matter

Article 1(1)(a) provides that the directive sets rules for companies with respect to their own operations, the operations of their subsidiaries and the value chain operations carried out by entities with which the company has an ‘established business relationship.’ This term is defined at Article 3 as ‘a business relationship, whether direct or indirect, which is, or which is expected to be lasting, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the value chain.’ While many Tier 1 suppliers may be ‘established’, this is not the case for all Tier 1 suppliers and even less so for Tier 2 suppliers and beyond. From the start, the proposed directive limits the reach up the value chain in a manner inconsistent with the UNGPs (see ITUC Guidelines Component 2). 

Guidance to Principle 17 of the UNGPs refers to prioritizing action “where business enterprises have large numbers of entities in their value chains and it may be unreasonably difficult to conduct due diligence.  However, the established business relationship limitation in the proposed directive applies to all companies, not only those with a large number of entities in their value chains. Further, it also contradicts the approach in the UNGPs which calls for HRDD based on the significance of the risk, not the actual or expected length of the relationship with the supplier. We also note here that companies have some control over the number of supplier relationships they have and could consolidate these relationships to ease the carrying out of HRDD. Consolidation could also increase leverage to mitigate adverse impacts that companies contribute to or are linked to.

Of concern, it appears that it is the company that determines which relationships are ‘established’, and according to which criteria, at least on an annual basis.  

Article 2: Scope 

Article 2(1)(a) sets a threshold of a minimum of 500 employees on average and a global net turnover of over 150 million Euros. Article 2(1)(b) sets a lower threshold of 250 employees and 40 million euros in global net turnover for companies in higher-risk sectors, including apparel and footwear, agricultural, forestry and fisheries and mining. This raises several serious concerns. First, less than 1% of EU-based companies will be required to comply with the directive’s requirements. Second, the three listed sectors at 2(1)(b) are not the only ones which present a high risk for adverse human rights impacts in global value chains. Third, and perhaps most troubling, companies covered under 2(1)(b) are only required to address severe potential and actual adverse human rights impacts (per Article 6). Also, the proposed directive will not apply to 2(1)(b) companies until three years after the time by which member states must have transposed the directive (per Article 29).  

Article 2(2) of the proposed directive applies the same 2-tier set of minimum criteria to MNEs based outside of the EU, though it reasonably requires that the net turnover thresholds be in the EU. These thresholds might be evaded by non-EU-based companies through creative accounting as to where the turnover is generated. This will require careful oversight to avoid regulatory evasion. 

We note that Principle 11 provides that ‘The responsibility to respect human rights is a global standard of expected conduct for all business enterprises wherever they operate.’ Further, Principle 14 provides that ‘The responsibility of business enterprises to respect human rights applies to all enterprises regardless of their size, sector, operational context, ownership and structure.’ Thus, there is no basis under the UNGPs to have excluded most companies from the obligation to conduct due diligence. Indeed, the UNGPs recognize that SMEs can have severe human rights impacts. The UNGPs recognize that the way in which SMEs address potential and actual impacts may take on different forms given their size and resources, which should have been the approach taken here (see ITUC Guidelines Component 1).

Article 6: Identifying Actual and Potential Adverse Impacts 

Article 6(1) states that the ‘appropriate measures’ to identify actual and potential human rights risks that may occur in a company’s value chains applies only to ‘established business relationships’, potentially excluding a significant portion of a company’s value chain. 

Article 6(2) provides that those companies that do not meet the higher employee/net turnover threshold and which are engaged in the three identified high risks sectors need only identify actual and potential severe adverse impacts. There is no rationale nor foundation in the UNGPs to limit the duty of companies, especially in well-known high risks sectors, to only identify potential and actual severe adverse impacts.  While HRDD may vary with the risk of severe human rights impacts (Principles 17 and 19), it is fundamentally a consideration in determining whether more immediate or serious action may need to be taken, not whether action need be taken at all. A related concern is how ‘severe’ will be interpreted and by whom. The definition at Article 3(l) is generally consistent with the definition of severe human rights impacts, focusing on scale, scope and irremediability. 

A common human rights violation suffered by workers in these high-risk sectors is anti-union discrimination. It is often the case that the dismissal of union activists will chill efforts to form and join a union, not only by those fired, but any other worker who has knowledge of the retaliation. It is unclear whether this constitutes a ‘severe’ adverse impact. If not, all but the largest companies in, say, the garment and footwear sector (those with 500 employees and 150 million in turnover) will for purposes of the proposed directive be able to ignore potential and actual violations of the right to freedom of association. 

Article 6(3), which concerns HRDD for companies in the financial sector, is also inconsistent with the UNGPs. The directive provides that their obligation to conduct HRDD is only before issuing loan, while the UNGPs clearly require HRDD to be ongoing and iterative.

Finally, Article 6(4) does not require companies to carry out consultations to assess actual or potential adverse impacts in all cases, but rather only ‘where relevant’. It is the company that will decide when such consultations are relevant, not workers or unions. A key problem with the implementation of HRDD under the UNGPs has been the failure of companies to meaningfully consult with trade unions in assessing labour rights risks – instead relying on poorly-informed consultants.  By not requiring companies to consult with trade unions without qualification on labour rights risks, the proposed directive could entrench current bad practices. Notably, the definition of stakeholder, at Article 3(n), omits any reference to trade unions (see ITUC Guidelines Component 8).

Article 7: Preventing and Minimising of Potential Adverse Impacts 

Article 7 provides that companies shall take appropriate measures to prevent or minimize adverse human rights impacts that should have been identified under Article 6. Article 7(2) lists actions which shall be taken where relevant. Article 7(2)(a) provides for the elaboration of prevention action plans for complex cases. In such cases, it would be essential for the company to consult with stakeholders; however, the obligation is qualified as where relevant. Article 7(2)(b) requires that companies “seek” but not “obtain” contractual assurances from business partners with which it has a direct relationship that it will comply with the company’s code of conduct, and where necessary a prevention action plan. Pursuant to Article 7(4), such contractual assurances [with an SME] are to be fair, reasonable, and non-discriminatory, though the regulation provides no guidance as to what these terms mean. Of concern, these contracts may be verified by a “suitable industry initiative or independent third-party verification.” As such, companies appear to be allowed to outsource HRDD responsibilities to an MSI, even though there is voluminous evidence that many such initiatives are not fit for purpose and often fail to identify potential adverse impacts. If companies pursue this approach, the directive will have done little more than revivify a failed CSR model. 

Article 7(3) provides that if potential adverse impacts cannot be prevented or adequately minimized by the measures outlined in Article 7(2), the company may conclude a contract with a partner with whom it has an indirect relationship presumably with a view to shortening the value chain in order to achieve compliance with the company’s code of conduct or prevention action plan.  Article 7(4) also applies. 

Finally, Article 7(5) provides that where potential adverse impacts cannot be prevented or adequately minimized by the measures above, then the company should either temporarily suspend commercial relations while pursuing prevention and minimization efforts if these will succeed in the short term or terminate the business relationship if the potential adverse impacts are severe. However, the company need not do either of these if the governing law of the country in which the established business relationship does not permit it. This appears to be a large loophole and indeed encouragement to governments in countries of production to pass such laws.  

Article 8: Bringing Actual Adverse Impacts to an End and Mitigating Their Extent

Article 8(1) requires companies to take appropriate measures to bring actual adverse impacts to an end. However, Article 8(2) immediately provides an exception, stating that if it is not possible to end the adverse impact, companies can simply ‘minimize’ the extent of the impact. Of concern, it does not state that a company ‘minimize to the maximum extent possible’ or similar injunction. Article 8(2) contemplates that a company can continue a business relationship with ongoing adverse human rights impacts to some degree.  

As the commentary to Principle 19 provides, where a company causes or contributes to the adverse impact, it must act to cease or cease its contribution to the adverse impact, and in the latter case use its leverage to mitigate any remaining impact to the greatest extent possible. The situation is admittedly more complicated in situation where the company did not cause or contribute to the adverse impact but is directly linked to it in its operations. Even then, it must exercise its leverage to prevent or mitigate the impact. And, if it does not have the leverage and cannot increase its leverage, the company should consider ending the relationship. 

Like Article 7, Article 8 lists several actions that the company shall take, where relevant. Article 8(3)(a), which provides that the company ‘neutralise the adverse impact or minimise its extent, including by the payment of damages to the affected persons and of financial compensation to the affected communities’, raises several concerns. It is not clear what it means to ‘neutralize’ the adverse impact. Further, while not excluding other forms of remedy, the only remedy listed is the payment of damages and other monetary compensation. While important, the concept of remedy is far broader and should be reflected here. The second sentence, which provides that “The action shall be proportionate to the significance and scale of the adverse impact and to the contribution of the company’s conduct to the adverse impact.” In focusing on the company’s contribution to the adverse impact, it appears that this article excludes “linked to” liability. This is consistent with a HRDD obligation limited to established business relationships.

Articles 8(4)-(6) raise the same questions and concerns as with Article 7(3)-(5).

Article 9: Complaints Procedure 

Article 9 requires companies to adopt a grievance mechanism, though it lacks several elements of the effectiveness criteria for non-judicial grievance set forth at UNGP 31. Most notably, the article does not require companies to provide a human rights compatible outcome if the grievance is in fact sustained. It merely provides that complainants are entitled to request appropriate follow up from the company. Complainants are not even entitled to meet with company representatives unless the potential or actual impact is severe (as determined by the company). This is a process with no outcome (see ITUC Guidelines Component 4). 

Article 14: Accompanying Measures 

Article 14(4) makes explicit the possibility that companies outsource the entirety of the HRDD to an industry scheme or an MSI. Namely, ‘Companies may rely on industry schemes and multi-stakeholder initiatives to support the implementation of their obligations referred to in Articles 5 to 11 of this Directive to the extent that such schemes and initiatives are appropriate to support the fulfilment of those obligations.’ The last sentence of this sub-article provides that the EC may issue guidance for assessing the fitness of industry schemes and multi-stakeholder initiatives; however, such schemes will likely continue to dominate HRDD. As explained below, a company’s reliance on the monitoring and reporting of such schemes might provide a shield to liability. 

Articles 15-19: Supervisory Authority

These five articles together establish the oversight mechanisms that member states should establish to ensure that companies comply with their HRDD obligations. This includes a (fairly vague) process whereby individuals or organizations can come forward with substantiated concerns (Art 18). It also provides that member states can impose administrative sanctions for breach of the directive (Art 19). While these elements are positive, the proposed directive gives broad discretion to member states which, depending on transposition, could provide insufficient disincentives to poor corporate behaviour. Of particular concern are: 1) the lack of any formal trade union involvement in the establishment or operation of the supervisory authority (Art 16); 2) the failure to give this authority oversight over social auditors and MSIs to ensure that they are held to highest standards of accountability (Art 17), and 3) the broad discretion that member states have to impose administrative sanctions, and, if imposed, the amount of such sanctions (Art 19) (see ITUC Guidelines Component 5). 

Article 21: Civil Liability

The civil liability section is unfortunately drafted in such a way that it will be difficult to use. Article 21(1)(a) provides that member states ensure that companies can be held civilly liable if they failed to take appropriate measures to prevent or minimize potential adverse impacts or ending actual adverse impacts as set forth in Articles 7 and 8 AND that adverse impacts occurred and led to damage. While this may sound right, recall that Articles 7 and 8 may be satisfied by entering into contracts with business partners to respect a code of conduct or prevention plan, and that the code is verified by a third-party auditor. Thus, a company may be essentially immune from civil liability if it entered into such an arrangement, unless the injured party were able to prove that these assurances or prevention plan were not appropriate measures – a tall order unless the fact of the harm is itself evidence of the measure not being appropriate. 

The directive is silent on the burden of proof, and thus it is likely to fall on the under-resourced plaintiff to collect the evidence (often without the benefit of discovery) and to finance such a lawsuit, often thousands of miles from the site of the harm (see ITUC Guidelines Component 7). The failure of the directive to address the many and well documented practical barriers to transnational human rights litigation is a missed opportunity. 

The proposed directive is also silent as to which damages are available. Compensatory damages alone may be woefully insufficient. For example, where an effort to form a union is thwarted by violating the workers’ right to freedom of association, how does one assess compensatory damages in such a case. Is it the penalty under national law? Is it the differential between the wages unionized workers and non-unionized workers earn? In any case, the compensatory damages could be quite small, making it unlikely that workers would initiate costly transnational litigation to recover such damages, and even if recovered, they would be too small to provide a disincentive to the company. In such a case, administrative sanctions would have to be imposed to create a sufficient disincentive, though that would leave the workers without a remedy.  

Article 21(2) allows companies to escape liability for an adverse impact arising as a result of the activities of an indirect partner with whom it has an established business relationship unless it was unreasonable in the circumstances of the case to expect that the actions actually taken, including in respect of verifying compliance, would be adequate to prevent, minimize, bring to an end to or mitigate the adverse impact. It goes on to add that in assessing the existence and extent of liability, due account must be taken of the company’s efforts regarding actions relating to the damage in question, to comply with any remedial action required of them by a supervisory authority, any investments made and collaboration with other entities to address adverse impacts in its value chains and any targeted support provided pursuant to articles 7 and 8. 

The effect of this provision will be to provide a near complete defence for a company which entered into a contract with an indirect business relation in compliance with articles 7 (2)(b) and article 8(3)(c). It is most likely that the reasonableness test will be satisfied by the fact that the provisions require such contracts to be verified by suitable industry initiatives or independent third-party verification. It will be a tall evidentiary burden to overcome the reasonableness judgment of such a suitable industry initiative or indeed the views of an independent third-party, despite the fact that many such initiatives are not fit for purpose. 

Article 24: Directors’ Duty of Care 

We welcome the text regarding the inclusion of a director’s duty of care. It is a missed opportunity, however, not to have elaborated on the key elements of a sustainable economy in 24(3). 

Article 25: Setting Up and Overseeing Due Diligence

A problem throughout the directive, Article 25 fails to mention trade unions, who are both relevant stakeholders and those affected by adverse human rights impacts.       

Annex

We note and welcome that the Annex covers the current Fundamental Principles and Rights at Work, including explicitly the right to strike. We note however a missed opportunity to refer to the relevant ILO instruments on Occupational Safety and Health (though referencing Article 7 of the ICESR). Should OSH become a fundamental right in 2022, as is anticipated, we would expect the relevant conventions be added here.  We also note the absence of ILO Convention 190 on Violence and Harassment in the World of Work, and the absence of any language on a just transition.