Key Takeaways:
- The European Parliament recently adopted a law that will establish a regulatory regime to prohibit any products made using forced labor from being sold within, imported into, or exported from the E.U. market. Once the E.U. Council of Ministers provides its formal approval of this new law, E.U. Member States will have three years to implement the law.
- Natural or legal persons or associations of persons will be subject to the new law if they place or make available products on the E.U. market or export products from the E.U., regardless of legal form, size, production location, or citizenship.
- Violations may result in penalties including product bans, orders to withdraw and properly dispose of concerned products, and penalties imposed under national laws of E.U. Member States.
- Companies should take actions to prepare for the new E.U. law's implementation and ensure compliance with regulatory regimes aimed at eradicating modern slavery from the global supply chain. Foley Hoag will continue to watch this space closely and assist clients with responsible business practices, including forced labor and human rights laws.
Overview
On April 23, 2024, the European Parliament adopted, by an overwhelming 555-6 majority, a landmark law that will establish a sweeping and forceful regulatory regime to prohibit any products made using forced labor from being sold (including online) within, imported into, or exported from the E.U. market. As previously covered in our international trade law white paper, this law was first proposed in 2022 by the European Commission based on concerns over human rights issues in the global supply chain, with particular concern over the ongoing persecution of Uyghurs and other vulnerable minority groups in China's Xinjiang Uyghur Autonomous Region.
In addressing forced labor and other forms of modern slavery, the new law marks an important milestone in advancing legally enforceable standards for sustainable business practices and the corporate responsibility to respect human rights in the E.U. As such, it is the latest (and so far, the most extensive) phase in a growing initiative by governments to align their oversight of supply chains with a common set of international principles for eradicating modern slavery.
Key Provisions of the New Law
What conduct does the new law target?
The new law prohibits entities from placing or making available on the E.U. market products that are made with forced labor. Consistent with the standard used by U.S. Customs and Border Protection ("CBP"), "forced labor" is determined with reference to the Convention on Forced Labour of the International Labour Organization ("ILO"), which defines it as "all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily."
Who needs to comply with the new law?
The entities that fall under the scope of the law include any natural or legal person or association of persons that is placing or making available products on the E.U. market or exporting products from the E.U., regardless of legal form, size, production location, or citizenship. The E.U. forced labor law is especially aimed at importers and exporters, companies involved in the production of such goods, and other commercial entities in that supply chain.
How does the new law compare to the UFLPA?
Foundational aspects of the new law were drawn from the U.S. Uyghur Forced Labor Prevention Act ("UFLPA"), which went into effect in June 2022 and requires CBP to ban the importation of any goods whose supply chains are deemed to share a material nexus with the Xinjiang region of China, or other parts of China known to use forced labor of Uyghurs or other persecuted minority communities.
The E.U. forced labor ban targets products made with forced labor from anywhere in the world. A product is subject to the E.U. ban if forced labor has been used "in whole or in part at any stage of its extraction, harvest, production or manufacture, including working or processing related to [the] product at any stage of its supply chain." This includes all downstream and upstream tiers of a product's supply chain.
Enforcement and Penalties
Who will enforce the new law?
The new E.U. law also provides authorities with expansive powers to investigate and stop forced labor practices within the European Union. As enforcers of the law, the European Commission and its counterpart authorities in E.U. Member States will cooperate to identify common enforcement priorities and coordinate in connection with investigations – with the ability to impose significant monetary penalties on a company whose products and commercial activities within the E.U. market are derived in any amount from forced labor.
What will an investigation under the new law look like?
The enforcement of the law begins with a two-tiered investigation. In the preliminary phase, unless exceptions apply, the competent authority must request from companies and suppliers in question "information on their relevant actions taken to identify, prevent, mitigate, bring to an end or remediate risks of forced [labor] in their operations and supply chains with respect to the products under assessment[.]" On the basis of the information received, the authority must determine whether there is a "substantiated concern of violation" of the law. If such concern exists, the authority must launch an actual investigation on the relevant products and commercial entities involved, which will be obliged to provide further information to assist with the investigation. If necessary, field inspections may be conducted.
When assessing the likelihood of violation of the law, initiating and conducting the preliminary phase of the investigations, and identifying the products and commercial entities concerned, the competent authorities must follow a risk-based approach. Relying on "all relevant, factual, and verifiable information," the authorities will determine the likelihood of a violation in light of three factors:
- scale and severity of the suspected forced labor, including whether forced labor imposed by state authorities may be a concern;
- quantity or volume of products placed or made available in the E.U. market; and
- share of the part suspected to have been made with forced labor in the final product.
Will the EU provide any guidance to help assess forced labor risks in specific geographic regions?
To support authorities in assessing potential violations and to help companies identify forced labor risks, the E.U. Commission will establish a public database that identifies "forced labor risks in specific geographic areas or with respect to specific products or product groups, with special focus on widespread and severe" forced labor risks, "based on reliable and verifiable information from international institutions, such as the ILO and the UN, and research or academic institutions." This is similar to CBP's approach, which – pursuant to the UFLPA – established high-risk sectors and product types that have been increasingly mapped using data from academic researchers and civil society organizations.
What burden of proof will apply in the context of the new law?
Notably, under the E.U. law, the competent authority always bears the burden of establishing that a product is tainted with forced labor. In the E.U. Parliament's prior negotiation position, products coming from the "high-risk" geographic areas (published in the database above-mentioned) are presumed to be in violation of the law – a burden of proof that clearly drew inspiration from the rebuttable presumption standard that the UFLPA established. This provision was stripped out of the current text of the law. As it stands, the E.U. law does not specify the standard of proof required to "establish" a violation, a question waiting to be answered with future guidance and enforcement practice.
What potential penalties will apply for violating the new law?
Following an investigation, if the competent authority establishes any violations, the products concerned shall be prohibited from the stream of commerce on the E.U. market. If the products concerned have already been placed or made available on the market, the authority must order the company "to withdraw . . . or to remove content from an online interface referring to the products or listing of the products concerned." The company must also properly dispose of the products, including through recycling, destruction, or donation.
Non-compliance with such decisions could lead to significant penalties under national laws of E.U. Member States. The penalties must be "effective, proportionate and dissuasive" and are to be determined in light of the following factors:
- the gravity and duration of the infringement;
- any relevant previous infringements by the company;
- the degree of cooperation with the competent authorities; and
- any other mitigating or aggravating factor applicable to the circumstances of the case, such as financial benefits gained, or losses avoided, directly or indirectly, from the infringement.
Are there any steps companies facing penalties can take?
Companies facing penalties may request a review of the decisions at any time. The request for a review must contain information demonstrating that the products concerned are in compliance with the law, including any "new substantial information that was not brought to the attention of the competent authority during the investigation." Thus, banned products may be allowed back on the market if forced labor is shown to be eliminated from the supply chain. At this point, it is unclear what level of proof is required to obtain a withdrawal of product ban.
Next Steps for Implementation of the Law
With the E.U. Parliament's adoption of the law, the only remaining step is for the E.U. Council of Ministers to provide its formal approval. Given that the Parliament and the Council had previously reached a provisional agreement over a draft virtually identical to the current version, the Council is expected to give its final approval to the law without making any further substantive changes. This is likely to occur this year, after the June E.U. elections. Upon receiving the Council's imprimatur, the law will be formally published in the Official Journal – the European Union's official repository for current laws and regulations – and E.U. Member States will have three years to implement the law and ensure its enforcement.
Which other related E.U. laws have been passed recently?
Given that the law implicates a range of entities in a product's supply chain, it is a timely complement to another corporate human rights measure that was also recently passed by an overwhelming margin in the E.U. Parliament: a mandatory standard for conducting and disclosing due diligence on a company's sustainable business practices and its supply chains. Foley Hoag's Global Business and Human Rights Practice discussed the larger context behind both the E.U. due diligence disclosure standard and the E.U. forced labor prohibition when they were initially proposed by E.U. authorities several years ago.
Recommendations
The E.U. forced labor law is yet another legal measure that seeks to combat forced labor in supply chains, with similarly structured legal frameworks having been established in Canada, Mexico, the United Kingdom, Australia, and the United States (through the UFLPA and other enhancements to the Tariff Act). These efforts are the product of a growing international initiative aimed at eradicating modern slavery in an ever-globalizing supply chain system.
Companies, especially those doing business within the markets of Europe, the U.S., and their trade allies, should consider ways to:
- Deepen engagement with suppliers and other stakeholders involved in their E.U. supply chains;
- Establish or strengthen supplier codes of conduct that can be consistently enforced;
- Develop tracing systems that can map the supply chain down to raw materials and determine the presence of vulnerable groups in the labor force; and
- Periodically engage external human rights experts to independently assess and verify these due diligence protocols. This will not only help prepare for the new E.U. law's implementation, but will also keep companies ahead of modern slavery prevention efforts that are becoming more internationally integrated.
Companies should also be aware that the European Union is expected to issue guidance to industry on complying with the new law. We anticipate that such guidance will provide greater detail on the responsibilities of commercial entities throughout the supply chain and how to conduct due diligence that effectively complies with the law and helps companies manage their forced labor risks. Many business enterprises – especially those with complex, multi-tiered supply chains – have struggled significantly with their compliance duties and due diligence expectations under the UFLPA, with industry continuing to press CBP and other U.S. agencies to issue guidance that contains greater details on how to comply with the UFLPA and establish a more predictable compliance regime. With E.U. regulators having closely studied the framework and implementation of the UFLPA, companies remain hopeful that regulators will avoid the compliance headaches in the U.S. market by issuing comprehensive guidance that industry can rely on.
We will continue to monitor this space closely and provide additional updates as E.U. Member States get closer to implementing the new forced labor law.
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