The EU’s new forced labour ban: context, content and consequences for companies

Overview

The European Parliament has given its final approval to a new Regulation aimed at enabling the EU to prohibit the sale, import and export of goods made using forced labour, known as the Forced Labour Regulation (FLR).

The arrival of the FLR brings the EU closer to the United States in having strict product control measures to prevent goods made with forced labour from being traded in its market. It is designed to operate alongside and to reinforce the EU’s Corporate Sustainability Due Diligence Directive (CSDDD) which was recently formally adopted. The CSDDD compels in-scope companies to conduct effective human rights and environmental due diligence throughout their own operations and on certain business partners in their value chains.

Scope of the FLR

Under the FLR, “forced labour” means “forced or compulsory labour, including child labour”. Specifically, it is “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/herself voluntarily”. This is as per the standards established by the ILO’s Convention on Forced Labour, 1930 (Article 2), with some exceptions.

The FLR will encompass the use of forced labour for all products, without targeting specific companies or industries, across the entire supply chain, including at any stage in the extraction, harvesting, production or manufacturing of products. Accordingly, the prohibition applies irrespective of whether it is the final product, one of its component parts or a raw material that is affected by forced labour.

The FLR will apply to all businesses that place or make available products within the EU, or which export products from the EU market. Entities are therefore in scope regardless of where they are located and regardless of any threshold of EU-generated turnover.

If a product is deemed to have been made using forced labour, it will not be possible to sell it on the EU market and shipments will be intercepted at the EU’s borders (ingoing or outgoing). This includes products sold online to EU consumers. Member State authorities and the European Commission (EC) will be able to investigate suspicious goods, supply chains and manufacturers.

Investigations pursuant to the FLR

The EC will be responsible for creating a list of geographical areas and economic sectors at high risk of using forced labour. The database, which will be indicative and non-exhaustive, is intended to identify forced labour risks in specific geographies or with respect to specific products or product groups, with special focus on widespread and severe forced labour risks, based on reliable and verifiable information from international institutions, such as the ILO and the UN, and research or academic institutions. Key information for competent authorities in deciding which products to investigate will come from this database of forced labour risks, in addition to information submitted by the public.

Where the suspected forced labour is taking place outside the EU, the EC will act as lead competent authority. Where it is taking place within the EU, the relevant Member State will designate a competent authority responsible for investigating and enforcing the suspected use of forced labour in the company’s supply chain, through a two-part investigation process (preliminary and formal).

Competent authorities must follow a risk-based approach when assessing the likelihood of a violation under the FLR, using criteria including: (i) the scale and severity of the suspected forced labour, (ii) the quantity or volume of products placed or made available on the EU market and (iii) the proportion of the product suspected to have been made with forced labour.

Before undertaking a formal investigation, competent authorities should request from the business under assessment information on any actions taken to identify, mitigate, prevent or terminate risks of forced labour or remedy forced labour cases in their operations and supply chains with respect to the relevant product. If, following this preliminary investigation, a competent authority has a "substantiated concern of a violation", it can conduct a formal investigation.

When requesting information during the investigation, the authorities should prioritise (to the extent possible) the steps in the supply chain that are as close as possible to where the likely risk of forced labour occurs and take into account the size and economic resources of the business (in particular whether it is a micro, small and medium-sized enterprise (SME)) and the complexity of its supply chain, the quantity of products concerned, as well as the scale of suspected forced labour.

Those investigating should be guided by the principle of proportionality – all measures and actions carried out during the investigatory process should be suitable and necessary to achieve the objective of the FLR and should not impose a disproportionate burden on businesses.

Consequences of a forced labour finding

If the investigation concludes that forced labour has been used, the authorities can prohibit the product from being sold in, or exported from, the EU and order the relevant economic operator to withdraw and dispose of the product in accordance with applicable law. In practice, the goods will be donated, recycled or destroyed. Other Member States will be required to recognise and enforce that decision. Businesses can also be fined according to penalties set by Member States.

Where goods have been removed from the market, they will only be allowed back on the market after the company demonstrates that it has stopped using forced labour in its operations or supply chain and remedied any relevant cases.

Practical guidance ahead of implementation

EU Member States have three years – until 2027 – to start applying the FLR, but given the potential complexities associated with identifying and addressing risks of forced labour in the supply chain, companies that place goods onto or export goods from the EU market should begin to take steps now to prepare.

The EU has just set out its standards for good human rights due diligence in the CSDDD. CSDDD applies to EU companies with more than 1,000 employees and a net worldwide turnover of more than €450 million or non-EU companies with more than €450 million net turnover in the EU,  but – in practice – will have a much broader indirect effect because in scope companies will necessarily require their business partners to upgrade their human rights and environmental due diligence in line with the CSDDD, effectively cascading its standards throughout the private sector.

For businesses importing/exporting goods in the EU market that are not within the direct scope of CSDDD, taking steps voluntarily and progressively to align with CSDDD standards (in so far as possible and proportionate) will likely be the most effective means of spotting and addressing risks of forced labour, before potential sanctions under the FLR become an issue, or alternatively the most effective means of responding to a preliminary investigation.

In practical terms, alignment with CSDDD standards is likely to include looking at and taking advice  on the following:

• Creating or updating a human rights due diligence policy and code of conduct.
• Putting in place an ongoing and dynamic risk assessment process, focusing on the most salient risks of forced labour in your direct operations and supply chain; a “one and done” pre-contractual risk assessment is unlikely to be effective.
• Opening up lines of communication and collaboration with your suppliers and other stakeholders as appropriate (e.g., civil society groups and other buyers) in order to surface risks and concerns and identify solutions.
• Establishing operational-level grievance mechanisms for people and communities who may be adversely affected by forced labour in your operations or supply chain.
• Monitoring the effectiveness of your forced labour due diligence, including interrogating the effectiveness on the ground of any supplier audits conducted by third parties.
• Revisiting contractual arrangements with suppliers. Contracts often seek to shift the risks of forced labour onto the supplier which, in the context of the FLR, may actually serve to increase risks to the buyer (i.e., by incentivising suppliers to suppress forced labour issues to win or retain contracts). Buyers should instead consider incorporating contractual provisions that allocate risks between buyer and supplier appropriately and drive a collaborative approach to identifying and addressing forced labour risks. 

For more information and tailored advice as needed on the FLR, please email your Charles Russell Speechlys contact.