New U.S Legislation Would Require Forced Labor Audits

Foley Hoag LLP - Global Business and Human Rights

Foley Hoag LLP - Global Business and Human Rights

[co-author: Christopher Piccione]

On February 3, Senators Josh Hawley (R-MO) and Kirsten Gillibrand (D-NY) introduced the Slave-Free Business Certification Act of 2022.  The legislation aims to provide U.S. policymakers with greater assurances that companies are taking concrete steps to eradicate forced labor where their supply chains directly involve workers’ inputs, but would also significantly increase their due diligence burdens.  Pursuant to the legislation, covered business enterprises would be required to conduct independent audits of their “direct” supply chains to determine if they involve forced labor.

The legislation would add to existing measures recently codified into U.S. law that are exclusive to the Xinjiang region of China by requiring such audits of any business, defined as an issuer by the U.S. Securities and Exchange Commission, that: (1) has annual, worldwide gross receipts exceeding $500 million; and (2) is involved in the mining, production, or manufacture of goods for sale.

The legislation would require audits that include interviews of a cross section of workers including men, women, migrant and local workers, workers on different shifts, and workers performing different tasks.  These audits must also include a review of company documents such as worker contracts and employment agreements, and age verification procedures to assess the company’s compliance with local forced labor laws.  Further, the bill provides workers with protection from retaliation for feedback provided during interviews that may be critical of the company’s policies and practices.

Following the audit, covered entities would be required to submit a publically available annual report to the Secretary of Labor containing the following information:

  • A disclosure of the covered business entity’s policies to prevent the use of forced labor by itself, its suppliers, and on-site service providers
  • A disclosure of what policies/procedures the entity applies to verify respect for labor rights in its supply chain, and evaluate and address any risks that it may involve forced labor
  • A disclosure of the steps taken by the entity to eradicate forced labor in its supply chain
  • A written certification, signed by the CEO, attesting to the entity’s compliance with these requirements

Each year the Secretary of labor would produce a report listing the entities that have failed to conduct supply chain audits and entities found to have forced labor in their supply chain.  The bill empowers the Secretary to impose up to $100 million in civil damages and $500 million in punitive damages for companies in violation of the legislation.

It is unclear whether the Slave-Free Business Certification Act of 2022 will become law.    Large corporations have refrained from commenting on the proposed legislation.  But given the severe monetary penalties and increased due diligence requirements contained in the bill, there is likely to be substantial pushback from industry if the measure advances further.

Aside from press releases by Hawley and Gillibrand, lawmakers in Washington have so far remained silent on the proposed legislation, and the measure does not yet have additional co-sponsors.  In the summer of 2020, Senator Hawley introduced a nearly identical proposal which never made it to the Senate floor for a vote.

Last December, Congress passed the landmark Uyghur Forced Labor Prevention Act, and federal agencies are already at work on an enforcement plan that will include detailed guidance to importers on the supply chain due diligence needed to comply with the Act.  That legislation passed with overwhelming bipartisan support.  While the Act’s passage led to a rare moment of political comity, some analysts have speculated that a broad set of lawmakers will be reluctant to expend a comparable amount of political capital to see the Slave-Free Business Certification Act to the finish line.

In addition, the Uyghur Forced Labor Prevention Act has also generated a massive amount of work for both regulators and companies, as they seek in the coming months to craft a due diligence framework for supply chains exclusive to one region in one country.  With many aspects of the that due diligence process currently undefined, it wouldn’t be at all surprising if companies had questions regarding the exact due diligence standards called for by the Slave-Free Business Certification Act.

Like the Uyghur Forced Labor Prevention Act, the Slave-Free Business Certification Act would likely lead to detailed guidance on designing a forced labor audit.  But the latter Act is distinct in that it focuses on direct supply chain segments, whereas the former may encompass many tiers below that.  The Slave-Free Business Certification Act requires rulemaking (which most likely will include an extensive public comment period) no later than 180 days after the law comes into effect.  The rulemaking process will ideally provide clarity on the difference between direct and indirect supply chain components.

The Slave-Free Business Certification Act follows a growing effort by federal and state legislators to institute mandatory human rights due diligence standards, as well as landmark statute in the European Union setting a strict environmental and human rights due diligence standard for companies active there.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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