Supply chain compliance: update to the Federal Office for Economic Affairs and Export Control’s FAQs about the German Supply Chain Act

On 9 July 2024, the Federal Office for Economic Affairs and Export Control (Bundesamt für Wirtschaft und Ausfuhrkontrolle, BAFA) updated its Questions & Answers regarding the German Supply Chain Act (Lieferkettensorgfaltspflichtengesetz, LkSG) (the “Act”).

We summarise the interesting updates compared to the previous version from 24 July 2023 and provide a legal assessment of them below:

General principles

The answers to the FAQs are intended to offer affected companies initial guidance on the application requirements and due diligence obligations under the Act. The FAQs are relatively detailed, covering 18 categories with up to 15 individual questions.

The statements from the Federal Office for Economic Affairs and Export Control contribute to the interpretation of the Act and are particularly important in practice as the Federal Office monitors compliance with the Act.

Scope of application: definition of a company

The Federal Office for Economic Affairs and Export Control has significantly altered its answer to question 3.1, which concerns the definition of a company. The definition of a company under the Act now always includes commercial companies because they are predominantly engaged in entrepreneurial or economic activities. This also applies to non-profit enterprises according to the Federal Office. Legal entities under public law, however, only fall within the scope of the Act if they are engaged in entrepreneurial or economic activities in the market.

Although the Federal Office for Economic Affairs and Export Control bases its interpretation on the Act’s wording and explanatory memorandum, it nevertheless then specifies company forms that should always be considered within the Act’s scope if they meet the further requirements of section 1 of the Act. The Federal Office thus irrefutably assumes that the commercial companies it mentions always carry on entrepreneurial or economic activities. However, the Act and its explanatory memorandum do not include these “standard examples”. The Federal Office for Economic Affairs and Export Control’s interpretation thus deviates from the wording and explanatory memorandum of the Act.

The creation of these standard examples appears unclear: for instance, publicly owned hospitals are often organised as non-profit private limited companies. As major healthcare providers, they in any case fulfil state responsibilities for public services. In this area, they do not compete with private hospitals. Nevertheless, according to the standard example, they would be automatically subject to the Act. This example alone illustrates that it is preferable not to make the scope of application dependent on a company’s legal form. Instead, it should be examined whether the company engages in entrepreneurial or economic activities in the market in the sense described above.

In any event, for associations and legal entities under public law, it will remain important to determine whether they are engaged in business activities in the market.

Scope of application: temporary workers

According to 3.7 of the FAQs, temporary workers are to be regarded as employees of the hiring company regardless of the duration of their employment with the temporary employment agency.

Pursuant to section 1(2) of the Act, temporary workers must be included in the employee count of the hiring company if their employment exceeds six months. This means that there may be situations where temporary workers are counted as employees for both the hiring company and the temporary employment agency.

Scope of application: group parent company in a horizontal corporate group

To determine the number of employees in a corporate group in which the member companies are equal-ranking, legally independent entities, the Federal Office for Economic Affairs and Export Control explains in question 4.3 that employees are mutually attributed to equal-ranking parent companies. Additionally, the employees of all group companies beneath the parent companies are to be attributed to each equal-ranking parent company. This would result in both parent companies in a horizontal corporate group being subject to the Act’s obligations if the relevant employee threshold were exceeded. Moreover, when determining the Act’s scope of application, employees of companies without a direct corporate connection would also have to be considered.

In our view, this interpretation is difficult to reconcile with the wording of the Act. According to section 1(1) of the Act, employees have to be assigned to a “parent company”. However, in a horizontal corporate group, there is no single “parent company” since no individual company can independently control the whole group.

Policy statement: language

The response to question 9.4 is a welcome development. It indicates that a company can decide in which language or languages to issue its policy statement. This decision can be based on the company’s business activities and its target group.

If a company operates exclusively in an English-speaking market and English is the primary language spoken within the company, it is permissible to draft the policy statement solely in English. However, it should always be noted that, where the company is headquartered in Germany, it seems unlikely that a statement in German will no longer be needed.

Complaints channels: connection with the German Whistleblower Protection Act (Hinweisgeberschutzgesetz, HinSchG)

In its answer to question 12.2, the Federal Office highlights that a company can use a standardised complaints channel for reports both under the German Supply Chain Act and the German Whistleblower Protection Act. As a result, companies are not required to establish two separate channels.

The Federal Office for Economic Affairs and Export Control diverges from the recitals of the Corporate Sustainability Due Diligence Directive (CSDDD) regarding complaint mechanisms. Recital 60 of the CSDDD states that its complaints procedure should be understood as a mechanism separate from the whistleblower procedure outlined in the Whistleblower Directive. Consequently, the implementation of the CSDDD would require offering two distinct procedures. However, it can be argued that the recitals are not the wording of the law, but should be used for interpretation. Moreover, the actual transposition of the CSDDD into German law is still pending.

It is important to note that the channels must comply with both laws, meaning they must meet the requirements of the Whistleblower Protection Act, particularly regarding identity protection, as well as the requirements of the Supply Chain Due Diligence Act.

Scope of due diligence obligations: retail trade with home and third-party brands

In response to question 16.2, the Federal Office for Economic Affairs and Export Control addresses whether trading in third-party brands is covered by the term “supply chain”. According to the Federal Office, it does.

The Federal Office for Economic Affairs and Export Control asserts, without any further explanation, that a “retail company provides a service that also includes trading in third-party brands”. It would have been helpful if the Federal Office for Economic Affairs and Export Control had explained what constitutes a “service” that justifies the application of the Act. In academic discussions among legal scholars, there is debate over whether trading in goods qualifies as a service. Only a court decision is likely to provide clarity on this matter.

Even if trading in third-party brands is considered part of the supply chain, the scope of due diligence obligations is usually less extensive as the influence over third-party brands is typically much lower than over own brands.

While some of the clarifications are welcome, the Federal Office for Economic Affairs and Export Control’s changes will, in our view, create additional uncertainties for companies. Therefore, companies should always critically evaluate the Federal Office for Economic Affairs and Export Control’s answers. Although these answers can be helpful when applying the Act, it should be remembered that they represent a legal opinion and the Federal Office for Economic Affairs and Export Control may change its opinion again in the future.

Any questions?

You can find information on our range of advisory services relating to supply chain compliance, including the German Supply Chain Act, the CSDDD and the CSRD here.