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California’s Anti-Slavery and Human Trafficking Act Can Potentially Impact Businesses Nationwide
The California Transparency in Supply Chains Act went into effect on Jan. 1, 2012, and even though it is a state law, because California’s economy is so large and because it applies to all companies that conduct business in that state, it impacts companies across the nation.
The Act was designed to encourage companies to take efforts to eliminate slavery and human trafficking from their supply chains by requiring them to disclose to consumers their efforts towards social responsibility. By requiring them to do so, consumers may then choose which companies they patronize.
So, what does this mean to your business?
“I think number one, companies need to make sure whether this Act applies to them or not. And I think a lot of people think ‘oh we’re not doing anything in California’ so it doesn’t apply to us.’ But if you’re selling anything in California, it applies to you,” said Maureen Gorsen of Alston + Bird.
Under the Act, a “covered entity” is any retailer or manufacturer that does business in California with annual sales exceeding $100 million. A covered entity must make five disclosures on its website: 1) that it engages in verification of its supply chains to “evaluate and address risks of human trafficking and slavery”; 2) that it audits its suppliers for compliance with company standards for human trafficking and slavery (and whether those audits are announced or unannounced); 3) that the company requires its direct suppliers to certify that materials incorporated into the product comply with the laws regarding human trafficking and slavery in the countries where they are doing business; 4) that the company maintains internal accountability standards for its own employees regarding human trafficking and slavery; and 5) that it trains employees and management who have direct responsibility on supply chain management on the subject of human trafficking and slavery (California Transparency in Supply Chains Act of 2010 [SB 657]).
“There’s no requirement for you to physically do anything in your supply chain, but a lot of companies we talk to, when they find they’re not doing anything, are not satisfied. So we look at what existing policies they have, what existing employee training they have, what existing supplier policies they have and how to tweak those so that they can answer some of these disclosures in the affirmative,” said Gorsen.
“And some clients want to go way above and beyond that. They want to be at the front edge of this and they look into really beefing up their policies and auditing and verification procedures,” she said.
Gorsen said that companies should not ignore their requirements under the Act.
“At minimum, you better know whether this applies to you and you better know what your answers are to those five questions and be sure that it’s somewhere on the website and in a very conspicuous spot,” she said.
She said that she has not seen any enforcement actions yet, but this is only because the act has only been in effect for several months.
“I would imagine that the NGO groups are scouring the websites and seeing what disclosures are out there and then compiling lists of companies that have no disclosures. I would imagine that there will be some filings later this year when they see who’s doing what,” said Gorsen.
Gorsen said she’s seen some “pretty big companies” who did not have any disclosure whatsoever, and others that have them but which leave out some important nuances of the disclosure. Others, she said, may not meet the “easily understood and conspicuous” requirement of the Act.
“If a company doesn’t have facilities in California, then they may not be following things that closely. [As for] the out-of-state sellers, a lot of them could be caught unaware,” said Gorsen.
Matthew Fischer of Sedgwick, LLP says that companies should be careful, however, not to “jump the gun and put something up on their website without actually having implemented the various procedures identified.”
Even if your company is not directly affected by the Act, it should not assume that the Act won’t affect them down the road, said Fischer.
“For instance a supplier’s customers who do conduct business in California may require that supplier to certify that the materials used in its products comply with the laws regarding human trafficking and slavery,” he said.
Fischer said that it would be “hard to imagine” a retail or manufacturing industry that might not potentially be affected by the Act—especially those that deal with clothing, retail and electronics.
As for best practices that companies can adopt in order to stay in compliance with the Act, Fischer recommended that they “engage and engage early” with outside counsel or consultants to determine whether the Act applies to them.
He also recommended that companies incorporate the five disclosure requirements under the Act into their existing compliance programs.
“It is easily adaptable because there is so much flexibility and there are no hard requirements—the Act is just about disclosing. … And then, the third one would be just making sure you have one person in the company who takes responsibility for that disclosure. That person should make a point in annual audits or reviews to ensure that in fact what has been disclosed is being practiced,” said Fischer.
“I think the Act is a victory for the anti-slavery advocates because … even though there are not enough resources in California to go police the global supply chain, the idea of getting people who are selling in California to be agents of enforcement—just giving them an affirmative duty to disclose what they are doing, and just getting them in that mindset—I think is a huge victory for these folks,” said Gorsen.
Register for the complimentary CLE Webinar on May 9 from 2 P.M. – 3:30 P.M. EST worth 1 ½ CLE credits on Human Rights and Compliance Across the Supply Chain - California’s Supply Chain Transparency Act and other State and Federal Requirements. Register now