LkSG: SMEs under scrutiny

With the German Supply Chain Due Diligence Act (LkSG), the legislator is targeting companies with 1,000 or more employees. Nevertheless, the legislation also affects small and medium-sized enterprises (SMEs) indirectly. There is a considerable need for action.

Decisions in the European Parliament do not usually attract much public attention. The rejection of the EU Supply Chain Directive was an exception. It was intended to apply to companies with 500 employees and worldwide revenue of more than EUR 150 million. The EU directive initially failed because of the FDP’s veto. However, following another attempt in mid-March 2024, the legislation secured a majority in the European Parliament — with Germany once again abstaining. The original version was also weakened. Following a five-year transition period, the EU supply chain rules will apply to companies with at least 1,000 employees and revenue of EUR 450 million. After three years, the requirements will initially apply to companies with more than 5,000 employees and worldwide revenue of at least EUR 1.5 billion. In four years, companies with 4,000 employees and revenue of EUR 900 million will be affected. (More on this in the article “News from Brussels: the Supply Chain Directive”)

German companies have had to comply with the German Supply Chain Due Diligence Act (LkSG) since the beginning of 2023. Since 2024, companies with at least 1,000 employees worldwide have also had to scrutinise their suppliers more closely. In particular where environmental standards, forced labour or child labour are involved, companies in Germany bear responsibility from the raw material through to the finished product.

No reprimands for LkSG violations

The companies concerned appear to have done everything correctly so far. According to its own figures, the responsible Federal Office for Economic Affairs and Export Control (BAFA) did not have to impose any sanctions in 2023. This was the result of 486 inspections conducted by BAFA at companies. The sectors particularly affected were automotive, chemicals, pharmaceuticals, mechanical engineering, energy, furniture, textiles, and food and beverages. A further 78 inspections were carried out in response to specific causes and irrespective of sector.

Although the LkSG applies only from 1,000 employees, a small or medium-sized enterprise can encounter the Act’s requirements sooner than it might like. This is the case where it provides services or supplies products to another company that is itself subject to the obligations of the LkSG. The SME then qualifies as a “direct supplier” of the obligated company within the meaning of the LkSG.

Complicated enquiries to suppliers

Obligated companies obtain information from their suppliers for their risk analysis — for example, information about identified risks or violations; whether the supplier conducts its own risk analysis and which method it uses; raw materials, semi-finished products and services used for the product or service; and the operating sites of upstream suppliers.

Depending on the outcome of the risk analysis, obligated companies may have to implement preventive measures at their suppliers. These might include training on an agreed supplier code of conduct or contractual control mechanisms. If obligated companies identify breaches of the LkSG requirements, such as child labour in the supply chain, they must seek to remedy them.

The LkSG for the SME next door?

Although the legislator is targeting companies with 1,000 or more employees through the LkSG, it also affects small and medium-sized enterprises. Find out more in our white paper Implementing the LkSG simply: the CLARIUS.LEGAL guide for SMEs.

Download the white paper here with no obligation!

What SMEs can do when they become involved with the LkSG

If, referring to its LkSG obligations, an obligated company asks an SME for data on the origin of products or possible manufacturing risks, suppliers should first examine the reasons given. These should show that the obligated company is conducting a risk analysis within the meaning of the LkSG, which risks have been identified so far, and which questions arise from them regarding risks for the particular supplier.

When transmitting data to the obligated company, the supplier should examine which information it needs to protect, for example because it constitutes trade secrets.

The obligations for implementing suitable measures at the SME must be specified.

When asked to participate in preventive and remedial measures or in designing a complaints procedure, SMEs should ask for an explanation of which specific risks have been identified in their business area or supply chain, how the requested participation can be provided, and whether and how the obligated company will support this with its own resources.

This applies above all to their own legal obligations. SMEs should not give an obligated company a blanket contractual assurance that they meet all obligations under the LkSG or guarantee compliance with all LkSG standards in their supply chains (for example, an assurance of “compliance with all human rights in the supply chain”). If an obligated company demands this, it may itself constitute a violation of the LkSG and, if reported to BAFA, may lead to an inspection by BAFA.

One approach

Our LkSG Business Partner Monitoring enables you to implement the EU Supply Chain Directive and the German Supply Chain Due Diligence Act (LkSG) with technical and legal certainty.

This ensures efficient, cost-effective and legally comprehensive implementation of the statutory requirements. Our lawyers support you with legal expertise and experience in all relevant compliance matters. Legal tech solutions ensure efficient, holistic processing.

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