Beginning Jan. 1, 2012, the California Transparency in Supply Chains Act of 2010, or "S.B. 657," will require retail sellers and manufacturers "doing business" in California to post certain disclosures on its websites. The new legislation is aimed at increasing consumer awareness of human trafficking and slavery in the supply chains of products and, ultimately, improving human rights protections in global supply chains.1
Disclosure Requirements
A company subject to the requirements of S.B. 657 must disclose the extent to which it engages in each of the following actions designed to eliminate human trafficking and slavery from its supply chain:2
(1) Engages in verification of product supply chains to evaluate and address risks of human trafficking and slavery (disclosing if the verification was not done by a third party);
(2) Conducts audits of suppliers to evaluate compliance with company standards (specifying whether the audit was independent and unannounced);
(3) Requires direct suppliers to certify that the products made comply with laws of the country in which the supplier does business;
(4) Maintains internal accountability standards for employees and contractors failing to meet company standards concerning human trafficking and slavery; and
(5) Provides employees and management who have responsibility for supply chain management with training on trafficking and slavery, particularly with respect to mitigating risks within product supply chains.3
Companies That Must Comply with S.B. 657
This law will affect every "retail seller and manufacturer" with annual worldwide gross receipts exceeding $100 million dollars and "doing business in the state" of California.4 Whether a company is considered a "retail seller" or "manufacturer" depends on whether the company has "manufacturing" or "retail trade" as its principal business activity code on its California tax return.5 The Attorney General will receive a list of all the retail sellers and manufacturers who will be required to post a disclosure on their website from the Franchise Tax Board.6 Those who fail to post a disclosure, if required to do so, will be considered to be in violation of the law.
Section 23101 of the California Revenue and Taxation Code defines "doing business" as "actively engaging in any transaction for the purpose of financial or pecuniary gain or profit."7 As of Jan. 1, 2011, a company is "doing business" within the meaning of section 23101 if any one of the following four conditions is met: (1) the company is organized or domiciled in California; (2) sales in California for the applicable tax year of the company exceed the lesser of $500,000 or 25 percent of the company's total sales; (3) the value of the real and tangible personal property of the company exceeds the lesser of $500,000 or 25 percent of the company's total real and tangible personal property;8 or (4) the amount paid by the company in California for compensation exceeds the lesser of $50,000 or 25 percent of the total compensation paid by the company.9
Notably, no matter where a retail seller or manufacturer is domiciled, it will be subject to S.B. 657 if it has annual global gross receipts over $100 million and fulfills any of the four criteria above.
Preparing for Compliance
S.B. 657 does not impose requirements on companies, other than to disclose whether they have policies and procedures in place to monitor human trafficking and slavery in their supply chains. The sole remedy for a violation of S.B. 657 (failure to post the necessary disclosure on the company website) is an action by the California Attorney General for injunctive relief to force compliance.10 In addition, the law states that it does not limit remedies available for a violation of any other state or federal law (e.g., a suit by a consumer for false advertising).
Compliance with the law could technically be achieved by disclosing that the company has no policies and does not audit or inquire about labor conditions. However, such an approach may have undesirable business and public relations consequences. Accordingly, a better approach is to review product supply chains and consider adopting or updating policies for suppliers, employees and contractors that suit the company's business and industry, and demonstrate an active role in the elimination of human trafficking and slavery from the company's supply chain. In addition, there will be increased pressure to enhance policies related to human rights based upon the disclosures other companies make. Some options to guide such a review are discussed below.
Verification of Product Supply Chain
Many companies have already adopted a Code of Conduct or adhere to industry-specific Codes of Conduct. Such policies may mandate compliance with labor and employment laws in countries in which they operate or with which they do business. They also may include the responsibility to report any known violations with respect to human trafficking and slavery. Further, companies may also choose to require their suppliers to adhere to all or part of existing Codes of Conduct.
Another strategy may be to focus particular scrutiny on the countries and/or goods relevant to their operations that have been identified as potentially susceptible to human trafficking and slavery. Based upon a report published by the U.S. Department of Labor, 122 goods were found to be produced with forced labor or child labor in approximately 60 countries. Examples of such goods include: cotton (15 countries), sugarcane (14 countries), coffee (12 countries), rice (eight countries), cocoa (five countries) , bricks (15 countries), garments (six countries), carpets (five countries) and footwear (five countries), among others.11
Conducting Supplier Audits
Policies for conducting supplier audits are largely a function of the nature of the company's relationship with its suppliers. Some companies use supplier audits to verify compliance with a Code of Conduct, and to identify potential issues and needs for corrective action. Audits may be conducted by company personnel, announced in advance and, as a collaborative measure, conducted in the presence of the supplier's management. In addition, companies may also use unannounced audits on a regular basis. Such audits may also be used in response to a specific allegation of a violation of law or policies applicable to suppliers. Companies may also partner with suppliers to improve their own auditing capabilities. Finally, there are a number of third party audit firms who may be engaged to perform supplier audits.
Obtaining Supplier Certifications
Companies should work with existing suppliers, particularly those in countries that have been identified as high risk for human trafficking and forced labor, to obtain certifications that none of the products purchased from those suppliers were made by victims of human trafficking or forced labor. Certifications should be maintained to demonstrate the due diligence conducted with suppliers.
Training and Maintaining Internal Accountability Standards
Companies should consider training employees responsible for supply chain management on how to identify forced labor and how to respond to allegations or discovery of forced labor by suppliers. Training may be accomplished through the adoption of written policies and/or Codes of Conduct, which include provisions aimed to ensure that child or forced labor are not permitted at any company business partner or supplier's operations. Such policies could be disseminated to and signed by all relevant employees and contractors on an annual basis. Companies may also conduct in-person or web based management training on industry-specific or company-specific supply chain issues. To ensure effectiveness, management's performance reviews, promotions, compensation and continued employment could be dependent in part upon the employee's participation in training and compliance with specific job responsibilities designed to identify forced labor and promote the use of corrective action if forced labor is discovered. –
Conclusion
Drinker Biddle's Customs & Trade and Labor & Employment practices can assist companies with determining if S.B. 657 will apply to them and in preparing for compliance with the law by training employees on the applicable corporate policies related to this law, providing guidance on certification language that should be implemented with suppliers, assisting with developing a supplier audit plan, and drafting or reviewing existing policies and procedures addressing human rights compliance.
Footnotes
1 S.B. 657 § 3(a)(1) available at http://info.sen.ca.gov/pub/09-10/bill/sen/sb_0651-0700/sb_657_ bill_20100930_chaptered.html (last visited July 6, 2011).
2 If the company does not have a website, it will be required to provide a copy of the disclosure statement within 30 days of receiving a written request for such information from a customer.
3 S.B. 657, § 3(c).
4 S.B. 657, § 3(a)(1).
5 S.B. 657 §3(a)(2)(C&D).
6 S.B. 657 § 4(a)(1).
7 S.B. 657 § 3(a)(2). The definitions of "manufacturers," "retail sellers," "doing business," and "gross receipts" are also found in the California Revenue and Taxation Code (specifically Sections 18401, 23101, and 25120).
8 Sales of tangible personal property are deemed to occur "in California" if (a) the property is delivered to a purchaser (other than the U.S. government) in California, or (b) the property is shipped from an office, store, warehouse, or other storage facility in California and the purchaser is the U.S. government or the company is not taxed in the state of the purchaser. Sales other than sales of tangible personal property, are deemed to occur "in California" if all, or a greater proportion of, the income producing activity is performed in California. Cal. Rev. & Tax § 23101(b) (2), 25135 and 25136.
9 Cal. Rev. & Tax § 23101(b)(3). available at http://www.leginfo.ca.gov/cgi-bin/calawquery?codesection= rtc&codebody=&hits=20 (last visited July 6, 2011)
10 S.B. 657 §3(b)(5)(d).
11 U.S. Department of Labor, "List of Goods Produced by Child Labor or Forced Labor," 21-28 (2009) available at www.dol.gov/ilab/programs/ocft/PDF/2009TVPRA.pdf.
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