Germany: Supply Chain Act Expands

As of this year, the scope of the German Supply Chain Act has expanded, and more companies inside and outside Germany need to make sure they are in compliance. In the act’s first year when companies with over 3,000 employees were affected, 1,500 to 2,000 companies fell under the scope of the act. With the expanded applicability to companies with over 1,000 employees, 4,000 to 5,000 companies in Germany will need to make sure they comply.

Smaller Companies Now in Scope

Midsize companies that are now within the scope of the act need to make sure they are prepared for its requirements. While the requirements are similar to those for companies with over 3,000 employees, there are certain challenges and ambiguities for smaller companies.

“You have to do the same things,” said Sebastian Runz, an attorney with Taylor Wessing in Dusseldorf. “You have to do a risk analysis, you have to take preventive or remedial measures; if you find any risks or violations, you have to establish a complaint procedure, and you have to file a report with the authorities once per year. All this stays the same.”

But smaller companies often have more limited resources that can be dedicated to the due diligence work that the Supply Chain Act requires. “The smaller companies perceive this as a huge bureaucratic burden, which is not really easy to accommodate,” said Michael Masling, an attorney with Morgan Lewis in Frankfurt.

Foreseeing this, the act provides that smaller companies need to fulfill the due diligence requirements “appropriately,” leaving some ambiguity and, in theory, flexibility. “It’s difficult because no one really defines what’s appropriate, what’s not appropriate,” Runz said. “The authorities have published a lot of handouts, and most of the handouts don’t distinguish between large and small companies.” There is still some time for smaller companies to sort through the ambiguity, as April 2025 is the first reporting deadline for companies newly in scope.

How Are Companies Outside Germany Impacted?

Companies outside Germany can also be affected by the Supply Chain Act and should be aware of how they might be affected and what they should do to prepare. Companies with subsidiaries in Germany or German companies with subsidiaries abroad likely fall under the umbrella of the act.

For international companies that are based outside of Germany but have employees in Germany, it might be difficult to determine if the act applies.

“It’s getting a little bit tricky as to how the counting of the employees works, in order to get in scope or to stay out of scope of the act,” Masling said. “Guidance from the regulator considers a bottom-up calculation, so you look at the various subsidiaries that you have in the country and then you start counting from the lower-tier subsidiary to the upper-tier subsidiary holding company.”

If a company is headquartered in Germany but has subsidiaries abroad, those subsidiaries would also fall under the scope of the act.

Companies that are not based in Germany might also be affected by the act, if they are on the supply chain of a German company that is in scope. “The Supply Chain Act also affects companies around the globe, even if they don’t employ any workers in Germany but are within the supply chain of a company with employees in Germany,” said Julia Hoeren, an attorney with Reed Smith in Munich. “Therefore, also smaller companies with no branch in Germany might be approached by their customers which have to enforce the act within their supply chain. Non-German companies will be confronted with contractual amendments ensuring compliance with human rights and environmental regulation such as additional audit rights and complaint procedures.”

How to Prepare

Non-German companies that fall under any of these categories need to prepare to comply with the act and determine whether or not they fall within its scope.

“Large international corporations don’t really want to play games, so they are really not thinking about avoiding being in scope, but rather about how to make it most efficient, so that they can comply with the set of regulations,” Masling said. “Most of them are clearly dedicated to sustainability and human rights, and they want to comply with it. It’s just a question of, how can we do this in the most effective way?”

Non-German companies without a branch in Germany but that might be on a supply chain of a German company need to be alerted and prepared. It is the responsibility of the German company in scope to make sure its supply chain is also in compliance.

“In most cases, the customers of a non-German company will approach their supplier to amend current contractual agreements with respect to the German Supply Chain Act,” Hoeren said. “Even if non-German suppliers have not been contacted by their customers yet, they should be aware of the obligations under the Supply Chain Act. A timely risk analysis helps to identify risks before the customer raises concerns that might lead to unpleasant consequences.”

Next Steps, Depending on EU

It remains to be seen what will happen with the German Supply Chain Act in the future. How strictly regulators will enforce it is still a question, especially for smaller companies that have only just come into scope. The EU is currently weighing an initiative that would supersede the German version of the act and would potentially include much smaller companies that have as few as 250 employees.

The one thing that’s certain is that the German Supply Chain Act is still evolving. According to Runz: “I think there will be some surprises in the future.”

Katie Nadworny is a freelance writer in Istanbul.