Human rights come at a cost: Why an appropriate pricing policy is imperative for the implementation of the German Supply Chain Due Diligence Act
In 2023 the German Act on Corporate Due Diligence in Supply Chains will enter into force. In this text we argue that, for the law to be effective, companies must pay their suppliers a price that enables them to respect human rights. This also includes the right to a living wage.
The Supply Chain Act requires companies to assess the extent to which their own sourcing model and their purchasing and pricing practices pose risks for human rights and environmental violations. If this is the case, it must "must lay down appropriate preventive measures in its own area of business", which includes in particular "the development and implementation of appropriate procurement strategies and purchasing practices that prevent or minimize identified risks". (§6 para. 3, 2).
This can be a significant step forward towards respect for human rights, more environmental protection and ultimately more justice along global supply chains. In price-sensitive sectors, the struggle for the lowest price and fastest availability on the market continues along the entire supply chain. Numerous studies and reports have already drawn attention to the fact that companies in these sectors systematically squeeze prices, shorten delivery times and reserve the right to cancel or change orders at short notice. Due to their clients’ market power, suppliers often have no choice but to accept those conditions.
Squeezing prices has a serious impact on workers in global supply chains. It is the reason for low wages and incomes, which often results in excessive overtime to generate additional income. Likewise, low wages and incomes contribute to child labour. If parents do not earn enough, children have to contribute to the family income. The German Supply Chain Act addresses the responsibility of companies for such abuses. However, for the Act to be effective, it must necessarily mean that companies adjust their pricing policies. Human rights come at a cost.
Time off for union members costs money. Investing in better environmental protection costs money. Paying decent wages costs money. Fire safety and building security measures cost money. These are just a few examples of the costs associated with what the Act aims to achieve. No company can claim to be acting in accordance with the law if it simply passes on these costs to its suppliers. Hence, if not yet done, companies need to start developing pricing models that adequately reflect the increasing demands on suppliers. At best, these components are isolated as non-negotiable in price negotiations. This is the only way to ensure that low consumer prices are no longer based on human rights violations and environmental destruction.
These non-negotiable components must also include the cost of adequate wages. As stated in the law, adequate wages must be at least equal to the minimum wage established under the applicable law (§2, para. 8 LkSG). However, if these are too low, an adequate wage can also be above this level. This is the case if the minimum wage is not sufficient for an adequate living, as stipulated in the International Covenant on Economic, Social and Cultural Rights (see for example Grabosch (2021) “Das neue Lieferkettensorgfaltspflichtengesetz“, Nomos Verlag, as well as the Government statement on the Act). The local cost of living of workers and their families as well as local social security benefits must therefore be taken into account when calculating an adequate wage. It is well known that in most countries where raw materials, food and clothing are produced, minimum wages do not provide workers and their families with a decent standard of living.
In terms of the Supply Chain Act, this constitutes a violation of the protected legal positions. For companies, this means that they must (1) ensure that their purchasing prices allow for the payment of adequate, i.e. living wages and incomes, and (2) ensure in the long term that rising wages and costs of living are taken into account in price negotiations.
In addition, the purpose of the law results in the need for companies to close the gap between minimum and living wages: The Act is based on the UN Guiding Principles on Business and Human Rights, which stipulate that companies must take effective measures to prevent human rights violations. This principle of "effectiveness" is also found in numerous places in the Supply Chain Act (see e.g. §4 para. 1 and 2 LkSG). Squeezing prices is a root cause of too low family incomes, which in turn fuel child labour. Likewise, workers cannot exercise their right to collective bargaining if companies are not willing to reflect rising labour costs in their purchasing prices. This means that if companies want to take effective action against human rights violations, they must necessarily stop squeezing price and enable workers and smallholder farmers in their supply chains to earn wages and incomes that allow for a decent standard of living.
Anneke Bremer has worked in various positions with companies on the implementation of their human rights due diligence, including for the Partnership for Sustainable Textiles and as a consultant for twentyfifty.
Tim Zahn is a global supply chain, human rights and migration officer at Oxfam Germany and works on the implementation of human rights due diligence in global food supply chains.
In the German version of this blog entry, the authors propose concrete indicators that BAFA (Federal Office of Economic Affairs and Export Control; the authority responsible for implementing the Supply Chain Act in Germany) should use to check whether a company has an adequate pricing policy that meets its due diligence obligations and enables the payment of a living wage.