Franchisors and parent companies supplying goods for sale in Canada should begin to evaluate and address the ethical standards of their supply chains. Bill S-211, An Act to enact the Fighting Against Forced Labour and Child Labour in Supply Chains Act and to amend the Customs Tariff (the “Act”) will impose annual reporting obligations on Canadian businesses and their foreign parent companies to prove that they are preventing and reducing the risk of forced or child labour from being used at any step in their supply chain. The Act is expected to come into force on January 1st, 2024.
Brief Overview of the Act
This legislation applies to both private entities and government institutions. Those subject to its provisions will be obligated to provide annual reports to the Minister of Public Safety and Emergency Preparedness, due on May 31st each year, commencing in 2024. Of particular note, Section 11(3) specifies the mandatory contents of these reports:
- The entity’s structure, activities and supply chains;
- Its policies and due diligence processes in relation to forced and child labour;
- The parts of its business and supply chains that carry a risk of forced or child labour being used and the steps it has taken to assess and manage that risk;
- Any measures taken to remediate any forced or child labour;
- Any measures taken to remediate the loss of income to the most vulnerable families that results from its measures taken to eliminate the use of forced or child labour;
- The training provided to employees on forced and child labour; and,
- How the entity assesses its effectiveness in ensuring that forced and child labour are not being used in its business and supply chains.
Primary Aims of the Act
The overarching objective of the Act is to prevent goods that have been produced in connection with forced or child labour from entering the Canadian marketplace. The Act will impose the following measures in order to achieve this objective:
- Supply Chain Transparency. The reporting obligations require companies to disclose information about their supply chains, including the measures they have taken to ensure there is no forced or child labour present at any point.
- Due Diligence. Companies whose goods are sold in Canada will now have a legislated responsibility to mitigate any risks of human rights abuses within their supply chains. Documenting this due diligence process is of utmost importance.
- Public Reporting. The Act strives to provide Canadian consumers with an opportunity to make educated purchases that align with their ethical standards. Therefore, the reporting obligations require that the reports are published on a registry on the Public Safety Canada website, as well as in a prominent location on the reporting entity’s website.
- Penalties for Non-Compliance. Failure to comply with the required ethical standards may result in being found guilty of an offence punishable by summary conviction, as well as a fine of up to $250,000. This liability can also be extended to the Directors, Officers and agents of the company.
Impact on Subsidiaries and Franchise Systems doing Business in Canada
Many franchisors oblige their Canadian franchisees to source products from the franchisor or designated suppliers. Similarly, most parent companies directly supply their Canadian subsidiary retailers with the goods they are to sell. As a result, such franchisors and parent companies that meet the threshold of $40 million in revenue, $20 million in assets or the employment of an average of 250 employees, are required to ensure that their supply chain has not violated the Act by employing prohibited persons. In light of the Act’s enforcement, these processes may require significant restructuring, impacting not only Canadian incorporated companies but also entities exercising control over Canadian companies. Here’s how the Act will affect franchise systems and retail chains that operate in Canada: :
- Compliance Burden. Companies that are deemed to control Canadian companies will be captured by the Act. There is no question that a parent-subsidiary relationship will be captured by this and for the purposes of the Act, franchisors that have mandatory supplier requirements in their franchise agreements will also likely be captured. Parent companies and franchisors both must ensure compliance prior to the first report in May 2024. The Act allows any controlling entity to submit a joint report with the Canadian company.
- Brand Reputation. The public reporting requirement will result in the public learning about a business system’s supply chain, which parent companies and franchisors consider proprietary and confidential. It will be important to keep this in mind when drafting the reports, to retain as much control over the franchise system’s brand perception as possible.
- Competitive Advantage. Many systems will find that it is difficult to comply with the Act without drastically changing their product or the price at which the product is sold. Striking a balance between offering ethically sourced products, while maintaining the product’s current price and quality will be attractive to consumers, and will be a new factor that sets brands apart.
- Global Alignment. Franchise systems and retail chains that currently operate in countries where similar legislation is already in place, as described in the following section, will find that they can adapt the Canadian arm of their business to align with those strategies. This will result in a more globally uniform strategy.
Following International Trends
At the fore front, the Act is part of a broader global trend where countries are implementing legislation to combat modern slavery, human trafficking, and unethical labor practices in their supply chains. In doing so, Canada is joining the United Kingdom (UK), Australia, and the European Union (EU), which have already enacted or proposed similar measures. Franchise systems operating in any of these regions should already have processes in place that allow for compliance with ethical sourcing standards.
In 2015, the UK also enacted legislation entitled the UK Modern Slavery Act, to combat modern slavery in supply chains. The legislation was accompanied by a Guide entitled Transparency in Supply Chains: a practical guide. Given the absence of regulations at this time as to how the Act will apply to corporations doing business in Canada, the UK Guide can provide valuable insight. Its appendices include examples on how to structure the reports, what should be included in the reports and the changes that should be made to internal operations to ensure due diligence.
The new Canadian legislation will broaden the scope of some existing regulations implemented in Europe. The Act introduces a stricter applicability threshold than legislation enacted in certain European countries, as it applies to companies doing business in Canada. This heightened criterion should warrant particular attention from smaller enterprises based in countries such as France and Germany.
As of January 2024, the German legislation exclusively pertains to companies with a workforce exceeding 1,000 employees in Germany. Similarly, the French legislation extends its reach to companies with more than 5,000 employees in France or 10,000 employees globally. For French and German companies falling below these employee thresholds but maintaining a presence in Canada, a comprehensive assessment of their supply chains is imperative.
In addition to the Canadian Act, the EU has proposed a regulation with the potential to impose the same applicability threshold of 250 employees, entitled “Regulation of the European Parliament and of the Council on prohibiting products made with forced labour on the Union market”. In October 2023, a joint report on the proposed regulation between the Committee on the Internal Market and Consumer Protection (IMCO) and the Committee on the International Trade (INTA) was confirmed in the European Parliament as their position in the November trilogue negotiations. If adopted, the regulation will halt all import and export of goods manufactured through forced labour at the EU’s borders. The regulation is currently awaiting the parliament’s position in the first reading and may not be in force for a few years, but given their stringent similarities, adaptation to the Canadian Act can result in advanced preparedness.
Preparing for Compliance
Business systems have a range of strategic measures to choose from to proactively prepare for the impending reporting obligations, which are set to become due in May 2024. These actions will empower them to navigate the regulatory landscape effectively:
- Supply Chain Review. Conduct a review of all supply chains and invest in due diligence procedures. This entails extending the scrutiny beyond immediate suppliers, delving deeper into the supply chain hierarchy to address potential issues. It will be important to be able to prove these steps have been taken through documentation.
- Collaboration with Stakeholders. Where appropriate, work with a local non-governmental organization or any other relevant stakeholder to establish effective strategies for addressing and rectifying any instances of forced labor. Genuine efforts to eradicate human rights violations within the supply chain will not only enhance ethical compliance but also demonstrate a commitment to responsible business practices.
- Supplier Contract Termination. Where it is not possible to directly address a human rights violation, explore how to terminate the supplier contract as soon as possible.
- Integration of Ethical Business Practices. Consider integrating ethical business operations into the brand’s image sooner than later. This proactive approach aligns the brand with evolving consumer preferences and demonstrates a commitment to responsible and sustainable operations.
- Franchise Agreement Review. Conduct a review of franchise agreements with Canadian franchisees to adjust any supplier provisions accordingly. Limiting the level of control over Canadian franchisee’s supply chain may assist in alleviating liability, should compliance become an issue.
- Use existing resources. It is important to note that tools currently exist to help socially-conscious consumers make informed purchasing-decisions. As an example, KnowTheChain.com offers benchmarks and assessments evaluating and scoring companies on their efforts to address and combat forced labour. By following the structure of these reports, your company may gain a better understanding as to what forced and child labour look like in today’s world.
- Starting early. By taking action on the above in advance of enactment, issues can be addressed earlier and more notice can be provided to third parties, if need be. This will also allow for further research to be conducted on entering agreements with suppliers who comply with the Act.
Bill S-211 represents a significant step towards greater transparency and ethical sourcing within supply chains in Canada. While it imposes new obligations on companies selling imported goods, it also offers the opportunity for businesses to demonstrate their commitment to socially responsible business practices. However, the consequences of non-compliance are alarming, not only from a legal standpoint, but also in terms of business impact.
For large franchisors with foreign suppliers, especially from high risk countries that are well known for using child labour such as Brazil, China, Vietnam and others, the legislation will require significant overhaul of their specific supply chains in order to ensure compliance and that the franchisor has robust policies to demonstrate as such. Maintaining transparency within franchisor-franchisee relationships will also be crucial, as franchisees will now have an additional business obligation starting in May 2024.
In the realm of large luxury brands collaborating with foreign manufacturers, there is a growing consumer concern for ethically produced goods both in Canada and across Europe. As reporting obligations loom, there is a potential revelation that some luxury brands employ similar sourcing methods as those associated with the production of “fast fashion” items. The ramifications of such exposure pose a significant threat to brand equity, erode customer trust, and diminish the overall value of a luxury brand. It is conducive for these brands to proactively address and rectify any indications of unethical sourcing well in advance of impending reporting obligations to safeguard their reputation and maintain the trust of their increasingly discerning clientele.
How We Can help
At Sotos LLP, we understand the importance of adhering to strict legislation and can provide you with tailored solutions for successful compliance. As franchising experts, we can help you navigate the nuanced issues your system may face, while preserving your brand reputation and long-term business goals. Although these upcoming reporting obligations seem daunting, we can use them as a tool for enhancing your supply chain strategy with efficiency.
John Sotos, IDICountry Expert for distribution in Canada