Over 40 million people around the world are caught in a form of modern slavery, with more than 25,000 people added to that number on a daily basis – that is more slaves than any time in history. But how does that affect business in Australia?
Slavery does exist in Australia, but numbers are much smaller than in some overseas countries. More likely than being directly involved in Australia, many businesses are unwittingly involved through long and complicated supply chains, where services, goods, or even components of goods are sourced overseas where slavery is more prevalent. Generally, the risks affect most industries, however electronics and high-tech, steel and automobiles, agriculture and seafood, mining and miners, garments and textiles, shipping and transportation and construction are especially at risk.1
For large businesses, the direct (minimum) response required is clear. In 2019, the Modern Slavery Act 2018 (Cth) (MS Act) commenced requiring entities and government agencies with a consolidated revenue of more than AUD$100 million to annually upload to a publicly available website a modern slavery statement that details an organisation’s due diligence processes against modern slavery in their supply chains. Organisations caught by the legislation have had two reporting periods so far, and we have previously written articles on these requirements. Assessing the risks, taking actions and evaluating those actions can be challenging, but is now an essential part of doing business in Australia. It is likely that the requirements will become more stringent considering the election promises of the new Federal Government.
Apart from the reputational risks (potentially both positive and negative) that may come from being associated with suppliers involved in modern slavery, there are also other good business reasons for small and medium enterprises (SMEs) to take action. This article focuses on the flow on effects of the MS Act, possible legal risks and corporate governance considerations for SMEs.
Flow on from reporting requirements
We are already seeing a flow on effect of reporting requirements under the MS Act, whereby large businesses and governments have required SMEs to respond to questions about modern slavery in their supply chains. This is likely to increase over time as businesses, not for profits and governments increase their response to modern slavery risk, particularly considering the recent commencement of the amended New South Wales Modern Slavery Act 2018 2,which requires state owned corporations in New South Wales to voluntarily report under the Commonwealth MS Act.3
This flow on has taken three main forms.
Firstly, many large businesses and governments have inserted modern slavery terms into their standard service contracts. These terms are varied, but typically include:
- warranties that no modern slavery exists in the SME (even extending to requiring warranties in relation to subcontractors and suppliers);
- warranties that modern slavery laws have been/will be complied with; and
- requirements to respond to modern slavery questionnaires from time to time.
We caution against blindly agreeing to these terms, and businesses need to be cognisant of exactly what they are committing to – often the “devil is in the detail” (or the definitions). In agreements we have seen, the definitions of “subcontractor” or “modern slavery laws” have been very broad and required clarification prior to agreement. An absolute warranty that no modern slavery exists, without any exception, is almost impossible to give considering the insidious nature of modern slavery deep in supply chains.
Secondly, more and more tenders for large organisations (business, government and not for profits) are asking what businesses are doing to investigate and address the risk of modern slavery in their business operations and supply chain.
Thirdly, some large organisations are requesting SMEs answer supplier questionnaires about their employment practices and that of their suppliers, both during onboarding and on a regular basis (often coinciding with their own MS Act reporting requirements and timeframes).
These flow on effects are forcing SMEs to review their practices and take action, which is exactly the point of the MS Act.
Legal Risks
There are a number of legal risks which come from modern slavery existing in a supply chain, whether it is with or without a business’ knowledge.
For example, a case in relation to breach of directors’ duties has recently suggested that a company’s relevant interests extend beyond just financial interests, and incorporate considerations of the company’s reputation and the need for the company to comply with the law.4Therefore, if modern slavery is discovered, or a corporation fails to provide an adequate modern slavery statement if required to under the MS Act, it is conceivable that a director could face liability for a breach of the duty of care and diligence under the Corporations Act 2001.
Another risk arises where companies mislead the public in relation to their ethical credentials, either in their modern slavery statement, or in their advertising – this may give rise to claims of misleading and deceptive conduct or false or misleading representation under the Australian Consumer Law. Claims of this type have been used overseas in an attempt to hold large corporations to account.5
A more direct risk arises from wage theft which has recently been criminalised in a number of states/territories, and is likely to be criminalised by the new Federal Government also. It is already possible under the Fair Work Act 2009 (Cth) for individuals or companies who are found to be involved in breaches of that Act to be liable for very significant civil penalties. This can include, for example, companies who outsource part of their operations without paying due attention to the conditions of the outsourced workers (for example, a supermarket and trolley collectors).
Lastly, Australian law also directly criminalises slavery and human trafficking, including slavery-like practices with penalties ranging up to 25 years imprisonment.6 It is also conceivably possible that a director or business owner could be prosecuted with aiding, abetting, counselling or procuring these slavery offences in their supply chain (the laws have extraterritorial effect), even if they were not directly involved7, although we are not aware of any such cases as yet.
Corporate governance
Robust governance policies and processes can assist to address these legal risks. For example, an Environment, Social and Governance (ESG) strategy, which is becoming more of a must have for all businesses, should incorporate modern slavery as a risk under the ‘social’ pillar. This provides a framework for boards and management to consider how the risks are addressed along the supply chain as well as monitoring any public statements on ethical credentials - Greenwashing ESG credentials or performance is high on corporate regulator radars.8 ASIC recently released an information sheet specifically putting funds managers and super funds on notice to ensure that claims and promotional materials relating to ethical or ESG aligned products are not misleading or misrepresentative of the facts.9
Governance frameworks also guide reporting to the board or management on business performance, and high performing businesses have effective governance frameworks. This would include internal compliance systems to monitor employee benefits and pay and external auditing to verify reports.
Finally, as evidenced by this article, the number of issues falling within director’s responsibility is increasing. Focused governance processes will assist directors in managing the new and emerging risks and provide a framework to ensure the right advice is obtained to support decision making.
Publicity, ethical approaches and recruitment and retention
There is the obvious and important ethical aspect to this issue, which requires entities to take responsibility, demonstrate awareness and a desire to engage in ethical and fair work practices that protects individuals, particularly those who are vulnerable.
A company may attract publicity, to its benefit or detriment, dependent upon how this issue is approached. Taking a proactive approach and demonstrating to onlookers that you are a socially conscious corporation will likely render positive feedback amongst onlookers. To the contrary, if an entity is found to have engaged with a supply chain or operation that has allegedly engaged in modern slavery practices and have failed to act in accordance with the objects of modern slavery legislation, the potential for negative publicity is high.
Determining to reduce the risk of modern slavery in supply chains and operations has potential to attract the right kind of attention from other businesses, governments and from skilled employees seeking an ethical employer.
Key takeaways
Over time, the flow on effects will become more pronounced, particularly as the requirements of the MS Act become more stringent under the new Federal Government. Now is the time for SMEs to start considering their response to the risk of modern slavery in their supply chains and operations. This will:
- enable your business to address modern slavery risks in your supply chain and operations;
- put your business in a good position to respond to large business and government’s MS Act related actions (tender questions, contractual warranties); and
- help to protect your business from potential legal claims associated.
HopgoodGanim Lawyers can assist you in preparing your Modern Slavery Statement, negotiate related contractual terms, or responding to any requests for information about SMEs supply chains. For further information, please contact our Workplace and Employment team.
2. The original provisions requiring risk reporting from businesses with a revenue of over $50 million, lower than the MS Act, have been repealed in order to harmonise with the MS Act.
3. Modern Slavery Act 2018 (NSW), s 25A.
4. Australian Securities and Investments Commission v Cassimatis (No 8) (2016) 226 ALR 209.
5. See for example Sud v. Costco Wholesale Corp., 229 F. Supp. 3d 1075 (N.D. Cal. 2017), discussed here at the Business & Human Rights Resource Centre.
6. Criminal Code Act 1995 (Cth), Divisions 270 and 271.
7. Criminal Code Act 1995 (Cth), s11.2.
8. See our previous article Managing ESG Risk – the importance of accurate and transparent disclosures.
9. ASIC Information Sheet 22-141MR How to avoid ‘greenwashing’ for superannuation and managed funds. 14 June 2022.