Now that the May 31 deadline has passed for subject companies to file their report under the Fighting Against Forced Labour and Child Labour in Supply Chains Act (the "Act"), the time is ripe for reflection.
A few questions that merit examination, both in looking back and, even more so looking forward, are:
- What were the main areas of confusion around applicability?
- Did all companies subject to the Act file the required report?
- Should companies consider filing late or refiling to improve?
- How can companies get ready for the next filing year?
Given that Public Safety Canada has recently confirmed its intention to accept late filings, these questions become even more pressing for companies that may have missed the deadline.
To File or Not To File
Many businesses subject to the Act likely remain unaware of the reporting obligations themselves or whether those obligations apply to them. The Act only came into force five months before the first reporting deadline and many companies have had a difficult time assessing whether the Act applies to them. We have witnessed this confusion ourselves as we were contacted by numerous companies uncertain if the Act applied to them in the days and weeks prior to the filing deadline.
After all, the Canadian government indicated that thousands of companies could potentially be captured by the Act. With the main criteria for private companies being (i) to meet at least two of the three size-related thresholds ($20M in assets, $40M in revenues or 250 employees) during at least one of the past two fiscal years and (ii) to conduct the covered activities, many small and medium-sized businesses may be surprised to be caught by the Act.
All things considered, determining whether the Act applies is not as straightforward as many businesses expected. If in doubt, it may be advisable to seek external legal advice and, if it is determined that the Act applies, to seriously consider making a late filing to comply to the best of one's ability with the Act.
Reopening of Web Portal
The government confirmed its intention to reverse its prior decision to close its online portal to submit new reports for the 2024 reporting cycle. We applaud the government for altering its stance given that the Act's policy objective of transparency seems to align with the acceptance of voluntary late filings, as well as with Public Safety Canada's statement that it would take an "education" based approach for this first reporting year. The government also indicated that the online catalogue will specify which reports were received after the legislated deadline. Therefore, late filers may now face a pressing question of whether a late filing is better than no filing at all.
Similarly, for those that filed in a hurry and wish to file an amended or improved report, it is permitted under the Act and thus possible to do.
A Few Lessons Learned
Below are some critical points companies should consider as we reflect on the first reporting year:
Foreign Companies ̶ Companies located abroad often assume the Act does not apply. However, the Act may apply if they have assets, a location or conduct business in Canada other than through their Canadian subsidiaries. This assessment is not a "tick the box" analysis. Rather, it requires a careful review of all relevant considerations regarding the extent and nature of activities occurring in Canada.
Thresholds Analysis ̶ To measure the size-related thresholds, the Act refers to consolidated financial statements. The government's guidance issued on December 20, 2023 and updated on March 5, 2024 (the "Guidance") indicated that such thresholds refer to total (global) assets, revenue and employees but suggests that for subsidiaries, the consolidated financial statements of its parent should not be used. This leads to questions including: Which subsidiaries have reporting obligations? Which financial statements are relevant? What is the impact of such assessment on the parent company, whether Canadian or foreign? These are all questions that have been raised with us time and again that we expect will continue to be an issue for businesses for next year's filing.
Covered Activities ̶ For those who were not privy to the evolution of the Guidance and the discussions with Public Safety Canada, it may look like companies that only distribute and sell goods have reporting obligations. Indeed, the Act indicates that this is the case. However, in a revision it made to its Guidance early March, the government removed all mention of such activities from the Guidance and later verbally confirmed in an informational session that it did not consider the Act to apply to entities that merely sell and distribute goods. They advised that the focus of the Act is instead on importing and producing, but corresponding amendments to the Act have not been made.
Controlling Entities ̶ The topic of controlling entities has also been of great interest. Given the Act provides for reporting obligations for any entity that controls a reporting entity, this raised questions for investors with a controlling interest but uninvolved in day to day operations. Did they have to provide disclosure on the supply chain of operating companies already filing their own report? Did they have to provide disclosure for other non-reporting subsidiaries? If not, what reporting was expected from them? Was the Act really meant to apply to them? Given the lack of clarity, many investors sought legal advice regarding their obligations.
Room for Improvement
Although the Act has created confusion regarding its applicability, it seems to have reached its goal of raising awareness around the issue of modern slavery in supply chains. Many companies that were not active on this front have taken action and improved their internal processes in light of the Act coming into force.
Indeed, there are multiple areas where improvement can be made to better manage such risks and to improve next year's disclosure: supply chain mapping, risk assessments, codes & policies, training, measurement of effectiveness, remediation actions, due diligence in selecting suppliers, revisions to supply contracts, etc. It is paramount for companies to evaluate whether these measures align with their risk profile and internal capabilities in preparation for the next reporting cycle, for which Public Safety Canada will begin accepting reports on January 1, 2025.
One should not forget that, for now, the Act only mandates the filing of a report describing the measures in place to prevent the use of forced and child labour in a company's activities and supply chain. There is currently no legal requirement under the Act to implement specific measures, but this could be forthcoming in the longer-term. For example, the federal government intends to introduce new legislation this year which would include mandatory human rights due diligence (mHRDD), following the path of certain European countries. The scope and extent of this anticipated bill remains to be seen.
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