Canada's new forced labour reporting Act

Canada’s new Act on fighting against forced labour and child labour (Bill S-211) was passed on May 11, 2023 and comes into effect on January 1, 2024. Affected businesses must report by May 31, 2024, on specific details and steps taken in its previous financial year to help prevent and reduce forced labour. To assist companies and other businesses prepare now for these new transparency and disclosure requirements, we have compiled commonly asked questions about the new Fighting Against Forced Labour and Child Labour in Supply Chains Act (the Act).  

The Act applies to a business (including a corporation, trust, partnership or unincorporated organization) that:

1. Produces, sells or distributes goods in Canada or elsewhere,
2. Imports goods into Canada, or
3. Directly or indirectly controls a business that is engaged in either activity described above

provided that the business is:

1. Listed on a stock exchange in Canada, or
2. Has a place of business in Canada, does business in Canada or has assets in Canada and that, based on its consolidated financial statements, meets at least two of the following conditions for at least one of its two most recent financial years:

(i) has at least $20 million in assets,

(ii) has generated at least $40 million in revenue, and

(iii) employs an average of at least 250 employees.

Many Canadian and foreign-owned businesses may be affected by the new Act. Here are a few examples:

• An online seller that warehouses goods in Canada may be subject to the Act because the Act applies to business that “have assets in Canada”.
• A franchiser may be subject to the Act and have to report on the supply chain of franchisees, if it exercises “indirect control” over the franchise.
• A foreign business, and its subsidiary located in Canada, could potentially both be subject to the new law if they meet the thresholds described above.

The new law introduces new reporting requirements for certain Canadian and foreign businesses to prevent and reduce the risks of modern slavery in their supply chain.

Many businesses are structured to reduce exposure to labour risks in production and manufacturing – whether through outsourcing, contract labour, or other legal structures. Modern slavery law in Canada and in other jurisdictions create broader accountability for workers impacted by businesses, beyond the workers directly hired by the organization.

The Act defines the terms “forced labour” and “child labour” broadly to incorporate international customary laws and Canadian domestic laws.

With respect to forced labour, these laws recognize that:

• Workers have the right to choose to work, without threats to their safety or the safety of a person known to them.
• Indicators of forced labour include working without pay, excessive overtime, debt bondage, restriction of movement, deception, intimidation, threats of violence or the removal of identity documents. Wages and working conditions are a key factor – while poor working conditions and forced labour are not equated, extremely low working conditions can be an indication of forced labor.
• Victims of forced work are often isolated in remote locations and denied contact with the outside world. Forced labour may involve taking advantage of workers in a vulnerable position, such as workers who lack knowledge of the local language or legal rights.

With respect to child labour, these laws recognize that:

• Children have the right to education. Work cannot interfere with or deprive them of the opportunity to attend school, or attempt to combine school attendance with excessively long hours of work.
• Children cannot work under conditions that are mentally, physically, socially or morally dangerous to them. Based on Canadian employment standards, most work is unsafe for children under the age of 14 – and children under the age of 16 should not be permitted to perform hazardous work.

The new Act focuses on disclosure and transparency. Canadian and foreign businesses subject to the Act are required to file a report on their efforts to prevent and reduce the risk of forced labour and child labour in their supply chain, which will be accessible on a public registry.

A business’ report must include:

1. The steps taken during its previous financial year to prevent and reduce the risk that forced labour or child labour is used at any step of the production of goods in Canada or elsewhere by the entity or of goods imported into Canada by the entity.
2. Its structure, activities and supply chains.
3. Its policies and due diligence processes in relation to forced labour and child labour.
4. The parts of its business and supply chains that carry a risk of forced labour or child labour being used and the steps it has taken to assess and manage that risk.
5. Any measures taken to remediate any forced labour or child labour.
6. Any measures taken to remediate the loss of income to the most vulnerable families that results from any measure taken to eliminate the use of forced labour or child labour in its activities and supply chains.
7. The training provided to employees on forced labour and child labour.
8. How it assesses its effectiveness in ensuring that forced labour and child labour are not being used in its business and supply chains.

The report must be attested and signed by one or more members of the governing body of the business and filed with the Minister of Public Safety and Emergency Preparedness by May 31 of each year. The Act comes into effect on January 1, 2024, and therefore the first filing date is May 31, 2024.

The Act also extends the import ban under the Customs Tariff to enable the Canada Border Services Agency (CBSA) to seize goods that are mined, manufactured or produced, wholly or in part, by forced labour or child labour. This is consistent with the USMCA labour chapter, which prohibits forced labour and requires each country to put measures in place to prohibit the importation of goods manufactured by forced or compulsory labour.

The Canadian law is similar to the disclosure and transparency laws in California, United Kingdom and Australia, which require businesses to prepare a Modern Slavery statement, disclosing the steps taken to assess and remediate modern slavery in their supply chains.

In contrast to the regulations of a number of European countries, the new Act does not require businesses to take active steps to prevent human rights violations (such as consultation, grievance mechanisms, or supervision). Nor does it create a civil cause of action by third parties for failing to take steps to address modern slavery.

The new Act has customs and trade implications. However, in contrast to legislation like the US Uyghur Forced Labour Prevention Act, the Act does not explicitly include a reverse onus, where companies’ goods are seized unless they took due care to prevent forced labour from goods produced in a certain region.

The CBSA has not released its official policy on how businesses will need to demonstrate that imported goods are not made with forced or child labour. The CBSA currently has a specific tariff classification that can be applied to import goods to prohibit them from entering Canada based on the belief that they were made with forced or child labour, which may be used as an enforcement mechanism.

We anticipate that the CBSA will release guidance soon detailing the detention of goods suspected of forced or child labour.

The reporting requirements prescribed in the new Act are similar to Modern Slavery statements in other jurisdictions but are not identical. In other words, the contents of a report may be similar, but businesses will need to review their current reports to determine if they meet all the content required under the Canadian Act.

While the reporting requirements are included in the new Act, regulations may be published in the coming months, to clarify some of these requirements.

Failing to file a report, or filing an inaccurate report, attracts criminal liability for the business and its directors and officers. Organizations or individuals who fail to comply with the Act, or make false or misleading statements, are subject to summary conviction with fines up to $250,000.

In addition, the content of the report, which must be made available publicly under the new Act, may highlight grounds for legal action by third parties, including:

• Breach of contractual warranties relating to modern slavery in the supply chain
• Common law liability to workers who are subject to forced labour
• For workers in Canada, regulatory audits and investigations under employment standards and health and safety laws.

The obligation to publicly report on forced labour and child labour in the supply chain carries a number of operational risks.

A key operational risk is that goods may be seized at the border, if the report gives the CBSA reasonable grounds to believe that the production of the goods involved forced labour or child labour. As an example, this could be the case where the report indicates that the company’s goods are produced in geographies that have a high risk of forced labour or child labour, and the report shows no steps were taken to address or mitigate those risks.

Businesses also have reputational and market risk, as information in their report may disclose details about their supply chain that will become accessible to their competitors, employees, investors, lenders, business partners, customers and other key stakeholders.

In addition, compliance with the Act requires an in-depth understanding and review of the business’ supply chain, which can be a significant operational burden on the organization. Addressing forced labour and child labour risks requires an investment in systems, processes and support, and requires freeing up internal resources and/or using external consultants.

To be in a position to substantively report on measures taken to prevent and reduce forced labour and child labour, businesses may need a comprehensive program relating to forced labour and child labour in their supply chain. Complying with the Act will require businesses to increase visibility over human rights risks and impacts in the supply chain. Strategies to increase this visibility may be similar to the ones used to mitigate other forms of supply risk and respond to customer demands. Businesses should integrate their compliance requirements under the Act into their overall strategy to improve the effectiveness and efficiency of their supply chain.

As a starting place, businesses should undertake a risk and readiness assessment to identify the factors that may indicate the presence of forced labour and child labour, and to review best practices relating to due diligence. An entity’s business risk assessment may include consideration of known risk factors related to forced labour and child labour, such as:

• Suppliers located in geographies with weak rule of law, corruption, displacement and known human rights violations.
• High-risk sectors, such as information and communications technology, food and beverage, and apparel.
• Suppliers who employ vulnerable workers, such as migrant workers.
• High-risk business models, such as outsourcing and franchising.

With this information, businesses will design their due diligence program that will include the steps required to identify and mitigate risks, including documentation, processes, policies and training programs. In addition, businesses may focus on engaging with suppliers and consider their approach to mitigate risks of forced or child labour, especially in high-risk geographies or products.

We can help you assess how the new Act may affect your business and steps you may take to prepare for these new reporting obligations. For more details, contact your KPMG adviser or one of the following professionals: