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Mandatory ESG Reporting on Forced & Child Labour in Supply Chains: 5 FAQs

Published:

June 21, 2023

Author(s):

• Alexandra Gosse
• Sarah Douglas

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Updated April 17, 2024.

On January 1, 2024 the federal Fighting Against Forced Labour and Child Labour in Supply Chains Act (Bill S-211) (often referred to as “The Modern Slavery Act”) took effect. The Act serves as a transparency tool to aid the fight against modern slavery and lines up with the growing trend of voluntary ESG (Environment, Social and Governance) reporting and the steady march to mandatory public ESG disclosure in Canada. The Act imposes annual reporting obligations on certain entities (which could include both Canadian and non-Canadian owned or controlled entities); the first report submission deadline is May 31, 2024 (though practically, federally incorporated entities required to report might need to prepare their Report earlier). On December 20, 2023, Public Safety Canada launched its website and released its much-anticipated Guidelines clarifying the organizations with reporting obligations under the Act and how they should prepare and submit their Report, and on March 7, 2024, updated those Guidelines.

To help you understand the Act, determine whether you have reporting obligations under it and are aware of the ramifications of non-compliance, here are the answers to five frequently asked questions about Canada’s Modern Slavery Act.

1. What conduct does the Act address?

The Act’s purpose is to eradicate forced labour and child labour from Canadian supply chains. It augments existing legislation by amending the Canadian Customs Tariff to also prohibit the importation of goods mined, manufactured or produced wholly or in part with “child labour”, as well as the already prohibited “forced labour” and “prison labour”. The Act codifies in Canadian law definitions of these key terms:

“Child”. For the purposes of the Act a “child” is anyone under the age of 18.

“Child Labour”. In addition to labour or services offered or provided by a child in Canada under illegal circumstances, “child labour” means labour or services offered or provided by a child that:

• Are mentally, physically, socially or morally dangerous to the child.
• Interfere with the child’s schooling or requires them to attempt to combine school attendance with excessively long and heavy work.

• Reflect article 3 of the International Labour Organization (ILO) Worst Forms of Child Labour Convention, 1999 (No. 182), which include trafficking, slavery, debt bondage, and that is likely to harm the health, safety or morality of the child.

“Forced labour”. Labour is “forced labour” if it’s offered or provided by a person who could reasonably be expected to believe their failure to provide or offer it would threaten their safety or the safety of someone they know. It could also be forced or compulsory labour under the ILO Forced Labour Convention, 1930 (No. 29), which encompasses “all work or service which is exacted from any person under the menace of any penalty and for which the said person has not offered himself voluntarily.”

2. What organizations have reporting obligations under the Act?

The Act imposes reporting obligations on all Canadian federal institutions and departments (which the updated Guidelines clarify doesn’t include provincial or municipal government institutions but does include some provincial agent Crown corporations), federal Crown corporations and their wholly owned subsidiaries, and to any private sector “entity” (or any entity it controls) that are both an “Entity” under the Act and that carry out the “Activities” the Act targets.

Entity. The Act only imposes reporting obligations on an “Entity”. Similar to the Extractive Sector Transparency Act, the Act defines an “Entity” as an organization that’s either listed on a stock exchange in Canada or that satisfies both the Canadian connection and size threshold tests set out in the Act. The updated Guidelines provide welcome clarification respecting whether and how to assess parents and subsidiaries for the purposes of determining reporting obligations:

• Subsidiaries are to determine whether they are an “Entity” under this test entirely independently of their parent based on their own financial statements. If they don’t meet the Entity test, they have no reporting obligation.

• Parents are to determine whether they are an “Entity” based on their consolidated financial statements, including their subsidiaries.

Notably, the definition of Entity includes those headquartered and operating in any country or jurisdiction – meaning the Act can apply to organizations neither owned nor controlled by a Canadian entity that otherwise meet the Entity test. 

• Canadian Connection. You satisfy the Canadian connection threshold if you meet any one of these three conditions. The Guidelines indicate an organization can determine this based on Canada Revenue Agency’s criteria for tax purposes and on an ordinary sense of the words, but provides clarification:
  • You have a place of business in Canada. The Guidelines clarify this means any owned, rented or, in some cases, simply available premises, facility or installation used to carry on business, whether or not used exclusively for that purpose, where: goods are produced, sold or distributed; employees are located; deliveries, payments, purchases or contracts are made or assets are acquired; and assets, inventories or bank accounts are located.
  • You do business in Canada. The Guidelines provide a non-exhaustive list of considerations – and clarify that “doing business in Canada” does not require having a “place of business” in Canada. The updated Guidelines indicate you can use tax and employment-related records such as T2 corporate returns to determine if you’re “doing business in Canada” for the purposes of the Act.
  • You have assets in Canada. The Guidelines clarify that “assets” are any property owned by a person or business and could also include intangibles such as goodwill.

• Size Threshold. The Act requires the size thresholds to be based on your consolidated financial statements. The Guidelines clarify that you should make all calculations in Canadian dollars based on your global (not just Canadian) assets, revenue and employees. The Guidelines further clarify that “consolidated financial statements” means your revenue, assets and employees including those of any entity you control (subsidiaries) but excluding those of any entity that controls you (parent). You meet the size threshold if, based on your consolidated financial statements, you satisfy at least two of these three conditions for at least one of your two most recent financial years:
  • You have at least $20M in assets. The Guidelines clarify that “assets” refers to gross, not net, assets.
  • You have generated at least $40M in revenue.
  • You employ an average of at least 250 employees. The Guidelines indicate this you should base this calculation on the average number of employees employed over a financial year and exclude independent contractors.

Activities. Even if you’re an “Entity” within the meaning of the Act, you’re only under an obligation report if you carry on one or more of these three activities:

• Producing, selling or distributing goods in Canada or elsewhere. The updated Guidelines removes “selling and distributing” from Guidelines. However, the Act still includes them and since the Act is law and the Guidelines aren’t, you should comply with the Act.  The Act defines the production of goods to include “the manufacturing, growing, extracting, and processing of goods.” The Guidelines clarify that “goods” refers to goods that are the subject of trade and commerce, understood in the ordinary sense of the word, and is intended to capture marketing and administrative, financial and software services.
• Importing into Canada goods produced outside Canada. For the purposes of the Act, an Entity is only “importing” goods if it’s responsible for accounting for imported goods under the Canadian Customs Act. Therefore, for the purposes of the Act an Entity isn’t considered to be “importing” goods if it purchases goods produced outside of Canada from a third party, and that third party is already the importer of record for those goods.
• Controlling, directly or indirectly, an Entity that’s engaged in either producing, selling or distributing goods in Canada or elsewhere, or in importing into Canada goods produced outside Canada. The Guidelines indicate you should assess whether one Entity controls another based on “substance over form”.

The Guidelines provide some further clarification that generally applies:

• “Ordinary Sense”. Consider the words importing, selling and distributing “in their ordinary sense” to determine whether they’re engaged in any activities the Act captures, but they aren’t meant to capture services that solely support the production, sale, distribution or importation of goods.
• “Very Minor Dealings”. The Act doesn’t set a minimum value of the goods you must produce, sell or import to be captured by the Act but does indicate it’s generally intended to exclude “very minor dealings” – without offering further clarification about this exception. Therefore, the basis for measuring this exception (for example, materiality) isn’t yet clear – so the scope of the exception could be very narrow. However, since this is the first round of reporting under the Act, Public Safety Canada could eventually provide further guidance and we expect questions like this will be resolved over time. Meanwhile, you could consider indicating how you measured this exception in your Report.

3. What does the Act require?

The Act’s reporting and public disclosure requirements effectively institute mandatory public ESG reporting obligations on Reporting Entities. This is a step toward the federal government’s implementation of its human rights obligations pursuant to key standards, such as those under the ILO and the United Nations’ 2023 Agenda for Sustainable Development. It’s also in line with the recognition in Canadian jurisprudence of the accountability of multinational actors in the context of forced labour as the Supreme Court of Canada’s 2020 decision in Nevsun Resources Ltd v. Araya confirmed. If you are an Entity with reporting obligations under the Act:

Frequency. Starting in 2024, you must annually complete an Online Questionnaire and submit a Report to the Minister of Public Safety and Emergency Preparedness before May 31 of each year. However, if you’re a federally incorporated Reporting Entity, practically you might be required to at least complete your Report earlier depending on your year-end date because the Act requires you to provide shareholders with a copy of your Report “along with” your annual financial statements.

Online Questionnaire. You must complete an online questionnaire that includes both mandatory and optional questions.

Report. You must prepare and submit a Report that outlines the steps you’ve taken during the previous financial year to prevent and reduce the risk of forced or child labour within your supply chain and include mandatory information as part of your Supply Chain Risk Report. Your governing body (for example, your Board of Directors) must approve the Report and one or more of its members must sign it.

Public Access.  Public Safety Canada will post each Report on its publicly accessible electronic catalogue on its website. In addition, you must post the Report in a prominent place on your corporate website. If you don’t have a website, it’s wise to be prepared to send a paper copy to anyone who requests it, though it could be sufficient to refer such requests to the Public Safety Canada catalogue.

Shareholder Notice. If you’re a federally incorporated Reporting Entity, you must also take positive steps to provide the Report to your shareholders “along with” your annual financial statements and other annual materials. While the meaning of “along with” isn’t clear, it suggests your Report should accompany these materials. Practically, this could mean the date by which you must at least complete your Report will be earlier than May 31 depending on your year-end.

4. What are the non-compliance penalties?

In addition to exposure to the expanding risk of ESG-related civil and statutory litigation, the Act holds Reporting Entities accountable for their reporting obligations through statutory non-compliance measures, including serious consequences and penalties for both the Reporting Entity and for its directors and officers personally.

Entity Liability. Entities that fail to comply, or knowingly mislead or file a false report, are exposed to conviction for a summary offence and a fine up to $250,000.

Personal Liability. Additionally, directors or officers who “directed, authorized, assented to, acquiesced in or participated in” the offence are exposed to personal liability regardless of whether they or the Entity has been prosecuted or convicted of a summary offence.

Separate Penalties. Each instance of failure to comply with a requirement of the Act can result in a separate penalty:

• Filing the Report.
• Having the Report approved as required.
• Having the Report signed as required.
• Sending each report to your shareholders.

Enforcement. In furtherance of ensuring entities comply with their obligations, the Act also gives the Minister of Public Safety and Emergency Preparedness new enforcement powers, including powers to search, inspect and seize documents and evidence.

5. What should I do?

It’s important to act now to identify and manage your risk exposure under the Act. Working openly and proactively with your current and prospective suppliers will best position you to comply. The Act doesn’t mandate that you take specific actions to address forced or child labour in your supply chains. It instead requires only that you report on the forced and child labour risks and measures in your business and supply chains (similar to Canadian governance diversity disclosure obligations). While more guidance about minimum due diligence and other requirements could come, in the meantime, if you have reporting obligations under the Act implement proactive measures now to help mitigate future compliance and reporting risks:

Prepare Your Board of Directors. Your governing body, which in most cases will be your Board, must sign each annual Supply Chain Risk Report – effectively elevating the issue of child and forced labour in supply chains to the highest level. In signing off on the Report, directors will be required to exercise their fiduciary duty and act in the best interest of your organization. This, plus their management oversight role, means it’s crucial the Board both understand and address the risks this issue poses. Make sure they’re ready for it. For example, consider establishing a new Board committee or adding Act compliance to the mandate of an existing committee. Implement mandatory training covering human rights and child and forced labour in supply chains, the implications and risks, and how to respond.

Create a Conscious Culture. Take steps to create a culture of awareness of the issue of forced and child labour in supply chains throughout your Entity from the senior ranks right on down. Train your employees and get them involved. For example, create an internal committee or cross-functional group with a focus on the issue and on Act compliance.

Focus on Incremental Improvement. This is the first year of the Reporting obligation. We expect Public Safety Canada’s initial goal will be to bring Reporting Entities into compliance with this obligation. Remember the obligation is only to Report. While as with any such obligation you’re expected to exercise diligence to ensure your Report is as complete and accurate as possible, focus on reporting what you can. Furthermore, as time goes on, we expect the Reporting requirements will likely become clearer. Particularly after the first round of Reports are submitted, Public Safety Canada will be in a better position to identify grey areas and will likely issue guidance respecting them. Finally, you can expect your internal Reporting processes and procedures to become more refined – and more streamlined – each year.

Please contact your McInnes Cooper lawyer or any member of our ESG Team @ McInnes Cooper to discuss compliance with your ESG reporting obligations under the Fighting Against Forced Labour and Child Labour in Supply Chains Act.

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