Kevin O’Callaghan
Fasken, Vancouver
kocallaghan@fasken.com

Dani Bryant
Fasken, Vancouver
dbryant@fasken.com

Marie-Christine Valois
Fasken, Montréal
mvalois@fasken.com

Cliff Sosnow
Fasken, Toronto
csosnow@fasken.com

Canada’s Fighting Against Forced Labour and Child Labour in Supply Chains Act (the ‘Act’) came into force on 1 January 2024.

On 20 December 2023, only a few months ahead of the 31 May 2024 reporting deadline, the government published the first set of compliance guidelines which, among other things, introduced an online questionnaire to be completed as part of the reporting obligations under the Act.

Now that the 31 May deadline has passed for subject companies to file their reports under the Act, the time is ripe for reflection.

Many businesses subject to the Act likely still 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 as to whether the Act applies 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 (1) to meet at least two of the three size-related thresholds (CA$20m in assets, CA$40m in revenues or 250 employees) during at least one of the past two fiscal years and (2) to conduct the covered activities, many small and medium-sized businesses may be surprised to be caught by the Act.

However, Public Safety Canada has stated that it will take an ‘education’-based approach to this first reporting year, so hopefully this uncertainty does not create too many consequences.

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 the relevant considerations regarding the extent and nature of the activities occurring in Canada;
• threshold analysis – to measure the size-related thresholds, the Act refers to consolidated financial statements. The government’s guidance (the ‘Guidance’) indicates that such thresholds refer to total (global) assets, revenue and employees, but suggests that for subsidiaries, the consolidated financial statements of the parent company 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 an assessment on the parent company, whether Canadian or foreign? These are all questions that have been raised with us time and again, which we expect will continue to be an issue for businesses during 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 made to its Guidance in 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; and
• 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 business operations. Did they have to provide disclosure on the supply chains 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 improvements can be made to better manage such risks and to improve next year’s disclosure, namely: supply chain mapping, risk assessments, codes and policies, training, the measurement of effectiveness, remediation actions, due diligence in selecting suppliers and revisions to supply contracts, etc. It is paramount that companies 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 1 January 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 chains. 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 that would include mandatory human rights due diligence, following the path of certain European countries. The scope and extent of this anticipated bill remains to be seen.