Fasken lawyers say they had many calls from clients about whether act applied
The first deadline for Canada’s new anti-slavery disclosure requirements has passed, unveiling several difficulties, including a rushed approach and a lack of clear definitions, say Fasken Martineau DuMoulin LLP lawyers Marie-Christine Valois and Dani Bryant.
“If I had to summarize this first year of reporting, I would use two words - confusion and improvisation,” says Montreal-based partner Valois. “Likely the government was ill-prepared for the coming into force of this new legislation, starting with the guidance that was issued less than two weeks before the act came into force.”
Even with this guidance, she says her clients were asking some basic questions, such as, “Should I or should I not file a report?” The act also contained provisions that appeared to contradict each other and terms that were not adequately defined.
“This led to a situation where we had to provide answers to clients on some very basic questions on applicability and go back to the government for answers,” she says. Even after the government revised the guidance in March, Valois adds, many questions remain unanswered.
The legislation targets a broad range of entities. The Canadian government indicated that the act could capture thousands of companies. The main criteria for private companies are meeting two of the three criteria: $20 million in assets, $40 million in revenues, or 250 employees during at least one of the past two fiscal years.
However, Valois notes that the Fighting Against Forced Labour and Child Labour in Supply Chains Act appears to have achieved its goal of raising awareness of modern slavery in supply chains. Many companies that were inactive in this area have improved their internal processes since the act came into force.
Valois says there is a reputational risk in not filing a report if a firm falls under the act’s jurisdiction. “What will stakeholders think if they see no measures in place? What will employees, investors, and clients think if the report has no measures? Some companies decided to adopt measures quickly in light of the legislation, as they didn’t want to file a report saying they had no measures.”
Bryant points out that among the challenges was a first reporting deadline only five months after the act came into force. So, Public Safety Canada, the ministry responsible for the act, “had a short runway to provide guidance, and that short runway extended to clients trying to figure out whether they had reporting obligations under the act.”
One example deals with who comes under the act - sellers, distributors, importers or producers. It may look like companies that only distribute and sell goods have reporting obligations. The act indicates that this is the case. However, all mention of such activities was removed in the March revision to guidance. Public Safety Canada later verbally confirmed that it did not consider the act to apply to entities that merely sell and distribute goods. It advised that the act focuses on importing and producing, but corresponding amendments have not been made.
Bryant says, “A lot of companies not in the production business would likely not think the act applied to them.”
Valois and Bryant point to other areas of potential confusion:
- Foreign Companies: Companies located abroad often assume the act does not apply. However, it may apply if they have assets, a location or conduct business in Canada other than through their Canadian subsidiaries. Making that determination requires carefully reviewing all relevant considerations regarding the extent and nature of activities occurring in Canada.
- Thresholds Analysis: To measure size-related thresholds, the act refers to consolidated financial statements. The government’s guidance indicates that such thresholds refer to total (global) assets, revenue, and employees but suggests that the consolidated financial statements of its parent should not be used for subsidiaries. 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?
- Controlling Entities: The act provides reporting obligations for any entity that controls a reporting entity, raising questions for investors with a controlling interest but uninvolved in day-to-day operations. Do they have to disclose the supply chain of operating companies already filing their own report? Do they have to provide disclosure for other non-reporting subsidiaries? If not, what reporting is expected from them? Was the act meant to apply to them?
Valois says: “The question is, what is a shareholder who is mainly investing in a company, happens to hold 51 percent of the shares, obligated to do? It’s the type of answer pension funds need an answer for.”
One positive change, say Bryant and Valois, was the decision to revise an earlier decision to close its online portal to submit new reports for the 2024 reporting cycle after the May 31 deadline. Similarly, for those who filed in a hurry and wish to file an amended or improved report, it is permitted under the Act and thus possible.
Bryant says the government should be applauded for altering its stance, especially in its first year and with the potential penalty of up to $250,000. She says it has taken an “education-based approach” to improving transparency.
“Many firms might not have been aware the act applied to them, so filed late. But they are still filing and abiding by the purpose of the act. So, it made sense, in my mind, for the portal to be open after the deadline.”
The two Fasken lawyers suggest other areas of improvement to better disclosure: supply chain mapping, risk assessments, codes and policies, training, measurement of effectiveness, remediation actions, due diligence in selecting suppliers, and revisions to supply contracts. In a co-authored report, they say: “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.”
They also note that the act only mandates filing a report describing the measures in place to prevent forced and child labour use 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.
For example, the federal government intends to introduce new legislation this year that would include mandatory human rights due diligence, following the path of some European countries.
Says Bryant: “It will be interesting to see how all that interacts with this act.”
