SUPPLY CHAINS AND LABOUR EXPLOITATION: THE NEW INVESTIGATIVE AND LITIGATION TREND?

Introduction

Supply chains are under the radar of public prosecutor offices, other governmental authorities, including the competition authority, and consumers or consumers’ associations in Italy. As a consequence, companies should look at their supply chains as a matter of the utmost importance and urgency: failing to do so may result in severe and widespread consequence.

Being front line in the new trend, Italian prosecutors are increasingly targeting labour rights violations within corporate supply chains and purported systemic issues of labour exploitation in sectors such as luxury goods, logistics and construction.

Recent investigations have uncovered recurring patterns of alleged labour exploitation at the supplier level, leading to various repercussions for downstream companies that fail to control their supply chain effectively. These include potential reputational damage, fines and, most notably, the imposition by public authorities of the so-called “judicial administration” (amministrazione giudiziaria).

Key features of labour exploitation under Italian criminal law

The criminal offence of labour exploitation, also known as caporalato, is punished under Article 603-bis of the Italian Criminal Code and is included among the crimes triggering the company’s direct, quasi-criminal, liability under Legislative Decree No. 231/2001. It occurs when a person either recruits workforce to be employed by third parties, or directly employs workers, under exploitative conditions and by taking advantage of the workers’ state of need. 

Sanctions include imprisonment of up to 6 years and fines of up to EUR 1,000 per each exploited worker. More severe penalties apply in case of aggravating circumstances (e.g. use of violence, exploitation of multiple workers).

Judicial administration in a nutshell

Judicial administration (amministrazione giudiziaria) is a precautionary measure under Italian law that Courts may impose inter alia when there are sufficient indications that a company’s business activities could facilitate illegal behaviours by third parties. 

The application of judicial administration does not require the company to be directly guilty of any criminal activity. Instead, it is sufficient that, due to organizational deficiencies or inadequate controls, the company inadvertently facilitates third parties in engaging in criminal offences.

In essence, judicial administration involves the intervention of a Court-appointed administrator in the company’s management. This does not necessarily imply a complete takeover of the business. The administrator, who may be appointed for a period up to 2 years, is tasked with overseeing the company’s operations and exercising the powers of the company’s management body to prevent the company from further facilitating criminal activities by third parties. 

Originally introduced to combat mafia infiltration in businesses, judicial administration has since been extended to address other serious criminal offences, including labour exploitation.

Recent cases 

Judicial administration has been increasingly applied in Italy, most notably by the Court of Milan, to halt illegal practices of workers’ exploitation that were allegedly disguised through chains of contracts and subcontracts. 

In these cases, Courts uncovered recurring outsourcing schemes purportedly involving exploitative workshops that employed irregular and undocumented workers. Several indicators of labour exploitation were identified in these cases. Workers were found living in makeshift accommodations within workshops not authorized for residential use. The workshops lacked basic safety measures, and workers were denied necessary medical examinations and safety training. Workers were also reported to be paid far below the applicable minimum wage and worked excessive hours without adequate rest.

Downstream companies in these cases are accused of having failed to implement effective internal controls to monitor their supply chains insofar as they did not verify the entrepreneurial capacity of their suppliers and did not conduct inspections and audits to ensure compliance with labour laws and health and safety regulations.

This lack of oversight allowed workers’ exploitation to persist within their supply chains, prompting the Court to impose judicial administration. Administrators were appointed to oversee extensive reviews of the companies’ supplier relationships, terminate contracts with those suppliers responsible for labour exploitation, and enhance internal and external control management systems. 

Additional key downsides of failure to supervise the supply chain

Beyond the risk of judicial administration, failing to properly supervise the supply chain may trigger other serious effects, including, inter alia: 

• Competition law profiles: false or misleading ESG/human rights-related statements provided by the company to the market and consumers may constitute a conduct of unfair competition that may lead to expensive investigations and severe sanctions, as is shown by an investigation – still underway – that the Italian competition watchdog has launched in Summer 2024 for allegedly untrue ethical and social responsibility statements, particularly regarding working conditions and compliance with the law at the subcontractors’ level,

• Consumer law profiles: the same conduct may also lead to expensive litigation strands (including class-actions and follow-on litigations) by consumers or consumers’ associations, and/or

• Cross-border investigations: supply chain issues in one jurisdiction could draw the attention to other group companies operating in different markets/jurisdictions. This may trigger parallel investigations by local or supranational authorities (e.g., public prosecutors, regulators, independent agencies), and even media scrutiny, with significant reputational implications.

Conclusions

The current approach of Italian Public Prosecutors’ offices and other authorities proves that monitoring respect of fundamental labour rights across the supply chain and carefully selecting business partners that share a commitment to these principles is not only a matter of legal and business ethics, but also a key risk prevention strategy. 

The urgency of this is further reinforced by the recent approval of Directive (EU) 2024/1760 of the European Parliament and of the Council of 13 June 2024 on corporate sustainability due diligence, which aims at ensuring that companies contribute to sustainable developments by addressing human rights and environmental impacts. The Directive, whose entry into force is to be phased in between 26 July 2027 and 26 July 2029, prescribes Member States to introduce progressively, inter alia, the following measures:

• Due diligence obligations: EU and some non-EU companies meeting certain size thresholds must identify and assessadverse impacts in their own operations and in the operations of their subsidiaries, as well as within their supply chains,

• Preventive and remedial actions: companies must prevent or mitigatepotential adverse impacts (including, e.g., seeking contractual assurances from business partners and/or adopting prevention action plan, where necessary) as well as implementing remediation measures, where appropriate, 

• Liability and penalties: violations can result in penalties, including fines with a maximum limit set by Members State which cannot be less than 5% of the company’s net worldwide turnover for the previous financial year.