Casner & Edwards

Client Alert: 6 FAQs for Businesses Facing Economic Downturns Due to COVID-19

By Steven Ayr, Peter Caro, Edward V. Colbert, Jr., Renee Inomata, John T. Morrier, and Stéphanie Smith

Every day, Massachusetts businesses are facing new challenges, including those imposed by government actions, resulting from the coronavirus pandemic. Most recently, Governor Charlie Baker ordered that all non-essential businesses be closed by noon on March 24, 2020, leaving many with just over 24 hours to address employee, customer, vendor, and landlord issues. Although we all hope that most will weather this crisis, these six questions are among the ones our multi-disciplinary team here at Casner & Edwards has been fielding.

Q: How do I address the financial impact on my organization? What do I need to tell my creditors?

COVID-19 is having an economic impact. Even if your business or organization is not yet directly affected, consider how it may be, and adjust your budget and cash flow projections now. Here are some issues to consider: Will sales lost during this period be permanently lost, or will some be deferred? If my customers or donors are affected, will receipts be delayed? Which expenses will increase, and which will decrease? What is the impact on my supply chain, customers, and clients? Adjust your plans and budget accordingly.

With a revised and realistic cash flow projection, consider whether your business organization can meet its financial obligations for the near and medium terms. In working with your major creditors, communication is key. If you need some flexibility from your lender, key vendors, or landlord, reach out to discuss the situation. Ask for what you need, and be prepared to disclose information – like your revised cash flow projection – to support the request. In financial workouts, it is often better to ask for permission than for forgiveness.

For some businesses, more borrowing will be necessary and prudent. On March 12, the Small Business Administration announced that disaster recovery loans may be made available to businesses affected by COVID-19 without access to other credit. Rollout of that program is underway, with information and application links at the SBA online.

Q:  We decided to close our office due to the coronavirus outbreak. Do I have to keep paying my employees, including the ones who can’t work from home?

It depends. Employment agreements should be reviewed to determine the extent of any contractual obligations. Unless this is consistent with any contractual undertakings, under the federal Fair Labor Standards Act, employees working in positions eligible for overtime (i.e. “non-exempt”) are generally not entitled to receive pay if they perform no work, unless their employment contract or company policy provides otherwise. Employers should explore feasible options to minimize the financial impact of the outbreak on workers, such as allowing employees to use accrued sick time, even if they are not sick (but, note that employees should not be required to use paid sick time, if they are not sick). Options are currently being considered both on the federal and state levels to minimize the financial impact of the outbreak on workers, for example, by relaxing unemployment standards.

Exempt employees (i.e., employees who are paid on a salary basis and whose duties make them exempt from the overtime requirement under applicable law) must continue to receive their regular base salary for any workweek in which they perform any work. Therefore, if an employer is considering or is required to temporarily close (either of a specific unit or the entire entity) midweek, exempt employees will need to be paid their salary for the entire week if they work any part of the week. There are some very limited exceptions to this rule. 

Employers can require exempt employees to use accrued vacation time if the employee is absent from work for one or more full days due to personal reasons (other than sickness or accident), including partial-day absences. Also, if an employer initiates a temporary working-from-home program during the outbreak, and an employee who is otherwise able to work from home decides not to work for a reason unrelated to sickness, you could either deduct a vacation day from the employee’s leave bank (if available) or treat the full day absence as an unpaid leave of absence (NOTE: if the exempt employee performs any work during the day, no deduction from wages is allowed). However, given the widespread school closures, to minimize the impact of the outbreak on employee morale, employers should consider whether it is feasible to relax existing work rules in the short-term. With the enactment of the Family First Coronavirus Response Act, effective April 2, 2020, employers with fewer than 500 employees are required to provide paid sick leave to eligible employees. 

Additionally, for employees in jobs that must be performed on-site, other options should be considered, such as relaxing regular working time and encouraging social distancing and good hygiene practices. 

For more information, see the advisory from the Department of Labor.

Q: How can I reduce labor costs to manage the reduced volume of business during the outbreak?  
Given the sharp reduction in business that some industries have already experienced, some employers may need to take more drastic measures to reduce labor costs in order to stay afloat. 

One option would be to implement an across-the-board reduction in hours (with an attendant pay cut) to ensure that all employees continue to work (and/or get paid), albeit on a reduced basis. However, temporarily reducing exempt employees’ salaries due to a reduction in business may result in costly claims under federal or state wage & hour laws or for breach of contract. Instituting a part-time schedule also may not result in a significant, immediate enough impact on labor costs. Also, some states have predictive scheduling laws, requiring advanced notice of schedule changes.

If a Massachusetts employer, you should evaluate whether to participate in the state’s WorkShare program offered through the Department of Unemployment Assistance (DUA). WorkShare allows employers to reduce the work hours of their regular employees between 10 to 60 percent (10%-60%).  Employees receive the lost wages from the DUA. When business picks up again, you can cancel the WorkShare plan. WorkShare requires a reduction of both the employees’ work hours and pay, among several requirements. Your organization can only participate in this program if it is up-to-date with its unemployment contributions (non-profit entities who have elected the “reimbursable” contribution method for funding unemployment can still take part in the program, but will be charged dollar-for-dollar). For more information, including how to apply, visit the WorkShare program’s webpage. Multi-state employers will need to review unemployment programs in all applicable jurisdictions.

A layoff may have an immediate impact on your bottom line. However, aside from ensuring that the layoff is conducted consistent with applicable discrimination laws, before implementing a layoff, you should determine whether the federal WARN Act applies. The WARN Act, which applies to employers with at least 100 employees, requires that workers receive at least 60 days’ advanced notice before a “mass layoff” or “plant closing” (as defined under the law). State “mini-WARN” laws might apply, which are typically triggered at lower thresholds than the federal WARN law. Financial obligations at termination must also be determined before implementing a layoff, including any severance entitlements. In jurisdictions requiring accrued and unused vacation time to be paid at termination, such as Massachusetts, a layoff may come with significant financial obligations and therefore, may not provide the short-term relief you need. 

Another potential option would be to place some or all employees on furlough. Unlike a layoff, a furlough is a temporary, unpaid leave from work, usually of short duration. Employees out on furlough are not terminated but may still be eligible for unemployment insurance due to the reduction in their pay and hours (as determined under state law). Massachusetts Governor Baker has signed a bill waiving the standard one-week waiting period before unemployment benefits kick in. However, if you allow employees to use their accrued and unused vacation time while on furlough, that income may offset the amount of unemployment insurance benefits for which the employee is eligible. Thus, although you must provide employees with information about unemployment benefits and can suggest employees apply, employers should be cautious about telling employees that they will receive unemployment benefits or expressing opinions about the amount of unemployment benefits they may receive, both of which will be determined by the DUA (An employment contract, collective bargaining agreement, or employer policy may require payment of accrued vacation time in connection with a furlough.)  The federal WARN Act also does not apply to temporary layoffs or furloughs expected to last less than 6 months. 

Employers should consult with experienced employment counsel to ensure compliance with all applicable laws when considering among these various options.

Q:  We have a number of contracts to supply your products to third parties that cannot be met due to supply-chain issues that are beyond our control, and some of our own suppliers are expressing similar problems and concerns about delays in shipping products. What do I do ?  

From a business and legal standpoint, the best thing you can do is negotiate written amendments to your contracts with third parties that will allow you to fulfill your obligations while allowing you the flexibility to adjust your output as the pandemic subsides. Everyone needs to adjust to the circumstances we have been given, and business owners should realize that continuing to do business with their counterparts, even at a different pace, will produce less disruption than not doing business at all.

If your business partners are not as amenable to contractual changes, the law recognizes ways to excuse contractual performances where performance becomes impossible or commercially impractical. This can be found where the non- occurrence of an outside event — in this case a pandemic which has led to state and federal orders and guidelines restricting human activity and business — was a basic assumption on which your contracts were made. Some contracts even include language excusing performance due to Acts of God (e.g. earthquakes) or other “Superior Forces” (called Force Majeure) beyond your control, such as a pandemic.  

By staying calm, communicating with your business partners, and adjusting your obligations while knowing your legal rights, you can keep your contracts in good standing. 

Q:  How might the Covid-19 pandemic affect my organization’s obligations as tenant under our commercial lease?

Many commercial leases include a provision for “force majeure,” which is a legal principle affording relief from strict enforcement of contract terms. Force majeure refers to significant and unforeseen events beyond the control of either party. Typical examples include war, insurrection, riots, natural disasters, and widespread labor stoppages.

A force majeure defense does not arise automatically; it is a contract provision by which parties may agree to allocate the risk of such an event. And while a pandemic such as COVID-19 should by its nature qualify as a potential instance of force majeure, most force majeure clauses do not specifically reference pandemics or disease. So, you should review your lease to see whether it contains a force majeure provision and, if it does, what that provision includes. A common formulation might refer to “war, insurrection, riots, and other causes beyond the reasonable control of the parties.”  The COVID-19 pandemic should constitute such a cause.

Force majeure does not generally excuse all obligations: a typical provision will excuse late performance of certain obligations only, and will exclude other contract responsibilities from the scope of force majeure. The latter category usually includes rent and other payment obligations. So, while a force majeure provision might excuse delay or missed deadlines in completing build-out, opening for business, performing maintenance, and requisitioning for tenant improvement reimbursements, it may not allow the tenant to withhold rent due to the pandemic. You should review your lease carefully and consult counsel if necessary to determine your particular rights and obligations. 

Q: How do we make sure no one takes our data or proprietary information, especially if we have workers working remotely? 

For employees working remotely, the two security priorities are: (i) encrypted storage and transmission of digital records of any personal information of customers or employees and other company confidential information; and (ii) physical security of paper records of any of the same. All businesses with a Massachusetts presence should have in place a Written Information Security Program (“WISP”) that lays out basic guidelines for handling personal information of customers and employees and company confidential information, including remote work guidelines. If such a policy exists, then the first step is to review that document and remind employees of the data security guidelines included in it. Similarly, if the company has a bring your own device policy that governs employee use of personal devices for work purposes, then that policy should be reviewed and employees should be reminded of any data security guidance included there.

If the company does not already have these policies in place, then the company should create and implement policies for employees working remotely that solve for the two priorities above, including by requiring strong passwords for devices, full-disk encryption for any device used for work purposes, and limiting online transmission of personal information and company confidential information to those services that use end-to-end encryption and are otherwise contractually required to keep such information confidential. Finally, the company should be aware of and discourage employees from using personal online services, including file storage, file transfer, and chat programs, and especially free or freemium versions of the same, which frequently lack necessary security features or allow vendors to make their own use of data transmitted.

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