At the time of this writing, it is clear that the Novel Coronavirus (COVID-19) Pandemic is having and will continue to have a significant impact on the economy – effecting businesses of all kinds – particularly small businesses. To survive, there is an important lesson to remember: “Nobody ever regrets making fast and decisive adjustments to changing circumstances”; and changing circumstances is where small businesses find themselves right now.
The current pandemic presents both operational and legal issues for small to medium sized businesses; which are the primary client of our law firm. Here in Western Washington, which has been a Hot Zone of the COVID-19 Pandemic, businesses have quickly found themselves needing to respond to emergency regulations and public health orders that have directly impacted operations, along with the general economic impacts of economic activity abruptly slowing.
Over the last week and a half, questions have fallen into three basic categories:
- Compliance with Public Health Orders and Emergency Regulations
- Handling Employees, Contractors, and Keeping the Business Operating
- Impacts on Existing Contracts and On-Going Business Obligations
The following is a quick outline of the issues that businesses should be reviewing, assessing, and acting upon to protect the businesses various critical relationships (i.e. employees, customers, suppliers, and the community at large). Each business is unique, but there are principles here that will be helpful for all business entities. All of these items address key areas of: (1) Safeguarding the Upstream (Supply Chain) of the business, (2) Assisting the Downstream (Customers/Demand), and (3) Protecting the Organization (Employees, Contractors, and Operations). An honest assessment of the business; its operations, its environment; and present threats requires hard and honest thinking and effective communication. The key issues are as follows:
- Remain Informed.
More than ever, it is crucial that business owners and managers remain well-informed as the situation develops and changes as the COVID-19 Pandemic evolves. It should be expected that things will change daily; and though emergency declarations and public health orders have been put into place until March 31, 2020, it should be expected that these will change and may likely be extended until the emergency situation ends.
Resources and links are listed at the end of this article.
- Compliance with Emergency Regulations and Public Health Orders.
As of March 16, 2020, the State of Washington has imposed significant restrictions on businesses of various kinds, including the closing of restaurants, bars, and other businesses focused on recreational activities. Most of the regulations are coming out on a Federal, State, and Local Level. The following is a link to King Seattle / King County Public Health’s COVID-19 Page. Check in here often to keep current on the status of these regulations.
In addition to providing a possible safe harbor defense to certain business decisions (i.e. reliance on WHO, CDC, and DOH guidance); avoiding penalties for violation of these regulations is important as violation of emergency proclamations and public health orders are deemed gross misdemeanors.
- Be Prepared to Improvise and Adapt to the Environment.
Businesses that want to thrive and/or survive this environment will need to be prepared to approach the situation with flexibility and a willingness to improvise and adapt. Looking for approaches to both avoid threats and risks, but also to find opportunities to serve customers and maintain the continuity of the business organization.
- Workplace Concerns and Employee Safety.
Human resources, including employee safety is an essential part of every business. Employee safety and compliance with employment laws is an essential element of evaluating actions taken in response to the COVID-19 Pandemic.
One of the first determinations is figuring out if you are dealing with an independent contractor or an employee. If you are dealing with a contractor then your actions are likely going to be informed by the terms of your agreement with that individual or other business. When dealing with employees, other issues are implicated, which are described below.
As a matter of Federal Law, Section 5(a)(1) of the Occupational Safety and Health Act (“OSHA”) imposes a duty on businesses to provide a workplace free from recognized hazards that are causing or are likely to cause death or serious physical harm. Washington’s corresponding statute (“WISHA”) along with other statutory and common law, impose duties on businesses, including regarding the spread of infectious diseases. It has been recommended that businesses adopt policies permitting ill employees to work from home or send employees home if they disclose that they have coronavirus symptoms. There are also ADA and other privacy obligations that come into play here, where legal counsel is essential. Businesses should consider that before disciplining or terminating an employee who misses work out of fear of contracting the virus, they should consult legal counsel. There have been some courts have found that a public policy exception to at-will employment provides a cause of action to employees terminated for missing work under conditions that pose a risk of communicable infection. It is not clear that this is the case in Washington at this time, but because of the extraordinary nature of the COVID-19 Pandemic, businesses should take care with regard to employment issues. Furthermore, in Washington businesses should ensure they are complying with applicable state and local sick leave laws and be prepared to notify eligible employees of their rights under the Family Medical Leave Act, and Washington’s Paid Family and Medical Leave Laws.
In light of the COVID-19 Pandemic, employers are required to monitor the health of their employees daily (for COVID-19 symptoms); and both CDC and DOH guidance encourages work from home policies to promote the “social distancing” required to combat the virus and its spread. These policies are rapidly changing.
- Communicate with Critical Suppliers.
Businesses should assess the potential impact of any delays or disruptions to delivery of mission critical supplies, materials, and parts. Businesses should reach out to those suppliers to determine what level of inventories they are carrying and what actions they are taking to ensure the least amount of disruption to deliveries of parts and/or components. This is especially true for businesses with critical suppliers in the nations that have been hardest hit by the pandemic; but also, in other areas of the country. Furthermore, businesses should seriously consider redeploying resources in order to build additional banks of parts and/or onboard alternative suppliers to mitigate the impact caused by delays in deliveries from critical suppliers. This is a crucial element of claiming force majeure defense (as described further below). If there are going to be payment issues with regard to suppliers, including landlords, utilities, etc.; communication early is essential.
- Review Contracts for what “Force Majeure” Rights and Requirements May Apply.
The term “Force Majeure” refers to a legal doctrine where a party may be relieved from liability for non-performance if circumstances beyond the party’s control prevent the party from fulfilling its obligations under an agreement. Although most force majeure provisions are unlikely to list disease, epidemics, or quarantine, many include general provisions covering such things as natural disasters, “Acts of God,” “Acts of Government”, or “other circumstances beyond the parties’ control.” The COVID-19 Pandemic presents a somewhat unique situation in that it includes both a naturally occurring component (the coronavirus itself) and a government action component (including the quarantines and other measures put in place in response to the Pandemic). Parties should carefully review the force majeure provisions in their agreements to determine whether they apply. Application of the doctrine has a number of elements that have to be shown, including: (1) the existence, duration, and impact of the force majeure event, (2) the causal connection between the event and the nonperformance of the agreement, and (3) attempts to mitigate the damages caused by the force majeure event. In the absence of a force majeure clause in the agreement, the legal doctrine of impossibly may apply in certain circumstances.
- Review Contracts to Determine what “Material Adverse Change” (“MAC”) Rights and Requirements May Apply.
Typically, a Material Adverse Change (“MAC”) clause is a way in which both sides of a transaction can allocate risk between signing and closing, and can be utilized in certain areas of an agreement (e.g., in the representations and warranties section specifying the lack of an MAC occurring since a particular date). MAC clauses usually define a MAC as “any event, circumstance, development, condition, or change that, either individually or in the aggregate, has had or could reasonably be expected to have a material adverse effect on the business, financial condition, results of operations, or other aspects of the business of the target and its subsidiaries, taken as a whole.” Whether a company can rely on the MAC clause in any specific contract will be contingent upon: (1) how the provision is written, (2) how the provisions will be interpreted under the agreement’s governing law, and (3) the actual impact on the business at issue. Given that the full impact of the COVID-19 Pandemic remains unclear at this time, it is likely still too early to assess whether a MAC provision will have been triggered. Therefore, businesses should evaluate the continuing effect of the COVID-19 pandemic on the business at issue in the agreement.
- Continually Monitor Customer Demands
Businesses should be communicating with and monitoring their customers to ensure that they will be complying with their contractual obligations, including timely payment for materials and services supplied to the customer. In anticipation of disruptions, businesses should formulate a plan for managing communications with customer and other counterparties to agreements, bearing in mind that strategic considerations may be involved when deciding whether to take certain actions.
For those customers with a greater risk of nonpayment, businesses should evaluate their contractual payment terms with those customers. As a general matter, however, companies should assess whether the circumstances and applicable law permit any party to assert any basis for avoiding or pausing performance under their agreements and evaluate the potential consequences of a breach and/or default of the agreement.
Again, communication with customers is a critical element of business continuity in difficult economic times.
- Review Resource Allocations
For technology manufacturers in particular, they should review their allocation requirements and obligations to their various and multiple competing customers for any potentially scarce materials. This becomes more important as manufacturing operations begin to ramp back up. Depending on the nature of the business, this may apply to service providers as well.
- Reporting Obligations
Particularly in the case of publicly traded businesses, the review and making of accurate required disclosures, in the event that business operations are impacted to a degree that such reporting is required. But businesses of every size who are parties to credit agreements and other financing arrangements should also review existing MAC clauses, and potential impacts on the borrower’s financial covenant compliance, in order to determine whether any proactive conversations with lenders may be warranted.
Businesses should review insurance policies to determine possible coverage in the event of business disruption and comply with all applicable notice requirements. Businesses may also want to review the possibility of obtaining business interruption insurance. Regardless, businesses should evaluate their coverage to determine whether they may be covered for losses due to business interruptions attributable to COVID-19 or related illnesses. Many, insurers have precluded viral outbreaks from being included in their standard business interruption policies. It is crucial, therefore, for businesses to evaluate the terms of their specific policies in order to determine whether interruptions from COVID-19 would be covered. During the course of this evaluation, businesses should assess what their policies’ notice requirements are and ensure that they will comply with those provisions in the event coverage is sought.
- Business Travel
Businesses whose business involves travel to nations with Level 3 travel health notices (e.g. China, Iran, Italy and South Korea) should implement guidelines around travel to and from those nations. This is a rapidly changing area with travel bans from Europe having been recently implemented, and as of March 16, 2020 Canada and other countries planning to close their borders. Remaining informed of these current or pending travel bans is warranted.
Businesses should postpone nonessential business travel to such nations and consider whether there is a need for other international travel; this should apply to domestic travel decisions as well. Businesses should respect employees’ unwillingness to travel rather than demanding they do so, in order to minimize the risk of future liability. If employees have traveled to either China, Iran, Italy, or South Korea within the previous several weeks, companies should require employees work from home for a period of 14 days from the day they left those nations per CDC guidelines.
As governments continue to require or recommend office and school closures to prevent or slow the spread of COVID-19, many businesses may decide to implement or expand employee work-from-home programs. These programs allow for business continuity, but they also pose increased cybersecurity risks by creating several additional avenues for unauthorized access to company systems and information. As a result, businesses should review their current cybersecurity controls and whether they must be enhanced prior to initiating or significantly expanding remote working technology. As a practical example, best practices require implementation of two-factor authentication for accessing business networks and webmail and encryption on laptops and mobile devices. Businesses should ensure adequate physical security and access controls for information technology assets during preparations for extended office closures.
Businesses also should warn their employees that malicious actors will increase the use of targeted phishing attacks. These might include emails that purport to include medical updates or are “important notices” for those working remotely. These are risks for both large and small enterprises.
In addition, business policies that govern the acceptable use of business systems and devices as well as the transfer and storage of the business’ information are essential. Employees working remotely are more likely to forward business information to personal email accounts or to store information on unprotected laptops or other mobile devices, which creates significant additional risks.
Training or reminders about such business policies is critical. Finally, businesses should be mindful of applicable privacy laws when collecting information about employees or clients they might not have previously collected, such as health information and travel itineraries.
- Government Programs / Relief Programs for Businesses and Employees
As a response to the COVID-19 Pandemic, the Federal, State, and some Local Governments have begun to provide resources for businesses and residents. These include resources for unemployment programs, Short-Term and Emergency Loans, and other resources. These are rapidly changing, so business owners and managers should continue to monitor the availability and applicability of these programs for their businesses. Some include:
- SBA Economic Injury Disaster Loan Program (Federal); See. Also.
- Washington DOR Excise Tax and Filing Deferral
- Washington DOR Excise Tax Late Penalty Waiver
- Washington ESD Shared Work / Layoff Alternative for Employees
- Washington EST Unemployment / Paid Sick Leave / Paid Family & Medical Leave
- Washington ESD State Unemployment Tax Late Filing and Payment Relief
- Washington SBDC Business Resiliency Webinars
- Washington DFI Financial Resource Page for COVID-19
Small businesses in Washington State find themselves in a rapidly changing and dynamic situation, which will require on-going vigilance and action to navigate. The preceding checklist of items should provide a framework for navigating those businesses through this challenging time.
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DISCLAIMER: This blog post, as well as any data and information provided are for informational purposes only. It is not legal advice nor should it be relied on as legal advice. To the extent that this document may contain suggested provisions, they will require modification to suit a particular transaction, jurisdiction, or situation. The law is a rapidly changing subject, no representation is made that everything posted on this site will be accurate, up to date, or a complete analysis of legal issues. Please consult with an attorney with the appropriate level of experience if you have any questions. Review or use of the document and any discussions does not create an attorney-client relationship with the author or Possinger Law Group, PLLC. No attorney-client or confidential relationship is or should be believed to be formed by the use of this site. The opinions expressed here represent those of Jeffrey Possinger and not those of Possinger Law Group, PLLC or its clients.