At the time of this article’s release, 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 sentiment to remember: Nobody ever regrets making fast and decisive adjustments to changing circumstances.
The current pandemic presents both operational and legal issues for small- to medium-sized businesses; which are the primary clients of Possinger Law Group. Here in Western Washington, which has been a particularly affected by the COVID-19 pandemic, businesses have found themselves needing to respond quickly to emergency regulations and public health orders. This rush to adapt has directly impacted business operations, and the widespread decrease in economic activity has further changed the way that businesses must operate to sustain themselves.
Over the past week, questions that our firm has received have fallen into three basic categories:
- Compliance with Public Health Orders and Emergency Regulations,
- Handling Employees, Contractors, and Keeping the Business Operating, and
- Impacts on Existing Contracts and Ongoing Business Obligations.
The following is a quick outline of the issues that businesses should be reviewing, assessing, and acting upon to protect critical relationships (i.e. employees, customers, suppliers, and the community at large) and remain successful during these unprecedented times. Every business is unique in its needs and resources, but principles listed in this article will be helpful for all business entities. All of these items address key issues in: (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 careful thought and strong communication. The themes that we outline below will give businesses a strong starting point to effectively respond to the COVID-19 pandemic.
More than ever, it is crucial that business owners and managers remain well-informed as the situation rapidly develops and changes. It should be expected that circumstances will change daily; and though emergency declarations and public health orders have been put into place until March 31, 2020, businesses should anticipate that these will change and possibly be extended until the emergency situation ends.
- Remain Compliant with Emergency Regulations and Public Health Orders.
As of March 16th, 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. Regulations are coming out on federal, state, and local levels. Businesses should visit the Seattle/King County Public Health’s COVID-19 Page 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 of utmost importance, as violations of emergency proclamations and public health orders are gross misdemeanors.
Prepared to Improvise and Adapt to the Environment.
Businesses that want survive (and thrive) in this environment need to approach the ongoing situation with flexibility and a willingness to improvise and adapt. It is essential that businesses not only seek approaches that avoid threats and risks, but also find opportunities to serve customers and maintain the continuity of operations and services.
- Prioritize Workplace Concerns and Employee Safety.
Human resources, including employee safety, is an essential part of every business. When it comes to the COVID-19 pandemic, employee safety and compliance with employment laws are an essential element of a business’ response.
One of the first steps of a comprehensive response 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 detailed 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 laws, imposes duties on businesses 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 are experiencing symptoms of COVID-19. 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. 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, Washington businesses should ensure their compliance 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.
with Critical Suppliers.
Businesses should assess the potential impact of any delays or disruptions to delivery of critical supplies, materials, and parts. Businesses should contact their suppliers to determine what level of inventories they are carrying and what actions they are taking to prevent disruption to routine deliveries. This is especially true for businesses with supply needs in industries that have been hardest hit by the pandemic, such as retail, food, and transportation. 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 delivery. 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, and fees, it is essential that these issues are communicated clearly and quickly.
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 must 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.
Contracts to Determine what “Material Adverse Change” (“MAC”) Rights and Requirements
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 monitor and evaluate the continuing effects of the COVID-19 pandemic on their operations, in regards to MAC clauses in their active contracts.
- Continually Monitor Customer Demands.
Businesses should monitor and communicate with their customers, to ensure continued compliance 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 customers and other counterparties to agreements, bearing in mind any strategic considerations that may be important to when determining whether to take certain actions.
For customers with a greater risk of nonpayment, businesses should communicate with the customer to evaluate their contractual payment terms. 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, while also evaluating the potential consequences of a breach or default of the agreement.
Again, communication with customers is a critical element of business continuity, and is especially important difficult economic times.
- Review Resource Allocations.
Technology manufacturers in particular should review their allocation requirements and obligations to their various and multiple competing customers for any potentially-scarce materials. This will likely become more important as manufacturing operations eventually return to their normal rate. Depending on the nature of the business, this may apply to service providers as well.
In the case of publicly-traded businesses, reviewing and making accurate disclosures on business operations is often necessary. This is especially true during the COVID-19 pandemic, as operations and services continue to be impacted heavily. Businesses of every size who are parties to credit agreements and other financing arrangements should also review existing MAC clauses and assess potential impacts on the borrower’s financial covenant compliance, in order to determine whether any proactive conversations with lenders may be warranted.
- Review Insurance Policies.
Businesses should review their 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. Either way, businesses should evaluate their coverage to determine whether they may be covered for losses due to business interruptions attributable to the COVID-19 pandemic. Many insurers have precluded viral outbreaks from being covered within in their standard business interruption policies, but certain contracts may include related coverage. It is crucial, therefore, for businesses to evaluate the terms of their specific policies in order to determine whether interruptions from COVID-19 could be covered. During the course of this evaluation, businesses should also determine what their policies’ notice requirements are, and ensure that they will continue to comply with those provisions, in the event that coverage is sought.
- Assess Business Travel Protocol.
Regarding travel guidelines, businesses should implement internal guidelines around travel to and from nations with Level 3 travel health notices (e.g. China, Iran, Italy and South Korea). This is a rapidly-developing issue, with travel bans to/from Europe having been recently implemented. As of March 16th, 2020, Canada and several other countries are also planning to close their borders entirely. Staying informed on these current or pending travel bans is important for all businesses, especially for those whose operations rely on international travel of any kind.
Businesses should postpone nonessential business travel to high-risk areas and evaluate whether there is a need for other international travel. This should also apply to domestic travel decisions, especially as the public continues to better understand community spread in different parts of the United States. Businesses should respect any employee’s unwillingness to travel (rather than demanding they do so), in order to minimize the risk of future liability. If employees have traveled to China, Iran, Italy, or South Korea (or any other countries later added to the list of nations with Level 3 travel health notices), companies should require that they work from home for a period of 14 days from the day they left the nation, as per CDC guidelines.
- Develop and Maintain Cybersecurity Practices.
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 additional avenues for unauthorized access to company systems and information. As a result, businesses should review their current cybersecurity controls and determine 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, as well as 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 should also warn their employees that malicious actors are likely to increase the use of targeted phishing attacks. These might include emails that claim to include medical updates or appear to include “important notices” for those working remotely. These are risks for large and small enterprises, alike.
In addition, business policies that govern the acceptable use of business systems and devices, as well as the transfer and storage of 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, all of which creates significant additional risks. It is for this reason that training or reminders about such business policies is critical to maintaining cybersecurity in remote work environments.
Finally, businesses should research and remain compliant with applicable privacy laws, when collecting information about employees or clients that they might not have previously collected, such as health information and travel itineraries.
- Maintain Awareness of Government Relief Programs for Businesses and Employees.
As a response to the COVID-19 pandemic, all levels of government 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 that are currently-available include:
Small businesses in Washington find themselves in a rapidly changing and dynamic situation, which will require ongoing vigilance and action to navigate. The preceding checklist of items should provide a framework for navigating 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.