Can you believe it’s been less than a season since the devastating impacts of COVID-19 upturned our lives, shuttered our offices, and turned a trip to the store into an existential threat to our health? For some businesses, like retail, the impact was immediate and disastrous. For others, it is taking longer to feel the full force of the pandemic and the recession that is likely coming hot on its heels.
In the first weeks of self-imposed or government-mandated quarantine, many companies immediately shut their doors, cut programs and services, and furloughed staff – waiting to see what shape the pandemic would take for their industries. It’s clear now, as our quarantine stretches into its third month, that wait-and-see is no longer a good strategy.
The US economy is expected to contract by 34% in Q2. That hit will be felt unevenly across businesses but every company is likely to be shaken to some degree by supply line breakdowns and a drop in spending across all verticals. Some companies are well placed for a pandemic. For example, those in the business of home entertainment, remote work, fitness, and cooking. Others, like those in events and retail, need to pivot online quickly or face what will likely be a quick and unceremonious extinction. Smart business leaders need to act now to protect their companies. That means getting a handle on all the contracts that govern your activities.
Stem the Bleeding
First things first, you need to pull together the people who best understand the business and make some tough decisions. The Harvard Business Review‘s five-day crisis plan is an excellent place to start – it includes the questions that will help you arrive at the set of actions you need to do today in order to survive the coming weeks or months. No one can predict the future but businesses that are prepared for a few likely scenarios will pivot more quickly than their competition, shifting their focus from surviving to thriving in less time.
For most companies, the highest cost is your employee costs. Many have already furloughed workers and cut hours but are still paying full benefits. Some have moved their entire workforce to remote, retooling the organization and retraining workers to do their jobs from home. For some companies, certain types of work have exploded while others can’t be done easily or safely. Now is a good time to look at your current business practice. Consider whether you have the right number of people – and the right people in those roles.
If you decide you need to lay people off, freeze wages, or furlough teams, you want to look closely at your employment contracts and their provisions. Firstly, remember that discriminatory layoffs are illegal. You must be able to show good business reasons for the cuts you decide to make. Secondly, look at your contracts for terms such as severance pay and COBRA benefits. Notice periods may also apply, though in some states the COVID-19 pandemic is considered an exemption to the WARN act, which stipulates notice periods for job losses that relate to plants closing and companies laying off over 100 people.
Calculate what it would cost if you laid off teams now, in a month’s time, or in four months’ time. Know what your liabilities are. If you decide layoffs are the right move for you, be considerate about how you notify staff. Consider your company’s reputation. With unemployment at an all-time high and still rising, customers have a very short fuse for companies that seem to be behaving poorly in a pandemic.
Retaining a Lawyer for Layoffs
You might consider hiring a lawyer to inform your layoff process if:
- You’re laying off people in a state that has no Right to Work provisions.
- There are provisions in the employee handbook and/or contracts that you can’t fulfill.
- You want to enforce non-compete clauses and you’re expecting some resistance.
It may seem like an unnecessary expense, but the cost of a lawyer to review your contracts and advise your position is likely a fraction of the cost of fighting a class-action suit or protracted union battle. If you do want to retain a lawyer, look for one with specific experience with contracts and the size or type of business you run.
Your Contract Liabilities
The next thing you want to look at is what your contractual obligations are as a company. Start with your bread-and-butter work. Do you owe suppliers money? Are you expected to deliver goods or services to another company? If you have a contract lifecycle management tool, this will be a breeze. Otherwise, you may be looking at a long, hot summer poring over file cabinets in your lonely office.
Even if you have negotiated delays or changes since the coronavirus pandemic began, those deals may not hold forever so you must know what you’re up for. Largesse may get you free beers from time to time but it is not a legal defense.
When examining your contracts, you’re looking for clauses like force majeure, which excuses your obligations in the event that you’re unable to deliver because of circumstances beyond your control. In recent years, these clauses have been tightened as the disastrous weather events they were originally written for become more likely. Your contracts may contain the term, reference to disasters, terms like “special circumstances” and/or pandemics specifically. The case law is still working its way through the courts so it’s hard to say what protection these clauses will offer companies but it’s safe to say that contract writers will be beefing up these clauses from now on.
Does Your Lease Feel Like a Leash?
Your plans for a summer spent alone in the office looking through HR file cabinets notwithstanding, your premises are probably empty and likely to stay that way for some months.
This pandemic has proven for many companies that their businesses are perfectly capable of operating remotely. If that’s the route you want to take, you may be able to break your commercial lease early. Many commercial landlords are offering rent discounts, deferring payment, or offering additional services. Find out what you can get. Look closely at your contract to figure out what a lease break would cost you. Once again, look for that force majeure clause or something like it, but even if it exists, there may be a burden to prove that paying rent is either impossible, unreasonably expensive, or, in few cases, a very narrow definition of “impractical.” Many leases have even more narrow force majeure clauses than other types of contracts, so if you’re contemplating an expensive lease break, it’s a good idea to engage a commercial law specialist.
Negotiating a Better Deal
Here’s the good news. Just because you are stuck with the proverbial pointy end of a contract doesn’t mean all is lost. It’s a global pandemic and everyone’s business is impacted. That means you may have some wiggle room. That customer who ordered 400 custom dinner plates for their restaurant opening in early June? Perhaps they won’t be needing them after all. Once you’ve figured out exactly what your contracts require of you and where you stand legally, you can do some informed negotiating.
For many businesses, the cost and effort of finding a new vendor or partner outweigh whatever you can’t deliver this one time. Figure out what you have to offer – reduced rates over a longer time period, additional services, or a discount, perhaps. This could be a great opportunity to renegotiate your contracts for a new way of working.
That goes both ways, though. If your business is the one bilked out of what is contractually yours, or your customers are demanding more when you have less to give, do the math on what the relationship is worth to you. Largesse may not be legally binding but it definitely still goes a long way in the business world. Know what your rights are but don’t forget your responsibilities. Companies that seemed to act callously in a pandemic will be remembered – but so will those who put people before profit and acted in line with their values.
Other posts about contract insights:
- How to Track Contract Compliance
- 6 Clauses Typically Found in Commercial Contracts
- A Primer for Evaluating and Mitigating Contract Risks
- Which Key Points Should be Covered in Your ERP Contract?
- What is Contract Leakage and How Can I Fix It?