With lockdown 2.0 slowly rebooting itself, people in the UK and beyond are coming to terms that the “new normal” is staying for longer than we think. It has impacted us all in several ways: from schools being closed and parents having to home school their children, to funerals only witnessing two or three family members being allowed for a final send-off; people have unexpectedly lost their jobs and their only source of income and those fortunate enough to keep their jobs, have found themselves attending a Zoom video call from the comforts of their bed. Some have been luckier than others, but unfortunately, many have seen the ugly side of the pandemic… the economy included.
At the start of this journey, it was estimated that if the virus became a global pandemic most major economies would lose around 2.4 per cent of the value of their GDP throughout 2020, meaning that the global GDP that was estimated at around USD 86.6 trillion at the end of 2019 now has USD 3.5 trillion in lost economic output (if applying the same 0.4 per cent drop leading economists applied to their 2020 forecasts). This is a blow to the economy which left businesses across the world feeling the wrath of a global pandemic; restaurants temporarily closed, leaving the high street only welcoming lonesome pigeons, supply chains were broken and travel restrictions forced companies to work remotely or crumble…it is not surprising that COVID-19 has left the United States facing an economic crisis seeing unemployment up at 8.4 per cent in August 2020. This is after the unemployment rate shot up from 3.8% in February – among the lowest on record in the post-World War II era – to 13.0% in May[1], showcasing that things are slowly healing.
But with the second phase creeping in, businesspeople are trying their best to keep their head above the water. After all, they didn’t survive the first round, to be knocked out in the second. Almost one-quarter of all businesses temporarily closed or paused trading due to the pandemic in the UK[2], with many declaring bankruptcy, searching for refinancing or restructuring as a method to save what remains when lockdown eased. So, we thought we would explore the ways in which companies can try their best to survive the COVID pandemic, not only for the economy, but for their employees who may need their job more than they think during such unprecedented times.
“These are exceptional times, but the margins between survival and disaster can sometimes be wafer thin and the adage that ‘he who hesitates is lost’ has never been truer”, Iain Young, Partner and Head of the Corporate Division at Morton Fraser tells us.
In greater numbers, firms with liquidity concerns are beginning to explore new ways of monetizing illiquid assets, like legal claims, in order to improve cash flow
“The extent of the damage to the economy is currently being masked by the wide range of ‘life support’ mechanisms being applied by the State. Whether it comes in the form of the furlough scheme, tax deferral and rebate schemes, government backed loans or the suspension of the wrongful trading provisions, there is little doubt that large parts of the economy are in intensive care and being kept alive by a Government sponsored induced coma.”
Faced with such circumstances there are usually two options: either recognise that the battle, and indeed the war, has been lost and that the elegant position is to withdraw knowing you have done everything possible to mitigate the pain suffered by yourself and others; or recognise that the position is not yet hopeless, roll your sleeves up and get on with doing what you can control, whilst hoping that with a fair following wind and the odd stroke of good luck you will emerge on the other side of the storm in better shape than your rivals and ready to sail on calmer waters.
“Whichever path is chosen; you cannot easily do it on your own”, explains Iain. “Insolvency professionals are easily characterised by the general public as the undertakers of the corporate world, though they prefer to be recognised as health workers: engaging with patients who are suffering and trying their best to either make them better or alleviate the worst of their suffering. And as with medical conditions, the earlier you seek help the more likely you are to have a satisfactory outcome. Sadly, now more than ever, survival of everyone cannot be guaranteed.”
Explaining the operational crisis to the employees honestly and transparently will earn business empathy from its core performers.
Alongside hearing more from Iain, in this article we speak to experts in the UK and US and asked them for their advice on how companies can stay afloat when everything else seems to be sinking.
Overthrowing Tradition
In order to withstand the economic hardships created by COVID-19, advises Matthew Oxman, Vice President of Business Development & Investments, LexShares, businesses should be willing to reconsider traditional methods of managing their finances. “In greater numbers, firms with liquidity concerns are beginning to explore new ways of monetizing illiquid assets, like legal claims, in order to improve cash flow”, explains Matthew.
“We expect business disruptions brought on by the pandemic to fuel a surge of insurance, breach of contract, and bankruptcy-related litigation in the coming months.” Companies looking for creative ways to subsist would be well-served to consider litigation financing opportunities, whereby third parties can help arm corporate plaintiffs with capital to fund business expenses, legal fees, and more--a potentially valuable resource in a highly turbulent environment.
Overthrowing tradition is not just applicable in a financial sense, either. Carol Li Growth Marketer and Co-Founder of CocoFax, explains that even though it is a tough time for the survival of businesses, it is not impossible to come through the other side, especially if technology is embraced and operations are assessed and scrutinized.
“There are ways in which businesses can ensure that their work continues, and their business survives the COVID-19 crisis. With the right technology, effective communication, and workforce support, you can combat the crisis”, explains Carol.
Here, businesses must get on a ‘resource optimisation mode’ and analyse the resources available at their disposal. If there is a way to counter engage the resources, that must be understood and implemented, advises Carol.
mployers may have to consider cutting costs and saving money in order to be around for the long run.
Honesty is important, here, however. “Explaining the operational crisis to the employees honestly and transparently will earn business empathy from its core performers. Hence, employees will be willing to contribute their skills.” That is not all. Overthrowing traditional ways of working is vital, especially if work is not COVID safe in the office.
“Allow your staff to work remotely if their roles allow them so. There are a lot of tips and tricks of remote working that can be incorporated in the business. Regular meetings, technological and human resource support can ensure that work is not hindered. Regular meetings, reviews and team engagements can be done to make sure that the team feels motivated. It also makes sure that deadlines are set and honoured.”
Flexibility and adapting to the situation are key to survival, in order to keep employees safe and happy. After all, without the employees, where would the company be?
We decided to hear from employment lawyers to discuss the legal aspects involved when it comes to making the best decisions for the business and its employees.
As a management team, you must be agile. Think outside the box - is there a new, more efficient, more cost-effective way of achieving the same result?
Employing the tough decisions
Even though a good company keeps its employees happy, sometimes, tough decisions need to be made. Employers may have to consider cutting costs and saving money in order to be around for the long run. David Bradley, Chairman and Head of Employment Law, Ramsdens Solicitors, has provided us with a checklist for employers to consider when trying to make savings to keep their business running:
- For many businesses labour cost is significant and it is, therefore, no surprise that according to IPD data that at least a third of all employers are considering redundancies. This would be a direct cost saving.
- Revise travel policies – travel cost is likely to have dropped as there is no need for face to face meetings, we are now a Zoom generation. What about benefits, such as company cars? This may also be a reduced cost in the future with less travelling scheduled in the diary.
- Working from home – do employers need all their current space? Can they downsize and reduce overhead?
- Savings can be made with subsidised canteens/gym membership etc.
- Necessity is the mother of invention. Ask yourself, do work patterns still make sense, (did they before?); does the remuneration policy continue to make sense? A crisis is usually a prompt and a potential rationale for wide-ranging contractual change – employers should seek specialist advice in this area particularly where variation is unlikely to be purely consensual. This strategy may also be used as an alternative to headcount reduction as was done so in the 2009 financial crisis.
- Keep an eye on holidays! Employers can dictate when holiday is taken by giving notice to employees – many employers will want good staffing levels as production/output increases later and will not want holidays banked up to denude that resource.
Adding to this, Iain shares that reducing hours across the board is better than imposing redundancies. “Redundancies are divisive and can create a climate of fear and self-protection, with employees behaving defensively, looking out for themselves and not playing as a team. Reduced working hours helps you retain the staff in whom you have invested, and if work picks up then you can increase their hours. This is less expensive than recruiting someone new, getting them up to speed, paying recruitment costs and taking a risk on an unknown quantity.
With the impact on the economy, fears of a second wave, and the future phasing out of furlough, businesses in several sectors will need to plan their staffing requirements and structure accordingly
“As a management team, you must be agile. Think outside the box - is there a new, more efficient, more cost-effective way of achieving the same result? Analyse where you throw away the old rule book and start again and think hard to identify what parts of your organisation are profitable and provide the guaranteed turnover necessary to keep the doors open and the lights on. Do you even need doors anymore? Are some divisions anti-cyclical?” There are a lot of questions to ask as a management team, explains Iain, but the answers will help steer you in making the right decisions.
You have to bear in mind that, although it may be tempting for struggling firms, you should not cut corners when it comes to legal obligations, as Robert Bird, Professor of Business Law at the School of Business, tells us. “There are a number of new legal requirements for organisations in the wake of COVID-19. Failing to meet these obligations can cost more than the time or money saved by ignoring the rules.”
“Also, most policies that a company makes regarding COVID-19 and its workers should be based on transparent and objective criteria. Failing to do so can leave a company vulnerable to the charge that a layoff or other decision was based upon illegal discrimination rather than for business reasons”, he advises.
Keep in mind that changes to working arrangements may need to be reflected in employees’ terms and conditions.
Following from David’s checklist outlining how employers should keep an eye on holidays, James Tamm, Director of Employment Services at employment law and HR support firm Ellis Whittam, says staffing requirements will need to be amended according to customer demand.
“With the impact on the economy, fears of a second wave, and the future phasing out of furlough, businesses in several sectors will need to plan their staffing requirements and structure accordingly”, explains James.
Will you need to make changes to start and finish times to comply with your risk assessment, perhaps redeploy some employees to other roles or departments, or cut hours or pay due to the financial impact of the crisis? Will these changes be temporary or permanent? These are all things that will need to be worked out, and it is a good idea to document your decision-making so that this can be used to support any processes that result from your planning.
Unfortunately, redundancies have become a reality for many businesses. These must be handled carefully as the potential for legal missteps is high.
“Keep in mind that changes to working arrangements may need to be reflected in employees’ terms and conditions. For example, asking people to work different shifts, perhaps with a later start and finish time, could involve a contractual change”, James expands.
A contract can only be changed in line with its existing terms or by agreement, so start by checking what it currently says. Is what you are trying to achieve already permitted under the terms of the contract? If so, the change can be enacted that way. If not, says James, the quickest and easiest way to introduce a change is by negotiation and agreement. It is also the option that is best for maintaining cordial employee relations. “There are however many factors and scenarios to consider and more detailed free guidance on this can be found via the Coronavirus Advice Hub”, he adds.
Unfortunately, redundancies have become a reality for many businesses. These must be handled carefully as the potential for legal missteps is high. Processes vary depending on how many employees are at risk; however, some broad principles apply universally, which James has outlined below:
- Provide adequate advance warning;
- Consult with staff in an attempt to find alternative solutions (usually 10 to 14 days is required, although this could be shorter for more straightforward situations, or longer if a certain number of dismissals are proposed);
- Be fair and reasonable, and follow a proper process;
- Explore alternatives (such as the flexible furlough scheme for the remainder of its existence);
- Consider, discuss and offer suitable alternative employment if available; and
- Make appropriate redundancy and notice payments subject to statutory requirements if no alternative/higher contractual arrangement exists.
Companies also are facing, and will be facing in the future in the event of a COVID resurgence, issues under the federal Worker Adjustment and Retraining Notification (WARN) Act and companion state laws, where they apply to particular employers.
What are other prominent employment issues companies are facing at the moment?
Many companies, particularly those in the retail, hospitality, restaurant and similar businesses, are struggling to remain in business. With governmentally-imposed shutdowns and gradual re-openings (often with additional closure periods due to upticks in coronavirus), it is difficult to operate and plan for operations. For those in the US, explains Christine Samsel, Labour and Employment Attorney at Brownstein Hyatt Farber Schreck, employers that operate in multiple jurisdictions are facing many challenges as well, with federal, state and local requirements and guidance, such as safety measures, reporting requirements, stay-at-home orders, and paid leave provisions that vary from jurisdiction to jurisdiction and change frequently. “Just keeping up-to-speed on these requirements is a challenge, let alone implementing policies and protocols to comply with them in each locale”, she explains.
As businesses resume operations, they will need to tread carefully with respect to paid leave issues. “Many schools will not offer in-person learning in the fall, or will initially offer it but will need to pivot to remote learning in the event of a COVID resurgence. This can trigger protected paid leave rights under the Families First Coronavirus Response Act (FFCRA) and similar state laws such as the Colorado Healthy Families and Workplaces Act and California Executive Order N-51-20, as well as local laws such as those in Los Angeles and San Francisco.”
Employers should consult with their legal counsel to assist in navigating these ever-changing legal requirements and issues.
Companies also are facing, and will be facing in the future in the event of a COVID resurgence, issues under the federal Worker Adjustment and Retraining Notification (WARN) Act and companion state laws, where they apply to particular employers. “While there is an “unforeseeable business circumstances” exemption to the 60-day notice requirement under the WARN Act that many businesses justifiably relied on earlier in this crisis, as COVID stretches on, and the likelihood of a resurgence becomes foreseeable, that exception will be more difficult to use. Employers still need to provide as much notice as they reasonably can, even if it is less than 60 days.” In addition, employees who have been furloughed beyond six months can trigger WARN Act obligations as well, which some employers are not aware of.
Workplace safety issues also are obviously at the forefront, with guidance issued by the Centers for Disease Control and Prevention (CDC) and the Occupational Safety and Health Administration (OSHA), and many states and localities issuing their own public health orders, executive orders and other legally-required protocols. “Guidance and legal requirements are updated regularly. One issue we are seeing, in particular, is backlash against employees by patrons who view mask requirements as an impingement on their personal freedom”, explains Christine.
How should these be tackled?
Similarly, employers will face requests for disability accommodations, and employees who generally fear returning to work.
“Employers should consult with their legal counsel to assist in navigating these ever-changing legal requirements and issues. For instance, failure to comply with current local public health orders (such as mask requirements) can lead to potential liability to employees, patrons and other third parties”, advises Christine.
Taking a proactive approach here is critical. Employers should be forward-thinking in their operational plans to run various scenarios. For instance, what if stay-at-home orders are issued again? You should be asking: how should we respond, who can work remotely, how can we best accommodate that, and what do we need to do now? What will our staffing needs look like if there is a resurgence of COVID? And so on. “This is particularly important for employers who may trigger WARN Act requirements through additional layoffs or furloughs, or extended furloughs for those employees already furloughed”, says Christine.
She expands by explaining how employers in the US will need to stay abreast of federal, state and local leave requirements as they may be modified. “Employers will need to comply with all requirements and restrictions (e.g., what documents can be required of employees, how much time employees may take and for what reasons), and carefully track leave taken and compensation provided. This is particularly true under the FFCRA, which requires certain documentation in order to claim the applicable tax credit.
“Similarly, employers will face requests for disability accommodations, and employees who generally fear returning to work.” This implicates workplace safety issues, as Christine discusses further below.
The crisis has presented investment opportunities for many businesses – particularly in the food and tech sectors – and for some businesses, now is the perfect time to consider seeking investment in the form of M&A and private equity.
With everything being a little uncertain at the moment, how should companies keep their employees in the loop, especially to avoid legal repercussions? Well, employers would be well-advised to implement a written workplace safety plan (and in some jurisdictions, are required to do so) based on current CDC and OSHA guidance and state and local requirements and best practices. “This is not a static document”, explains Christine, “But must be updated as circumstances dictate and guidance and requirements are updated. We are seeing many more OSHA complaints about workplace safety, and having a comprehensive safety plan in place, and actually following that plan, can help immeasurably in responding to such complaints.”
This plan should be communicated to employees, and employees should be trained on best practices. Employees also should be encouraged to report concerns and suggestions; often, the employees “in the trenches” come up with the best ideas for improvement. This can improve employee morale, give employees more of a sense of security, and can also help minimise potential workplace safety complaints.
“Likewise, employees should be kept reasonably apprised of business plans, such as planned return to the office, furlough status and the like. Leaving employees guessing and not providing adequate and timely information can be devastating to morale”, concludes Christine.
Deal or no deal?
Companies looking to sell to a private equity house as a form of investment can benefit from support that they may not have had previously
Employment issues aren’t the only thing employers should consider if they want to pull through past the pandemic. The crisis has presented investment opportunities for many businesses – particularly in the food and tech sectors – and for some businesses, now is the perfect time to consider seeking investment in the form of M&A and private equity, shares Debbie Jackson, Partner in the Corporate team at Walker Morris. But is it wise to proceed with an M&A transaction amidst a global pandemic?
“Although struggling firms have welcomed loans and the furlough scheme to streamline costs, the real task for businesses – especially those considering M&A and private equity – is working capital management. This will help companies get into a position to survive the ‘new normal’ and when they start repaying the debts they’ve accrued”, Debbie clarifies. And whilst there will likely be M&A activity created in the near future because some businesses won’t survive, many should have an improved understanding of what’s required to deliver their core business and what can be removed to save costs.
“Many businesses will now have a greater understanding of how they can run most cost-effectively, meaning they are in a good position to secure investment from a private equity firm if they can prove their business has scope for commercial growth under a streamlined model.
Companies looking to sell to a private equity house as a form of investment can benefit from support that they may not have had previously, for instance; how to incorporate technology to enable the business to run more efficiently, with fewer overheads. “Businesses in this position will not only benefit from the expertise of a private equity house when it comes to streamlining the business even further, but they will learn how to grow in a financially unstable climate”, expands Debbie.
For companies acquiring, what due diligence issues are more prominent during this time? Business continuity is an important issue. We ponder, ‘Does the target have sufficient employee resources to continue operating, whether now or going forward?’
We have also seen issues arise where companies have not timely paid out final wages and/or accrued paid time off in a timely manner, which can result in exposure
In the US, the WARN Act issues require particular diligence. “For example, if a target company has had people on furlough for an extended period of time, the WARN Act (and/or companion state laws) may have been triggered, unbeknownst to the target company, or it may be triggered shortly after closing”, explains Christine.
COVID-related paid leave laws also need to be considered carefully, too. Some paid leave laws specifically make successor entities (as defined, which can include asset deals) liable to carry over leave entitlement and provide additional leave. In addition, there may be potential exposure where the target company has not provided legally-required paid leave due to COVID-related circumstances.
As Christine discusses with us, she expands on how she is finding that wage-and-hour issues are arising more frequently. “This can occur, for instance, where exempt employees may have been improperly paid reduced compensation for working a reduced schedule, or non-exempt employees are not properly tracking all remote working time, or expenses incurred in working remotely have not been fully compensated in jurisdictions where such reimbursement is required.
“We have also seen issues arise where companies have not timely paid out final wages and/or accrued paid time off in a timely manner, which can result in exposure (for instance, California treats a furlough of more than a pay period as a layoff, triggering payment obligations)”, she explains.
And while companies are considering their “exit strategy” in a post-pandemic world, there are positive opportunities arising from the crisis. Companies have had to adapt considerably and there are lessons to be learned and a chance for them to gain competitive advantage. Debbie succinctly summarises this, by saying: “Businesses have learnt the importance of agility and having the ability – and willingness – to adapt and identify new opportunities to not only survive in the current climate but grow.”
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While eyes will rightly be inward facing at challenging times, it is important to also keep an eye on competitors. Do they have good people who could enhance your offering? “Now might be a good time to strike if your competitor is struggling”, explains Iain. “Turnover might be down but that isn’t a disaster. If your turnover is down less than that of your competitors, it suggests you are winning market share and will be extremely well placed when market conditions improve. Likewise, be open and nimble to acquisitions. Distressed companies usually have a few good parts, and if they go into formal insolvency be prepared to move quickly.”
From employment aspects to financial, there are several things for businesses to consider. One thing that can be concluded from speaking to a wide collection of experts this month, is that being on top of regulations and what you can and cannot do is vital - whether that is ensuring everything is legally sound when changing employee contracts, to thorough due diligence in acquisitions – remaining vigilant, being prepared and quick to act on change, is important if companies want to come out strong at the end of this pandemic.
[1] https://www.pewresearch.org/fact-tank/2020/06/11/unemployment-rose-higher-in-three-months-of-covid-19-than-it-did-in-two-years-of-the-great-recession/
[2] https://www.statista.com/statistics/1114406/coronavirus-businesses-closing-in-the-uk/
