Post Covid Legal Issues Small Businesses Face

March 10, 2021by Brian Walsh

State governments across the country are easing or lifting Covid-19 restrictions in place for more than a year. The disease and attendant control measures caused thousands of small businesses to go out of business and millions more wondering if they can hang on until society regains a measure of normality. Eager to put the past year in their rear-view mirrors, business owners are reopening their facilities, recalling laid-off workers, and aggressively advertising that they are ready for business.

For many, the post-Covid market brings a new set of legal issues that, if unresolved, can result in bankruptcy or closure. Understanding one’s exposures and developing a strategy to cope with potential problems before they arise is a good practice, especially in today’s business environment.

Potential Legal Exposure

Each business is unique with different products and services, customers, locations, and employees. Most will not confront all the possible consequences. The effects will differ from state to state depending on the relevant laws. Seeking the advice of a competent business attorney before or early in the process of reopening is advisable. Anticipating what might happen in the future allows for preparation today.

Government Loan Programs

The Federal Government through the CARES Act in 2020, created or amended several different programs to help beleaguered business owners:

  • Paycheck Protection Program (PPP).  Two series of loans(First and Second Draws) are available for companies up to 300 employees at an interest rate of 1% and terms of two or five years. Repayment of the loans may be forgiven if the proceeds were spent on payroll and other eligible expenses in the 8 to 24 weeks following loan disbursement.
  • Covid-19 EIDL. Congress extended the Economic Injury Disaster Loan (EIDL)for businesses who lost revenues due to Covid-19.
  • SVO Grant ProgramQualified small businesseswho have lost 45% of their gross earned income are eligible for grants up to $10million.
  • SBA Express Bridge Loan. Small businesses in a business relationship with an SBA Express Lender can receive up to $25,000while waiting for the approval and cash disbursement of an EIDL.
  • SBA Debt Relief. SBA is authorized to pay six months of principal, interest, and any associated feesthat borrowers owe for all 7(a), 504, and Microloans reported in regular servicing status (excluding PPP loans).

Many states created programs to assist small businesses with their borders to cope with the Covid-19 disaster. The terms of such programs are varied and unique.

Invariably, government leaders will begin to investigate, amend, and discontinue relief programs when a crisis is over. Small businesses who participated in one of the programs need to (1) understand their obligations and (2) have physical or digital records detailing the use of any loan proceeds. Those who seek forgiveness of repayment, as in PPP loans, need to be particularly diligent in compliance.

Commercial Loan Agreements

Many businesses use bank loans of various types for growth capital and smoothing cash flow secured by specific equipment, Accounts Receivable, Inventory, and personal guarantees. Some lenders, anticipating the disastrous impact from Covid-19 and seeking to avoid massive disclosures, offered payment moratoriums to customers with the expectation of repayment when business improved.

As businesses open, revenues are unlikely to reach pre-pandemic levels quickly. Requirements to repay past obligations too soon can burden already weak balance sheets and limit recovery efforts. Consequently, business owners should negotiate with their lenders to avoid onerous payment requirements until the business stabilizes.

Insurance Protections

Many small business owners with business interruption insurance discover that losses caused by Covid-19 are not covered unless the policies specifically refer to a pandemic as a covered event. Multiple individuals and industry groups have filed lawsuits against insurers claiming coverage. It is likely the U.S. Supreme Court will settle the issue on appeal.

Business owners must also worry about potential lawsuits from customers or employees seeking damages for exposure to Covid-19 while on their premises. Whether their liability insurance policies will protect and defend them in such cases is unknown.

Business owners should collect their insurance policies, ensure that they remain in force, and determine what protections are available. Understanding the complex, often obtuse, and esoteric language of an insurance policy may require an attorney or independent insurance professional’s assistance.

Real Estate and Equipment Leases

Many leases and rental contracts in place before the pandemic may have been amended as a result. In some cases, the lessee breached the contract and stopped paying fees. In others, lessors informally agreed to reduce or defer payments for the term of the Covid-19 restrictions, formally amended the lease terms to provide relief. As businesses begin to reopen, owners need to review all contracts’ rights and obligations to avoid new legal problems.

Some contracts’ boilerplate language includes a “force majeure” clause – a contract provision that excuses a party’s non-performance under certain circumstances. Whether the clause applies to the Covid-19 circumstances depends on the interpretation of the language and the parties’ intent, sometimes decided in a court of law.

Business owners should review existing leases and contracts – with amendments – to understand their rights and obligations, especially those that survive the shutdown. Understanding your legal position will help you develop the best strategy to recover from the past and move forward with confidence.

Customer and Supplier Contracts

Courts are generally reluctant to set aside contractual obligations with the presumption that both parties legally and voluntarily executed contracts. However, the pandemic and government-enforced closures’ unique circumstances may relieve lessees from performance due to the principles of illegality, impossibility, or impracticability.

Force majeure clauses, if present, can limit financial exposure to a business but may extinguish the possibility of future relationships. Before exercising a win-lose strategy with customers and suppliers – both critical to the company’s future health – business owners should explore alternative solutions that might protect the business and appease the other parties. Both parties to a contract should remember that any action has a reciprocal effect: If the company loses a customer, the customer forfeits a suppler and vice versa.

Employee Policies

The Family and Medical Leave Act (FMLA) and the Families First Coronavirus Response Act (“Families First Act”) imposed certain obligations through the calendar year 2020 on many employers that required

  • Two weeks of paid sick leave at the employee’s regular rate of pay if an employee was quarantined under a government order or experiencing Covi-19 symptoms, Two weeks of paid sick leave at two-thirds of the employee’s regular rate of pay under the above conditions or required to care for a quarantined member of the family or a child unable to attend a school or go to a childcare provider, and
  • Up to ten weeks of paid expanded family and medical leave at two-thirds regular pay for any of the above reasons.

If laid-off employees are subject to one of the Acts, owners need to prepare to bring them back to work. Businesses may face compensation claims due to their actions during the pandemic. Employers must anticipate some employees refusing to work due to concerns about possible Covid-19 exposure. At work, they might require PPP equipment or request extra compensation for duties related to maintaining a sterile workplace.

Hundreds of employees have filed lawsuits against their employers, claiming negligence to wrongful death for their or a family member’s illness. Some companies require their customers and employees to waive liability if they contract the disease at the business facility. Many employment attorneys believe that requiring waivers has few downside risks but is likely ineffective as liability protection.

Federal and state governments are considering protective legislation that would bar lawsuits for Covid-19-related claims. Business owners need to be aware of the changing laws that affect Covid-19 liability while taking extra measures to ensure employee and customer safety.

Regulations regarding reopening businesses – hours, social distances, the wearing of clinical masks – vary from state to state and are likely to create friction between company employees and the public over the policies. Instances of customers attacking employees for enforcing Federal, state, or business Covid-19 policies are common. Business owners should get legal guidance regarding the best approach to comply with regulations while protecting employees from disgruntled customers. Extra training may be beneficial in some instances.

Final Thoughts

Reopening a shuttered or drastically downsized business following Covid-19 is likely to be extremely stressful due to the unknown. Is the pandemic truly over? Will new strains of coronavirus appear, setting off more rounds of stay-in-place orders? Will old customers return? How are my suppliers affected? Do I have new liabilities than before?

Unfortunately, no one knows the answers to these questions or many more like them. Returning to normality may occur in months or take years. There may be crowd limits, social distancing, and mask-wearing practices that continue long after businesses are allowed to reopen. The only sure outcome is that the business environment will be different.

The legal ecosystem for business is changing with the economic and social impacts of Covid-19. Many issues, mostly about financial liability and legal terms’ meanings, will be resolved by lengthy trials or direct government regulations and laws. Having a competent legal steersman to pilot the ship through the choppy, chaotic waters of the future may be the difference between shipwreck and reaching shore.

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