By: Ian Sterlin

As the COVID-19 pandemic continues, many businesses across a wide range of industries have been impacted by orders to stay away from workplaces and public areas, delays in shipping orders and breached contracts, and other effects of the sudden economic slowdown. COVID-19 may result in new and potentially complicated legal issues for affected businesses, and while large businesses may retain the services in-house counsel or large law firms, many small businesses and entrepreneurs lack the capital necessary for such services. Fortunately, many organizations and law firms are publishing useful resources that entrepreneurs can use to best adapt to the rapidly changing economic circumstances.

After a comprehensive review of several resources, we have identified several areas of concern for entrepreneurs to consider as they weather the crisis.

Compliance with emergency orders. As of March 24, 2020, sixteen states have issued “stay in place” or “stay at home” orders, limiting on-site work activity to “essential businesses.”[1] The definition of “essential businesses” often varies per state, but mostly include (but not limited to) grocery stores, pharmacies, banks, hardware stores, post offices, warehouses, and agricultural services.[2] The Department of Homeland Security has provided a helpful set of guidelines to identify critical infrastructure workers.[3]

If your business does not fall under the essential business category, it is important to comply with stay at home orders. Several states have warned that they will fine businesses defying public health orders.[4] Moreover, certain businesses who move to classify themselves as “essential businesses” may have their reputations negatively impacted by such moves, as was the case with Gamestop and Tesla.[5] Noncompliance may also result in other forms of state intervention, and while it is unlikely that a small entrepreneur defying an order will generate news articles, noncompliance is a risk taken for virtually no reward.

Maintaining channels of communication. The importance of maintaining open channels of communication with employees, customers, suppliers, business partners, and investors has been repeatedly stressed.[6] Developing entrepreneurs may have an advantage in this regard, as they often lack a permanent workspace or offices and tend to collaborate through online spaces. Conversely, entrepreneurs who rent office space will likely be more affected, and if they have not done so already should actively transition to having their employees work online. This will not only insulate workers from exposure but may also enable reducing costs even after the crisis subsides.

Potential Employment Issues. Employers considering letting go employees as a result of COVID-19 should examine the employment agreements they have signed with their employees.[7] Most often, these employment agreements are for at-will employment, so it would be unlikely for a court to find unfair termination. Nevertheless, employers should make sure to comply with appropriate antidiscrimination statutes, provide notice to employees, secure all IP rights, and document the reason for termination.[8] This should be a last resort, and it is more advisable to cut hours or scale back project goals to maintain good relationships with your employees.[9]

Tax Issues. In order to alleviate the economic effects of COVID-19, The Families First Coronavirus Response Act was enacted to create new tax credits for sick leave and family leave.[10] Businesses can use these tax credits, which extend for the duration of 2020, on the employer share of Social Security taxes and other payroll taxes.[11] These tax credits ensure that new benefits provided under the Emergency Family Leave Act and Emergency Sick Leave Act will not be treated as wages.[12] Absent future guidance, employers seeking to claim these credits should include them on their 2020 IRS 941 forms, and a self-employed individual should include them on their 2020 IRS 1040 Forms.[13] Furthermore, the Small Business Administration recently announced that small businesses may be eligible for a loan of up to $2 million to deal with the effects of the pandemic.[14] Entrepreneurs should consider applying for both of these measures to alleviate the negative impacts COVID-19 has on their business.

Contract Issues. The upheaval resulting from the pandemic has led to serious disruptions to global supply chains, which has precipitated breaches of contract or other nonperformance across a broad range of industries. While this will very likely result in increased litigation once courts reopen, some breaches of contract may be excused if the contract contains an exculpatory force majeure provision.[15] These provisions excuse nonperformance when an intervening “act of God” outside the parties’ control and without any party negligence makes fulfilling contractual obligations impossible, impractical or illegal.[16] Such acts include but are not limited to acts of terrorism, war, and natural disasters.[17] If COVID-19 would not be classified as an “act of God,” parties may nonetheless be able to claim impossibility, impracticability, or frustration of purpose.[18] The ability to claim such defenses varies per jurisdiction and may have varying definitions.[19] Entrepreneurs should review their contracts with counsel to determine whether their contracts include such provisions, how the jurisdiction governing their contract classifies intervening “acts of God,” and whether other nonperformance defenses exist within the jurisdiction and how they are defined.

Aside from breach of contract, COVID-19 may also affect contractual performance cost provisions.[20] Courts will usually expect costs of performance to fluctuate during the term of a contract and will usually decline to excuse nonperformance due to increased costs.[21] Unless explicitly agreed upon, costs of performance will tend to rest on the performing party and will not usually be shared.

Entrepreneurs should also review their contracts to see whether COVID-19 triggers contractual notice provisions.[22] These may include notice requirements of nonperformance, delay in performance, and potential damages.[23] An entrepreneur planning to send notice of delays should be careful to not deliver notice that anticipatorily breaches the contract.[24] This would permit a non-breaching party to seek remedies that may include repudiation of the contract or seeking damages. Entrepreneurs should therefore carefully scrutinize any notices to avoid the mistaken assumption that the party does not intend to perform its contractual obligations.[25]

Resources. Small businesses and entrepreneurs may find the following links helpful when adapting their business practices to best handle the pandemic. Most importantly, we advise all entrepreneurs to practice good health habits and stay safe.

The United States Chamber of Commerce Small Business Coronavirus Survival Guide

Paul Hastings Blog Series on Dealing with Coronavirus

Dentons Coronavirus Hub

[1] https://www.usatoday.com/story/news/50-states/2020/03/23/stay-home-orders-spiking-numbers-liquor-boom-news-around-states/111459836/

[2] https://www.businessinsider.com/what-is-a-nonessential-business-essential-business-coronavirus-2020-3

[3] https://www.cisa.gov/publication/guidance-essential-critical-infrastructure-workforce

[4] https://www.bbc.com/news/world-us-canada-51970815

[5] https://www.newser.com/story/288470/the-latest-business-to-dub-itself-essential-gamestop.html; https://www.newser.com/story/288339/california-to-tesla-shut-down-youre-not-essential.html

[6] https://thenextweb.com/podium/2020/03/20/an-entrepreneurs-guide-to-startup-resources-during-the-covid-19-outbreak/

[7] https://www.spzlegal.com/employment/covid19-emloyee-termination/

[8] https://www.paulhastings.com/publications-items/details/?id=c830da6e-2334-6428-811c-ff00004cbded

[9] https://www.spzlegal.com/employment/covid19-emloyee-termination/

[10] https://www.dentons.com/en/insights/alerts/2020/march/20/covid-19-tax-response-100-percent-payroll-tax-credits-for-sick-and-family-leave.

[11] https://www.dentons.com/en/insights/alerts/2020/march/20/covid-19-tax-response-100-percent-payroll-tax-credits-for-sick-and-family-leave.

[12] https://www.dentons.com/en/insights/alerts/2020/march/20/covid-19-tax-response-100-percent-payroll-tax-credits-for-sick-and-family-leave.

[13] https://www.dentons.com/en/insights/alerts/2020/march/20/covid-19-tax-response-100-percent-payroll-tax-credits-for-sick-and-family-leave.

[14] https://thenextweb.com/podium/2020/03/20/an-entrepreneurs-guide-to-startup-resources-during-the-covid-19-outbreak/

[15] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded

[16] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded

[17] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded

[18] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded

[19] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded

[20] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded

[21] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded

[22] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded

[23] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded

[24] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded

[25] https://www.paulhastings.com/publications-items/details/?id=77abe36e-2334-6428-811c-ff00004cbded