Effects Of The Covid-19 Pandemic On Businesses With Focus On Employment & Other Commercial Contract Obligations

On the 11th day of March 2020, the World Health Organization (WHO) declared the COVID 19 disease as a pandemic. This disease has had far-reaching and unprecedented effects on businesses due to its nature and the precautionary measures advised to curb its spread. This advisory highlight the effects of the pandemic on your business and provides insights on some issues you are likely to experience and offers suggestions on how to handle them.The Occupational Safety and Health Act requires occupiers of workplaces and employers to ensure the safety, health and welfare at work of all persons working in the workplace which includes the provision and maintenance of a working environment that is safe and without risks to health. Employers are therefore advised to observe the following:

• Where possible and depending on the nature of work or deliverables, employers are advised to encourage a ‘work from home’ culture to keep the employees away from the place of employment and therefore mitigate transmission of the disease and minimize on work-related travel as well as face-to face meetings;
• To follow the guidelines provided by WHO regarding getting one’s workplace ready. The guidelines can be accessed through: https://www.who.int/docs/default-source/coronaviruse/getting-workplace-ready-for-covid-19.pdf;
• Avoid staff town- hall meetings or other meetings requiring more than 15 people to congregate in a room unless the same has been properly authorized by the relevant authorities and the venue is conducive to maintain the social distance between attendees. Where possible, meetings can be held through the use of audio-visual tools and attendees should leverage technology to hold virtual meetings;
• Develop, update and implement policies regarding maintenance of good hygiene, detection of infected persons and escalation in cases of emergencies.

The pandemic has without a doubt cast many doubts on parties’ abilities to perform their obligations under contract. This is due to amongst other factors, the Government’s directives minimizing movement and closure of various governments offices affecting delivery of services as well as stakeholders’ reactions which have led to closure of numerous businesses. This therefore means that the pandemic may lead to involuntary breach of contract by a party who is unable to perform its obligations. Ordinarily, the aggrieved party would be entitled to various remedies for such breach including specific performance and damages or as otherwise provided in the contract. This is however not the case where the breaching party can show that its inability to perform the contract is as a direct consequence of the pandemic. In any event, you could be the innocent party or the party in ‘involuntary’ breach. This being a global challenge, any party who would wish to enforce its rights under a contract ought to be cognizant of the fact that courts being alive to the resultant effects of the pandemic and may be reluctant to entertain such claims, as parties are called upon to balance their interests as much as possible from the time the event of the pandemic arose. The defenses available to a party in breach would fall under:

• Occurrence of a Force Majeure Event.  Force Majeure is defined as an unforeseeable event that prevents either party to a contract from fulfilling or performing its obligations under a contract. A force majeure clause is usually drafted to suspend or excuse the performance of one party’s obligations under the contract on grounds of occurrence of a specified force majeure event.  It is important to note that for one to rely on such a defense to excuse his non-performance, the force majeure clause must be included in the contract and such clause should contemplate the event at hand. It cannot be imported as this would amount to rewriting the contract, which courts are reluctant to do as their duty is to primarily give effect to the intention of the parties.
• Frustration of Contract This is a common-law doctrine that dictates that where a contract cannot be performed due to an occurrence that is beyond the control of the parties to the contract, the contract is said to be frustrated. The occurrence of the event, in this case the pandemic, would have to be one which ideally makes performance of the contract in a “substantial sense, impossible”. Unlike the force majeure defense, no specific clause must be included in the contract to allow one to claim frustration so long as the intervening event is so significant or substantial as to go to the root of the contract.
• Commercial Leases Commercial leases are fixed term contracts which are interpreted along the lines of a general commercial contract and as such the discussion under paragraph 2 above would apply. Many businesses may be unable to continue occupying the premises leased and may therefore have to invoke either of the foregoing, depending on the construction of the leases, in a bid to mitigate the adverse effects of the pandemic on their businesses. It is however important for the tenant to show a direct causal relationship between their ability to perform the contract and the pandemic. A remote relationship may leave the tenant vulnerable to a demand by the landlord for rent for the remainder of the lease period. Parties to a commercial lease are also encouraged to renegotiate the terms of the contracts to mitigate the adverse effects of the pandemic by suspending the obligation to pay rent, or service charge especially where the tenant’s business remains closed, for a period of time or reducing the rent for a given period as the situation stabilizes. Parties are encouraged to mutually pursue a solution that will accommodate both parties as the termination of leases affects both the lessee’s and the lessor’s interests.
• Employment This is one of the most heavily affected areas of businesses across Kenya. It is important to note that there is an inadequacy of laws governing employment when it comes to the occurrence of an event such as the current pandemic. It is advisable that employers and employees engage constructively to mitigate losses on both ends and to ensure a mutually beneficial outcome. Employers are in light of this advised to develop Business Continuity Policies in the event that the existing framework is inadequate to cater for arising issues. Further, employers should utilize a raft of measures across the board so as to handle the consequences in a creative, fair and legal manner and avoid any exposure to litigation indicting their conduct.Below are some matters that an employer will need to keep in mind as they contemplate dealing with their employees:
  • Sick Leave The Employment Act provides that after 2 consecutive months of service, an employee is entitled to sick leave of not less than 7 days with full pay and thereafter to sick leave of 7 days with half pay for each year of service. The Regulation of Wages (General) Order, under the Labour Institutions Act, however provides for up to 30 days sick leave on full pay and a further 15 days sick leave with half pay in each year of service. Subject to more favourable terms being provided in employment contracts/ Human Resource policies and Collective Bargaining Agreements. Employees who are infected or who may be quarantined or otherwise affected by the disease would be entitled to sick leave.
  • Annual Leave Employees are entitled to a minimum paid annual leave of upto 21 working days in a year with this leave being pro-rated throughout the year at the rate of 1.75 days per month. Annual leave is usually taken at the convenience of the employer on application by the employee. Employers whose businesses have been affected or who have had to close shop or otherwise downscale their operations, should engage with their employees and advise them to take their paid annual leave during this down-time. This will mitigate the losses accruing to the business once the effects of the pandemic subside or are at a manageable level as the employees would be able to resume work for the remainder of the year in a bid to recover the lost time. It is important to note that this is different from compulsory leave which is usually undertaken as a disciplinary measure especially when the conduct of an employee is being investigated. Beyond the 21 days, however, companies who are unable to completely operate due to the directives of the Government may have to send their employees on either reduced pay or unpaid leave. This must however be handled in a manner that complies with their employment contracts.
  • Reduction of Salaries This may be done hand-in-hand with a reduction of working hours. An alteration in the salary or working hours of an employee is in effect an alteration of the terms of the contract of service. The same cannot be done unless the employee signifies his consent of such alteration. This option must therefore be preceded with an engagement between the employer and employees to procure the consent of the latter. Employers should bear in mind the minimum wage regulations even as they undertake this exercise and should be guided by the principles of equity.
  • Termination of Employment Unfortunately, some businesses may have to let go of their employees due to the pandemic. All employers must be cautioned that existence of the pandemic does not vacate operation of the law and all actions undertaken must be within the parameters of the law. Employers will have to comply with the terms of the employment contracts when terminating their employees. This will of course differ with the type of contract e.g probationary contracts, fixed term contracts and indefinite term contracts.Employers who may want to declare redundancy during this period must also adhere to the strict letter of the law. This means that all requisite notices - to the employee, trade union or labour office as the case may be, must be issued, pay in lieu of notice, payment of any accrued wages, payment for any accrued leave days, and severance pay must be paid at the rate of  at least 15 days for each year of completed service. For a redundancy to be successful, it must comply with Section 40 of the Employment Act. If the redundancy is undertaken in a manner that does not comply with the law or if done discriminatingly, the redundancy will amount to unfair and unlawful termination of the employee and they can sustain a claim against the employer- the pandemic notwithstanding.

As at the date of this advisory, the Government and the Central Bank of Kenya have taken various steps to reduce the financial obligations of employers and business owners in a bid to mitigate the effect of this pandemic through various regulations and reliefs including:

• 100 % tax relief for persons earning gross monthly income of up to Ksh. 24,000;
• Reduction of Income Tax Rate (Pay-As-You-Earn) from 30% to 25%;
• Reduction of Resident Income Tax (Corporation Tax) from 30% to 25%;
• Reduction of the turnover tax rate from the current 3% to 1% for all Micro, Small and Medium Enterprises (MSMEs);
• Temporary suspension of the listing with Credit Reference Bureaus (CRB) of any person, MSMES and corporate entities whose loan account fall overdue or is in arrears, effective 1st April, 2020;
• Reduction of VAT from 16% to 14%, effective 1st April,2020;
• Ministries and Departments are to effect the payment of at least Ksh. 13 Billion of the verified pending bills;
• Kenya Revenue Authority is to expedite the payment of all verified VAT refund claims amounting to Ksh. 10 Billion or allow for offsetting of Withholding VAT, in order to improve cash flows for businesses. The Central Bank of Kenya has lowered the Central Bank Rate to 7.25% from 8.25% which will prompt commercial banks to lower the interest rates to their borrowers, availing needed and affordable credit to MSMEs;
• The Central Bank has lowered the Cash Reserve Ratio (CRR) to 4.25 percent from 5.25 percent to provide additional liquidity to commercial banks to directly support borrowers that are distressed as a result of the economic effects of the COVID-19 pandemic.

Please note that the foregoing is merely a general outlook on some aspects of businesses that will be affected by the pandemic. We remain available to offer our assistance and legal advice on the foregoing as well as any other legal issue or concern you may have affecting your person or business.