April 1, 2020

The novel coronavirus (COVID-19) global pandemic has caused organizations around the world to experience disruptions to their normal course of business. Common problems include mandatory remote work, business closures and quarantines, travel restrictions and breakdowns in the supply chain. The issues caused by the pandemic have raised an important question for many businesses: Does the COVID-19 global pandemic qualify as a “force majeure” event for purposes of their business contracts? What Is Force Majeure? The term “force majeure” is French for “superior force.” Force majeure clauses are common business-related contractual provisions. They provide for a suspension or cancellation of a company’s performance of obligations under the contract should an extraordinary event occur that is beyond the control of either party. Force majeure generally describes such uncontrollable events (e.g., war or extreme weather) that are not the fault of either party and that make it extremely difficult, or impossible, to carry out normal business. Does COVID-19 Qualify as a Force Majeure Event? The short answer to this question is: It depends. Whether the global pandemic is considered a force majeure event will depend on three factors: The Language of the individual contract—Many contracts include language that will specify examples of covered force majeure events such as, for instance, a hurricane or outbreak of war. Unfortunately, many force majeure provisions remain ambiguous, failing to directly address the specific situations in which the force majeure provision would be triggered. Check to see if your contract’s force majeure clause includes language specific to “pandemics,” “epidemics,” “illness” or “disease.” Jurisdiction—States vary in their interpretation and enforcement of force majeure clauses. Facts of the case—How has COVID-19 affected the parties’ businesses and their ability to fulfill their obligations at the time the triggering event occurred? This is a fact-based analysis that will vary in almost every instance.   There is no one-size-fits-all response to the question of whether COVID-19 qualifies as a force majeure event. The answer in each situation must be determined by considering the facts at hand. For this reason, businesses may need to audit their existing contracts to determine whether COVID-19 will affect either party’s ability to fulfill their obligations under the agreement. After conducting an audit, businesses may need to consult with legal counsel as to the enforcement and performance of their obligations under the existing contracts. Tips for Employers Of course, the primary concern of all employers should be the health and welfare of their employees and customers. Employers should stay informed and follow the advice of federal, state and local health officials. However, businesses must also assess the practical impacts of the pandemic on their operations. Employers analyzing force majeure clauses may consider the following: Document the specifics of your business interruption. This may be required to defend your invocation of a force majeure clause. Consider modifying future contract language to include specific circumstances such as pandemics. Review your current insurance coverage to determine whether your policies contain coverage that might assist in a force majeure situation. Additionally, regardless of whether a contract includes a force majeure clause, companies might find success in simply contacting customers, suppliers and employees directly to explain and discuss delays or other issues. A clear line of communication can ensure everyone is on the same page, and the individuals and companies involved typically appreciate a proactive approach during a particularly tumultuous period.

On March 26, 2020, the U.S. Department of Labor (DOL) issued three new opinion letters to clarify how employer should account for incentive payments and imputed income in an employee’s regular rate of pay. Under the Fair Labor Standards Act (FLSA), an employee must receive one and one-half times his or her regular rate of pay for any hours worked over 40 during a workweek. The regular rate of pay includes all non-discretionary bonuses and incentive payments paid to the employee. Whether any bonus or incentive pay is included in the calculation of an employee’s regular rate of pay depends on whether these payments are discretionary. Discretionary payments carry no expectation of payment, even if paid regularly. One way to distinguish non-discretionary payments is to evaluate whether these payments have contract-like qualities that provide the employee a legal right to receive them, and whether the employee could bring a lawsuit to enforce payment FLSA2020-3: Holiday Bonuses The FLSA specifically excludes Christmas bonuses and other payments provided for special occasions from the regular wage rate calculation if these payments are not tied to the employee’s hours of work, productivity or efficiency. The payments are excluded because they are considered “gifts” or discretionary payments, meaning that employees do not consider them as a regular part of their wages. However, holiday bonuses must be included in the regular rate if they create an expectation of payment. Setting eligibility criteria for receiving these payments can establish contractual-like obligations that create an expectation of payment. This is particularly true when the criteria are set to require the payment rather than to authorize the payment. For example, in FLSA 2020-3, Christmas bonuses were required by local regulations that established longevity payments for eligible employees. As a result, the DOL took the opinion that these Christmas bonuses must be included in the employees’ regular rate of pay. FLSA2020-4: Referral Bonuses The FLSA provides an exemption for referral bonuses if: Participation in recruitment activities is strictly voluntary; The employee’s efforts do not require a significant amount of time; Recruitment activities are limited to after-hours soliciting among friends, relatives, neighbors and acquaintances as part of the employee’s social affairs; and The bonus is not remuneration for employment because the individual is not employed to recruit others. A common practice for paying referral bonuses is to divide these payments into two installments. Usually, the first installment is provided when a referred candidate is hired. Typically, the second installment is paid some time later to reward lasting recruitment efforts. In general terms, the first installment should not be included in the regular wage rate calculation if all the conditions mentioned above are met. Whether the second payment should be included depends on whether the employee must meet specific criteria to “earn” the payment. Longevity bonuses are not per se non-discretionary, but they can establish a contract-like expectation for the employee to work for a defined period to receive the second bonus installment. The length of the period that the employee must satisfy and whether the employee will receive the bonus only if he or she remains employed by the employer can affect whether there is an expectation of payment. For example, in FLSA2020-4, the DOL presents the case of a second installment that was payable only after a 12-month period and only if the referring employee still worked for the company. Under these circumstances, the DOL took the opinion that the second installment must be included in the employee’s regular wage rate calculation. FLSA2020-5: Imputed Income Imputed income is the value of any benefits or services provided to an employee. Imputed income includes the employer’s cost (less any amount paid by the employee) of providing group-term life insurance coverage over $50,000. Under the tax code, employers must include this imputed income as an employee’s taxable gross income on the employee’s wage statement. With FLSA2020-5, the DOL is clarifying that not all imputed income must be included in an employee’s regular wage rate calculation, and that taxable income is included only if it represents remuneration for employment paid to or on behalf of the employee. Specifically, for imputed income situations, the DOL is reminding employers that the regular rate calculation excludes contributions irrevocably made by an employer to a trustee or third person pursuant to a bona fide benefit plan, such as life insurance plans.