How far should companies be legally compelled to operate in an ethical way in the wake of economies starting to open following the COVID-19 outbreak, especially with there being an impetus on survival and profit margin?
The following is an assessment by leading business law attorneys across the globe whose firms are members of Globalaw. Globalaw is a legal network with a unique framework and offering, in that it only takes one firm per jurisdiction worldwide. For over 25 years, Globalaw has fostered collaboration through multiple initiatives, including the free time policy which enables all member firms to benefit from a certain amount of free legal consultation from other Globalaw member firms. Thus, allowing its members and subsequently their clients to benefit from a firm with a global reach, but also a tailored, bespoke regional service. They have also established a COVID-19 taskforce looking to assist their clients and colleagues through the pandemic and help them adapt to the new reality through expert counsel and content.
The obligation to act ethically seems obvious and that the answer is always yes. However, questions of ethics have no single or simple answer. The Australian government has enacted legislation in response to the COVID-19 outbreak that places particular legal and ethical obligations on companies to assist in their survival. However, such initiatives do require or assume a certain amount of goodwill and honest reporting in order for companies to obtain government funding and financial assistance. Some examples include: employers are to pass government funds to employees who are laid off or stood down; commercial landlords and tenants are to comply with a Code of Conduct to allow for rental abatements or deferrals and avoid termination for non-payment of rent; government-guaranteed loans to small business; instant asset tax deductibility, and more. Many of these initiatives are similarly replicated around the world. Companies in Australia will however need to consider: do they comply with the necessary loss of revenue test – a loss of 30% or more – to obtain government funding or are they fudging the books? Will they simply use the opportunity to lay off nonperforming employees and “clear the decks” of underperformers? Undoubtedly the answer will be “yes” to these questions by some companies.
Companies will attempt to use COVID-19 as an opportunity to legitimately obtain government funding to ensure survival. So, they should. They will also take the opportunity to reset the dial on their expenses in the P&L. That is also appropriate. Acting legally continues however to remain relevant. Importantly, significant pre-COVID laws remain in place in protect the health and wellbeing of workers and the security of their employment. Insolvency and bankruptcy laws are still at play. The ability to wind up companies, albeit with some temporary lifting of limits, is still available. The Australian government audit and regulatory functions will become even more important in the post-COVID world. Eventually the government will try and recoup the $259 billion in fiscal and balance sheet support provided as a result of this pandemic. It’s expected that non-compliant or rogue companies would squarely fall within its sights. At which point, core company values of integrity, honesty and reputation will be important defences.
Paul Tully, Managing Director
McInnes Wilson Lawyers, Member of Globalaw
During times of prosperity, enterprises often promote and highlight their efforts in business ethics and Corporate Social Responsibility (CSR). However, it is in times of adversity that commitments to business ethics are truly tested. Hong Kong has long been practising a laissez-faire market economy, with Nobel laureate of economics Milton Friedman once famously remarking that “If you want to see capitalism in action, go to Hong Kong”. The government has hitherto not intervened with private business practices, especially in the arena of business ethics and CSR.
Hong Kong labour protections have been notoriously insufficient: there are no collective bargaining rights or protections against unfair dismissal. The main concern is that employees in Hong Kong could become even more vulnerable during an economic downturn following the pandemic. According to the government’s latest figures, the unemployment rate has climbed to a 15-year high at 5.9%. There have also been ongoing discussions on employers’ ethical responsibilities to their employees, and how measures could be put in place in the legal framework without disturbing the free market.
Following the government’s unprecedented billion-dollar bailout of Ocean Park and the city’s flagship airline—Cathay Pacific, – there are increased calls from the private sector inviting government intervention by way of subsidies and tax reductions. These calls are accompanied by heated debates as to whether terms – such as promises not to lay off employees or other social responsibilities – should be imposed as pre-conditions to forms of governmental assistance. Some believe that such legal compulsions are necessary and reasonable, and would ensure that the rescue or assistance of businesses by public funding is money well spent.
Recently the Hong Kong government has introduced the Employment Support Scheme (“ESS”) with an aim to prevent employees from being laid-off by their employers. Under ESS, eligible employers could receive a wage subsidy which is equivalent to 50 percent of employees’ salaries for 6 months with a cap of HK $9,000 (around US$1,150) for each employee. As a safeguard to prevent abuse, eligible employers must sign an agreement and warrant that they will not make redundancies during the subsidy period; and will spend the entire amount of wage subsidies on paying employee wages for the duration of the subsidy period.
However, some believe that government encroachment on businesses should be kept to the bare minimum. Business ethics should instead be regulated or encouraged by consumer behaviour in the free market. Indeed, during the pandemic, big brands making high-profile CSR efforts – such as the giveaways of medical supplies and sanitary products to hospitals, charities or the vulnerable – which have received a high level of praise from the public. These efforts have been contrasted to the the adverse PR other firms have experienced as a result of layoff or pay-cut announcements.
Anna Chan, Partner
Oldham Li & Nie Lawyers, Member of Globalaw
Following the guidelines of the World Health Organization (WHO), and learning from the experiences of other countries, Mexico has established its own recommendations and guidelines in response to COVID-19.
On March 30th, 2020, the Mexican General Health Council declared the epidemic generated by the COVID-19 virus a “Health Emergency”. From that moment on, a series of measures were implemented to limit economic and social activities throughout the country, allowing only for limited economic activities. These limited activities included those necessary to attend to the health emergency, such as the medical, pharmaceutical, public safety, financial and critical infrastructure sectors, among others.
Although it is understood that each company must rigorously implement these measures and that workplaces must preponderantly attend to the health care of their employees, managers have had to face various ethical and legal dilemmas in terms of the operation and survival of their companies.
Once the health emergency was declared, it was clear that of the total number of companies forced to stop their operations, only some had adequate means to continue their work remotely. This forced many companies to work during the following days to implement remote working remotely and establish other measures to minimize the operational impact and mitigate damages to the company and third parties. Knowing that they were facing a dilemma in the event of inaction and – as a consequence – facing potential irreparable damage and even the possibility of not being able to operate again, some companies decided to continue with minimal operations in order to carry out an orderly shutdown and organize the work, if necessary, at a distance. Indeed, difficult decisions were made with the support of volunteer workers and with protective measures, taking special care of vulnerable employees. Almost three months later, companies now face another challenge: how to return to work while taking care of their employees’ health.
On June 15th, 16 states began to reopen general economic activities at 30% of their capacity, amongst other state and municipal measures. The challenge is significant. The Federal Government issued an Agreement on May 29th with technical guidelines for the reopening of economic activities that include the implementation of social distancing measures (1.5 meters), hygiene, staggered schedules, protective elements such as the use of protective masks and temperature control at the entrance and exit of buildings. The primary objective should be to take care of the health of workers, following the federal, state and municipal guidelines for such purposes, and in that sense, restart the operation to the extent possible, maintaining the balance between the economy and health.
The reopening of the automotive and construction industries in the State of Puebla is a complicated case. Although the Federal Government reclassified these industries in previous weeks as essential activities, the State’s government refused to abide by this decision and did not allow them to be reopened, publishing decrees on May 22nd and June 12th establishing that the necessary conditions for resuming the activities of these industries were not met. Therefore, the automotive and construction companies in the State were able to initiate legal actions to restart activities, in accordance with the federal decision. Once again, the dilemma arises as to whether to initiate legal proceedings to reactivate the production plant or to comply with the local provisions on the “protection of workers’ health”. Taking into consideration the chain of production of the automotive industry, some companies decided to reopen under the health and safety guidelines established by the federal government throughout the country, leaving such decisions in the hands of the companies’ executives.
Another example of a similar conflict arose on June 9th, when the governor of Nayarit announced the reopening of hotels and beaches. However, on June 14th, state officials established that the hotels could only reopen at 30% occupancy and that the beaches would remain closed. Planning for economic revival in the face of such changes in government decisions is a complex matter for the tourism industry. Difficult times require difficult solutions. Businesses in Mexico are looking to survive in the face of an expected drop of between 6% and 10% of GDP according to different analysts, rampant unemployment and lack of substantial government support, which makes decision-making all the more dramatic.
José Luis Gutiérrez Azpe, Partner
Ramirez, Gutierrez-Azpe, Rodríguez- Rivero y Hurtad, S.C. (RGRH), Member of Globalaw
Mexico City, Mexico
COVID-19 has seriously affected most economies fundamentally and universally. Lockdown has had a staggering impact not just on economies but on our way of life.
In the corporate world, it is clear that the impact of COVID-19 has been fundamentally different depending on the sector and where a company happened to be when COVID-19 began to spread. What to do if a company has lost all its business? We have clients in the travel sector. Successful companies, that in a matter of two weeks went from thriving income generation to no business at all. This is unprecedented on such a scale. They have offices and staff and liabilities. Obviously, companies in that situation, assuming that they have cash reserves to survive at all, are taking advantage of all government grants and loans, furloughing staff, asking landlords for rent holidays, asking creditors to write off debt or extend payment terms, and more. They rely heavily on goodwill and understanding of others and it is here that ethical behaviour is key. If everyone in the business ecology co-operates as best they can and assists as much as they can, more businesses will survive, and the economy will bounce back quicker. No legislation is required for this and none has been introduced to ensure ethical behaviour. However, there will certainly be numerous post COVID-19 enquiries to see if companies have played by the rules.
Meanwhile, other companies have boomed, such as Amazon, food delivery companies such as Ocado, large supermarkets and their home delivery service, and some technology companies whose products have enabled businesses and people to manage lockdown, among others. These companies have been employing more people, trying to help with PPE, as have many others, diverting silent tooling to production of PPE, and offering benefits to essential workers. Again, this has not required legislation, it has been voluntary. They have tried, if in the right sectors, to assist vulnerable members of society by creating priority delivery systems, vulnerable people shopping slots, and more.
Presently one of the sectors that has come under the spotlight for seeking to avoid as much liability as possible for the consequences of COVID is the insurance business. It is becoming increasingly clear that this is a problem and it is starting to be taken seriously by Government and the Regulator.
Some companies will use COVID-19 to get rid of large numbers of employees, but who can judge whether that is because they have to or not. No-one will be able to check this across the hundreds of thousands of companies we have. But there have been some notable exceptions. British Airways was recently described as a “national disgrace” for its proposals to get rid of very significant numbers of its staff as a result of the shut down on air travel. Yet we know that this a huge publicly owned company whose business has effectively stopped for many months. What is it supposed to do? COVID-19 has generally heightened emotions, ironically brought people closer together whilst separating them, made people revalue society and the importance of friends and family, good health and good behaviour. It has brought back a sense of community.
In conclusion, it is the moral compass of the people of the United Kingdom that will ensure that for the most part that companies behave ethically going forward. There is another point. The pandemic happened so fast that steps announced on the outbreak of COVID-19 still have not hit the statute books. The legislature simply cannot react fast enough in such situations, so we have so far relied upon what our country is fundamentally famous for: fair play, stability, honesty and decency. We will find out soon if that is enough.
Michael Hatchwell, Partner
Child & Child, Member of Globalaw
We all recognize that these are challenging times for businesses and consumers alike. While many businesses are looking for immediate answers to help them survive, they should take a long-run approach to protect their brand and image, and to ensure that their conduct is ethical and fair to consumers.
Indeed, with limited outside distractions and the psychological impact of the lockdown, consumers, regulators, and elected officials are intent to keep businesses honest and punish those that appear to cross the line. From the consumers’ perspective, a perceived unethical business practice in the COVID-era may result in a social media and/or public relations disaster.
Large business and publicly traded companies that applied for and received government stimulus grants have had to confront the public-relations impact of accepting government aid at the expense of smaller businesses. For example, the popular restaurant chain Ruth’s Chris Steak House, which initially received $20 million in payroll protection program stimulus loans, ultimately returned the monies after facing significant consumer backlash, particularly when the government program initially ran out of funds.
Further, take an attempt by the actress Reese Witherspoon’s fashion label, Draper James, to express appreciation for teachers during the COVID-19 pandemic. Draper James decided to gift teachers with a dress from its collection. Due to unaccounted for limitations, Draper James did not have enough dresses to give away. Consequently, the company attempted to change the rules mid-stream, converting the “giveaway” to a sweepstakes with a limited number of dresses available as prizes. Instead of fostering goodwill, the company (and actress) created a public relations nightmare.
In the enforcement context, the Federal Trade Commission and Food and Drug Administration have issued over 100 warning letters to business making false COVID-19 treatment and prevention claims. The agencies’ positions have appeared, in at least some instances, to be quite aggressive, given that in many cases, the challenged claims appeared to be consistent with structure function claims. These letters signal that regulators are and will continue to be focused on claims that could be perceived as trying to profiteer off the virus. These warning letters may result in enforcement actions, particularly if the articulated concerns are not addressed by the companies making the claims at issue.
Similarly, the U.S. Securities and Exchange Commission has filed securities fraud actions against companies related to their coronavirus-related practices. In particular, the agency has taken issue with companies that have issued press releases promoting their offering and shipping of products to combat the coronavirus where such products had not been approved by the FDA, or where purported business arrangements were not in place.
Businesses that have failed to provide sufficient protection for employees, ranging from sickness policies to providing protective equipment, have similarly garnered ill will from the public. To help their employees cope with the impact of the pandemic, many retailers have had to alter their personnel policies, including sickness and time off rules, to address employee and the public’s concerns.
The obvious approach is for businesses to take the high road in these trying times. They will likely be rewarded for doing the right thing and punished (either by the government or consumers) if they fail to do so.
By Andrew B. Lustigman, Partner, Olshan Frome Wolosky, LLP, Member of Globalaw
New York, New York
Agreement declaring the epidemic generated by the SARS-CoV2 virus (COVID-19) to be a Health Emergency due to Force Majeure, as published in the Diario Oficial de la Federación (DOF) on March 30th, 2020 is declared.
Agreement establishing Extraordinary Actions to address the SARS-CoV2 Health Emergency, published in the DOF on March 31, 2020.
Agreement establishing the Specific Technical Guidelines for the Reopening of Economic Activities, published in the DOF on May 29, 2020.
Decree of the Executive of the State reiterating that in the State of Puebla the conditions are not met to resume activities in the automotive industry and the construction sector, published in the Official Newspaper of the State of Puebla on June 12th, 2020.