Lawyers discusses the business implications of COVID-19
[ Music ] >> Good afternoon, everyone. My name is George Fritter. I'm a proud member of the class of '86. I am a corporate and commercial attorney with the Ramon Law. I work a lot with startup and technology companies, and today I'm going to present to you on the subject of 10 steps that SMB's, that's small and medium-sized businesses, should be taking now.
Okay, since this is a legal presentation, you probably saw this coming. It has to have a disclaimer, so what I'm about to say today does not represent the viewpoints of my firm, probably doesn't even represent my own viewpoints. If you do need legal advice, you seek out an attorney, hopefully will convey a lot of useful information and give you some things to think about. What are the goals for this presentation? Well, the bottom line is we are in a very uncertain environment.
It's pretty pointless to predict what the world is going to look like in a week, much less in a month. So, for small and medium-sized businesses always are living much more on the margin than larger and more-established businesses. What are the goals? Well, first, we want to make that you are around when we return to whatever normal looks like in the future. We want you to be thinking about making the necessary cuts to your existing business, looking for ways to increase flexibility, looking for ways to minimize liability while you're making those cuts and taking steps to construct flexibility, while you're doing and taking a lot of tough actions, we want to make sure that you're preserving and enhancing customer relationships, and other stakeholders, as well. And really, at the end of the day, want to put you in the best position we can to kind of come out and fly at the other end of this, whenever and however that is-- whenever that is, and however it looks like. So, at the risk of being a little cliché, you know, store safety.
That's the first and foremost. That's the bottom line. It's the right thing to do, it's the important thing to do, and it has the added benefit of being the legally smart thing to do. By the way, I should point out that while I'm going to be doing a lot of presenting, really helpful to get questions, and you know, feel free to post them, and I will try to answer as many of them as possible.
Okay. So, in terms of safety, this slide kind of changes every time I give this presentation. In the early days, when I gave this presentation, we were talking about locking down, and now in many states, we're talking about loosening. The guidance here is changing constantly, as I don't have to tell people.
I still think the best course of action is limiting people in the office, who absolutely have to be there, and taking as many proactive steps as you can to promote safety in terms of distancing, staging people in shifts, whatever you can do to make people safe, what social distancing steps you can take, what mitigation steps you can take, which today you know, you seem to be taking people's temperature, but hopefully at a certain point we will get to an environment where we will be able to actually do testing. Now, you may have seen in the news that some of the battle in Congress around some of the financing, there have been attempts to couple that with legislation that would limit employer liability for workplaces that do open. I'm not going to try to predict where that's going to end up, other than to highlight that it does show the real risk that employers, who open up, do subject themselves to potential liability if employees become infected, and it can somehow be attributed to the workplace. And while there is no absolute bars to liability at this point, there may be in the future, but at the minimum, if you are confronted with those kinds of claims, you want to be in a position to demonstrate one that you were kind of employing best practices for the environment at times.
And two, that you can kind of do a whole list of mitigation steps that you took along the way. Okay the flipside to the lockdown is work from home. And work from home has really created a whole host of issues that are confronting many companies for the first time, even companies that previously have limited parts of their workforce are working remotely. We really should review your policies to make sure that they are keeping up with the actual deployment of your workforce. You can exchange those policies, you should feel free to do so. Just make sure that they don't look like they are in any way discriminatory against one segment of your work force.
You should also keep in mind that things like verification of employment or forms I9, etc., a new process has been put in place to allow you to do that remotely, and we should take advantage of that. H-1B visa, E-3 visa filings often include specific addresses, where people are going to be working, you should look to whether those forms require updating.
You can, where people are actually working today, and then you know, your IT practices kind of have to address the new environment, especially when you're dealing with data which is governed by HIPAA, or the privacy laws, like GDPR, or California's new CCPA regulations, you want to make sure that your practices are remotely, are deploying the kinds of security practices that are compliant with the statutes. It's a much easier, to control those variables, where everybody is working, you know, from a fixed location or a series of fixed locations, all connected by internet that you control, with most people accessing IT through the public internet. You want to make sure that both your practices, as well as your actual security measures are up to the regulatory tasks, regulatory requirements, excuse me, that apply to the data you're handling. And you should be scrutinizing your suppliers, to make sure, because they're confronting the same set of challenges that they've taken the same steps to assure the security of your data that they're handling.
And again, typically, in situations where you're passing personal information, personal financial information, health information. >> There is a question, if I can go ahead and read that aloud to you? >> Yes. >> Since employees are working from home, how should we encourage them to take days off, since they can still do their personal work during office time. We don't want to suddenly have employees taking a lot of days off together once they're back to the office, and we can't offer to carry over vacation days either. What would be the best practice to address this issue? >> Right. This is-- so I think that's going
to vary widely based on office culture. I think actually the key point of the question was the concept that you don't want a crude base for next year, so hopefully try to maintain this as a 2020 issue, but you know, you really can feel free, I think, in the current environment, to put out policies, as long as they're applied uniformly, change the way you've been doing, you know, doing business until now. And as long as they're on the surface reasonable, I think it's going to be tough for it to come back to bite you.
We have a [inaudible] to society, so never say never, but you know, if you basically say listen in this environment for the rest of the year, we want you to sign up you know, pre-approve vacation days with your supervisor, and we may have to, you know, veto more than normal, or we want to make sure people are spacing, and so we request that people take only two days a month, you know, those kinds of considerations. I think that's all fair game, and as long as the requests on the surface are reasonable, I think, I don't think that's going to result in liability. You might have a problem thinking about it on the flipside, nobody is taking vacation now, and you don't want people kind of rushing in as soon as things open up, to take their vacations if possible. You don't want people rushing to take vacation, massive vacation in November or December, so you might want to put in some policies there to let people know that they should take downtime now. And it's probably, you know, a good mental health procedure for all companies to kind of encourage employees to have downtime you know, when they're working remotely, because I think pretty much everyone realized as remote work tends to blur even more than, you know, smart phones and other devices to blur the work-office divide.
I think working full-time from home tends to blur those lines even more, and putting some policies around that, particularly policies that give kind of junior employees reassurance that they're not going to be penalized by senior, by senior managers, for not being accessible 24/7, especially this year. Okay, well there's no way around it, this environment is going to require layoffs. It has already required a massive amount of layoffs, and the likelihood is those [audio cuts out]. When you're terminating employees, do it in a systematic way. First, you want to understand the background to the termination.
And so we're looking at all the relevant employment agreements, make sure [audio cuts out]. Any required severance payments, as a requirement to continue benefits for any period. Is there accrued vacation time that needs to be paid out, how does this impact option vesting, and exercise and keep in mind, that when you're looking at the various termination provisions, which normally tend to stratify terminations based on whether it's for cause, or without cause, or for good reason, termination in this environment in most cases is going to likely be viewed as without cause, or with good reason.
And the consequences for the employee and the treatment that they're entitled to will be driven by that. It's always a good idea, not just in these times, to try to have a release of any departing employee which basically is most often a two-way document, you release the employee of any claims, they release you of any claims, and to do that, you typically want to give the employees some kind of payment over and above what they are contractually entitled to. That's called consideration, and the consideration is really what makes the release enforceable. Doesn't have to be huge sums of money, but it shouldn't be a trivial sum of money either. You want to have a communications plan.
Hopefully one that can make it very clear that easily offset reflections on performance, especially if you're laying off multiple people, you don't have to think about it from a logistics perspective, where the people will be told not to come into the office. You know, what else, what other steps logistically should people be following? Just looking at a question. Oh, actually the question is that [inaudible] posted, just came across my system. >> Okay looks like we just have a-- >> Oh, sorry, we do have a question. >> Yeah, one, just popped up on my end, so sorry for the delay there. What amount is considered trivial? >> So you know, I wouldn't be looking at, in a very technical sense, giving somebody $10 is enough consideration to make an agreement valid.
You know, there isn't going to be kind of a bright line rule, $100 is going to be better than $10, $1,000 is going to be better than that, but the point here isn't to run up a large bill, but to give them somewhat, something somewhat more meaningful. >> Okay we have-- >> Another question here? >> Mm-hmm, yep. >> Okay, going to read.
>> I'm also going to read it aloud to you, just in case the attendees can't see it. How should we handle employees that were temporarily laid off, and the company is still paying their health insurance, and then we offer them their job back, but they decline it. The reasons are: fear, I found out I'm pregnant, I'm concerned for my health, and I have health reasons, I'm making more money on unemployment, etc. This is a take-out restaurant environment, and in our case, this is preventing us from gaining enough trained employees to reopen. >> Great, so it, in general, when you know, when you say somebody is temporarily laid off, in this environment, it's kind of an open-ended termination.
You know, sometimes called a furlough. The legal-- it's not formalistically difference between the two, and unless you kind of give them a length of time, you know, you're going to be laid off for two weeks, then you're going to be brought back, even though you've kind of expressed the interest in bringing them back, I think and certainly from an employer perspective, I think these open-ended furloughs are treated as termination events. And so as a result, you know, it's nice to offer the help, the payment for the health coverage, but if they don't agree to come back, you know, if they don't agree to come back, you know, then I think you view it as a termination, and you know, and as long as when you offered the health coverage, you didn't, you didn't kind of make it as some kind of guarantee in a certain minimum period of time, I think you are going to be within your rights, you know, and get a lot that is going to depend on how the initial offer was phrased, but I think you're going to be within your rights to say a certain part, we're going to treat this like, you know, you've been offered reemployment, we are now going to treat this like a termination, and as a result, if you do continue to want healthcare coverage, you will have Cobra coverage, which is, in most cases for 18 months from the date of termination. The one area where I really want to comment, and give kind of blanket advice are comments like this, is a question was raised, you know, I'm pregnant, I have healthcare concerns. That's going to be a little bit more sensitive, and you want to make sure that you avoid any potential claim of discrimination, and that's one I would really talk to with counseling. >> Another question did come in, and it's how to differentiate the employees of the same skillset, but differing in the ROI, due to the projects being assigned to you.
Say a project's abrupt closure is not reflecting an employee's performance in some cases, but resulting in decline in revenue, and hence, cash flows. So in general, you know, employment in the United States is a very different story if you have employees internationally. Employment in the United States is important, is at will, which means you don't have to have a reason if you're terminating somebody, as long as you've complied kind of with your company policies, and any agreements you have with them. So you know, if an employee, if you're laying them off because, you know, they're not funding the projects that are most profitable to you, generally that's not going to be an issue. You know, the question you have is, you know, how do you communicate that, you know, that employee's termination? And I think, you know, listen, in general, the termination will guide companies not to comment on employee performance because it often can become the basis for claims, that says often, but not infrequently becoming the basis for claims down the road, you know, you terminated the employee, somebody calls you for a reference check, they don't get the job, and then there is a claim made that something you said during the reference check killed the opportunity. In this massive layoff environment, I think there is a lot less sensitivity to that issue, and I think to the extent, you know, you can make it clear that employee termination was not performance based, but really as a result of macro conditions, and the companies need, you know, to limit the priorities it was following.
You know, it's not going to be a situation that lands you in trouble. >> There is one more question. Do you want to take one more? >> Yeah, sure. >> Sure. So how do you make sure layoffs are sensitive to employees in a more vulnerable situation? Should the layoff policy aim to treat everyone the same, or meet each employee individual-- each employee's individual economic situations, and I'd like to ensure equity in layoffs. >> Yeah, so that, that's a tough one to answer in a blank business.
From the legal perspective, your concern is [inaudible] claims of discrimination, that the fact that a certain group got benefits, and other groups didn't, or the reverse, that other groups got benefits, but a certain groin didn't get benefits. Somehow, that's discrimination. And so that's, you know, that's going to be kind of a case by case, I think in some respects is going to be driven by how many people are getting the non-standard treatment, you know, so if there is, you know, an employee you know of, whose husband just lost a job, and, or wife just lost a job, you kind of want to let them-- keep them on payroll for a couple more weeks, just to give the family some comfort, but in general, you kind of laid off everybody at Department X? Probably not going to be an issue. On the other hand, you know, there's kind of, you know, let's say just picking one out of the hat, you know, you develop a different policy for expectant mothers. That's something you'd have to be, you'd have to consider very carefully in terms of how you roll it out.
So it depends a lot on the scope, and I'd say the basis for making those distinctions. Okay, I think we cleared out there, the questions at least for the time being. The WARN Act is a requirement that's triggered, you know, when you do mass layoffs of more than 50 people at a given location. There's some question about how rigorously that's going to be applied in this environment.
As I mentioned before, the distinctions from a legal perspective in terms of termination fair laws are going to be kind of, in many cases, a distinction about a difference from a legal perspective. One area where you may find a difference is when you have certain service-based benefits that employees who have been with the company more than five years get X, and employees that have been with the company more than ten years get Y, you know, how is that furlough treatment? How is that furlough period treated, and you want to be very clear about that. Many small businesses use professional employment organizations, things like an admin staffer, or sort of like [inaudible], and in those situations, from a legal perspective, your employees are considered co-employees with the PEO, and they have their own termination procedures, and you want to make sure that you're coordinating with them. In my experience with them, from when I was in-house, they actually tend to drive the show around terminations, and so you want to make sure you are in consultation with them. You know, the termination [inaudible] is difficult enough, but there are going to be cases where it really can drive, you know, where a person can be. I'm talking about situations where visas are tied to specific employment, and decisions will impact Visa status, now.
And in some ways, that has become a little moot, because a lot of times, these people just can't return to their original country. But hopefully that situation, in terms of the ability to fly again will start changing. But you still have situations around individuals who are in this country on various visas, in jobs that are kind of supporting those visas are going away, so that is another area of sensitivity that you need to work through.
And finally, you know, keep in mind, if you're running a 401K plan, and allowing loans against it, those loans will usually terminate and need to be repaid if the employee is terminated, and again, that's another area where employers need to be sensitive to. Okay, since I started giving this presentation, there have been a number of changes in government programs. The most notable one is the PPP, the Paycheck Protection Program, which is now on round 2.
Let's be charitable, and say the rollout of this program has not been the in C list, and in particular, for small businesses, a few areas have really emerged as hot button issues. First, you know, there's certain certifications you have to make to make a PPP claim. And those are subject to the False Claims Act, which can include some pretty hefty penalties for companies that make misrepresentations as part of their loan applications, and these misrepresentations can touch on issues like necessity, how really critical is the loan to the survival of the company and ability to make payroll.
Is the company the right size? I know there's been a whole controversy there in the venture capital world, whether they're the companies are considered affiliates of certain venture funds of our investing of them, and then thereby increasing the size of the applying company to include other portfolio companies of the investors, you know, to be getting. It has been quite a mess. There is an amnesty period which is expiring on May 7, which is in two days, where if you return the funds, you know, there won't be any penalty. And if you have taken PPP funding, and had any doubts at all, this is the time to talk to counsel and make sure that you're on the good side of the law in this.
The government has indicated that they're going to do auditing. The initial indication is that's going to focus on larger recipients, but it's tough to judge at this point how this is going to play out. Also, keep in mind, a lot of states, the New Jersey DA, have their own programs that are targeted at small and medium-sized businesses, and you know, make sure you take full advantage of them.
Okay, there are a lot of common mistakes companies are making these days with respect to employment law, that are driven kind of by a study of the hour. So here are some things to keep in mind. First, employees cannot, even if they do so voluntarily, cannot work unpaid.
It is just illegal, it violates minimum wage law. You cannot have employees that are coming in, showing up, and working for you that are not collecting or accruing unpaid wages. You can't offer them for, you know, for companies in the venture spaces, the temptation to offer equity instead of compensation. That is almost always not the case. Wages can't be paid late. You can't be allowed to reduce salary rates.
Accrued vacation time is considered salary, as is contractually required severance, and if your company shuts down and is unable to do that, potentially it could be a basis of liability, personal liability against officers and directors of a company. Now, you can get employees to prospectively agree to work at a lower wage. In other words, you say to them, okay listen, I'm running out of the ability to pay you. You know, I'm hoping that this will just be a short period of time.
If you come in next week, I want you to, you know, it's going to be for minimum wage only. You know, that you can do, and it's within their rights to say no. And keep in mind, minimum wage laws still apply, so you have to check with the local minimum wages in your area, where the employee is working, and you can make those offers, but again, only prospectively. In 2008, we saw a wave of companies hiring unpaid interns.
That is pretty much always illegal, unless there is an educational tie, where the individual is getting an academic credit. And you know, this impacts, in 2008, it impacted companies of all sizes. In fact, the company that got hit with the lawsuit that kind of set the warning signs.
Everybody was coming in [inaudible] and they were having a lot of influence in the various magazine publications. So even if the internship is helpful, and there are certainly a lot of people out there unemployed, who at least are looking to build resumes, you can't take on-- in almost all circumstances-- unpaid interns. And there's a lot of mythology around independent contractors paying people on a 1099 basis. It is really almost impossible, at least in the eye of states, to hire somebody and pay them through their social security number and have them be anything but an employee. So I've done several of these calls in different settings, and I inevitably get some questions, well what happens if I bring a person back on in a 1099 basis, or you know, what happens if I bring in other people at 1099 basis? A note on the side, it's never going to be the legal solution to most of your problems, and will usually create additional issues.
And this, this 1099 issue, was an issue that the states were going after very aggressively, even before this crisis hit, and I suspect that it will be an aggressive area going forward as well. And the reality also is that because the United States has employer at will, as long as you do it correctly, you can bring on employee individuals as temporary employees, and fire them, you know, without notice, unless there is a company policy to the contrary. So you can move people in and out of your workforce, you know, fairly flexibly, even by bringing them in as employees, and there is a minimum mythology around 1099s that they are inherently more flexible.
But one exception to everything I said is, if you're hiring the 1099, the individual through a company that they have set up for themselves, and sometimes people will set up LLC, where they are essentially the sole employee, engaging that LLC, and getting the services of the person who set up the LLC is generally not problematic. But again, bringing on a person on their own personal social security number on a 1099 is a problem. Okay, for most companies, their greatest cost, and their longest term commitment is real estate. And you know, and most landlords know that the future of the market is going to be worse for them than the market in which you signed your current lease, which creates in a very bad environment for CEP extensions, but it's still worth doing.
Courts are going to likely be more flexible with tenants who can't pay, at least for some hardship period. That leniency is not going to go on forever. If your landlord is willing to extend you, or give you some rent relief, make sure to document it. And the documentation should not only document what the relief is, but should make it clear for how long that relief is going to last. You should review, you know, if there are force majeure clauses in your agreements, review them.
Force majeure clauses could be the subject for another program all by itself. Bottom line is they're read very literally by courts, so you want to actually and likely counsel do this to review force majeure in real estate contracts, for that matter, and any other contracts they have, to see whether they could be potential sources for relief. Also a lot of real estate contracts have time is of the essence clauses. You have to move out by date X, time is of the essence. In normal situations, that's an incurable breach. If you're a day late, or a period late, or some period late.
Review to a breeched contract. In the current environment, it's also likely that the courts will be more flexible. Okay, manage your customer and supplier risks. And you're a contracting party to a bunch of customers and a bunch of suppliers. And those relationships are going to change, and the risk profile of your customers and your suppliers are going to change. So, for example, on the customer side, to the extent you can modify an existing contract, and for new contracts, you know, look to shorten payment terms.
So if you've been net 60, [stuttering] you know, 45 net 30, even net of 15, you don't want to be banking, you know, serving as customer banks to the extent you can in this environment. View your credit approval processes. You know, because again, during these net payment terms, you're acting as the customer bank. So do our diligence on the credit worthiness of significant customers. Where necessary, you know, seek cash on demand, or advanced payments, or letters of credit to cover the obligations.
Now, you should know, in some situations, when your customer is really failing, if you can actually have, under the Uniform Commercial Code, the right to demand reclamation of products you've already shipped if you do it within 10 days. The Uniform Commercial Code, which is kind of a-- every state has its own implementation of it, or it's a generally uniform set of commercial principles that govern U.S. commercial transaction, you do have the right to adequate assurance of performance.
And if you have a supplier that you think is in trouble, and you need their products to produce your product, you can send them written notice saying, are you going to be able to perform on time, suspend your performance while you're waiting for them? And if they don't give you that assurance, you can go out and seek another supplier, and if they provide that assurance, and then don't perform, they will likely be subject to additional legal liability. So you should be looking, except through your most rock-solid suppliers, you should be looking to identify potential second source suppliers, and where possible, try to enter into agreements to at least start getting those relationships going. And in some cases, that might mean going to existing suppliers, and saying listen, I know we're exclusive, but you know, your supply chain is remaining through China, it's vulnerable, we need to have some additional security, source of supply, and we need at least unlimited exception from our existing exclusivity. As I mentioned before, force majeure clauses are clauses in contracts that rarely get red. They're so-called acts of God clauses.
They're clauses that typically suspend performance, when one company or the other, when one contract party or the other becomes subject to some, you know, unforeseeable event. They are, because they get a lot-- they don't get a lot of attention in negotiations. They are usually not as crisp as they should be, and in some cases, might not even apply to the current situation. So when you have key contracts, you should work with the counsel to review the force majeure clauses, figure out whether it becomes a useful tool for you, or in situations where you know, the other side may invoke it against you, whether it becomes potential source of liability. But understand on key contracts where you stand on the respective force majeure clauses.
There are other legal concepts called Frustration of Purpose, and Impossibility, but even where contracts don't have force majeure clauses, these concepts may allow you to claim that because of the crisis, you're excused from performance. In general, courts don't like to use these clauses. They don't like to undo the negotiated agreements between parties. And that's why impossibility of performance shouldn't be confused with, you know, very changed performance. So in other words, even if it's dramatically more expensive to perform, courts generally won't declare performance impossible, and they'll insist on you performing.
Force majeure and these related concepts, Frustration of Purpose, and Impossibility, is really in exclusive situations, where the current situation is just really made performance flat-out impossible, or you know, very, very impractical. You know, and I suspect, you know, in the next year or so, you're going to see some significant litigation around commercial relationships gone bad, hinging on whether it was a proper indication of the force majeure clause. As I mentioned at the beginning of the performance, you're going to be seeking flexibility, going forward as much as you can. This obviously will include building in that flexibility in new contracts, but it's also going to include renegotiating existing agreements to the extent you can. And this is one area where being first in line is really helpful, because lots of people are going to be doing it, and my guess is, that flexibility to accommodate requested changes is going to decrease the later you are in line. And a lot of this has-- involves tradeoffs.
So, you know, if you have volume commitments you can no longer meet, or that you're worried about meeting, you might extend the term of the agreement, and maybe agree to a somewhat higher price. So you know, there's kind of a bowling effect, where you can push in one area, and another area expands. And you know, there might be, if not true win-win to construct here, if we lose less, if we lose less situations where you can horse trade a bit to get some flexibility going forward, when you're done, again, just like I mentioned in the real-estate context, you know, document, document, document. Make sure you have documentation of the amendments. Make sure it's clear on what terms were changed, and for how long those changes will last, whether it's permanent or for some period during the height of this crisis. Also, there is a side note which is, if you do your job too well of scaring a potential customer, for example, of your ability to perform because of all the hardships you are enduring, there is a legal concept called an anticipatory breech, where you basically-- it's a legitimate seed in your customer's mind, that you won't be able to perform and that creates its own legal consequences.
So there is a bit of a balancing act. But on the whole, this is the window where you should be reaching out to your key contractual relationships and seeing if there is opportunities to renegotiate better terms, or more flexible terms. Insurance, you know, this is the time to review your policies. Unfortunately, probably, a lot of the insurances that you need to address COVID related liabilities have probably already risen in cost, but you want to have an understanding of what your policies do cover, and where there is potential for crimes, and again, there are first party policies, things that directly impact you. And then there are third party liability policies that cover claims that third parties may have against you. One area that I want to highlight is D&O insurance.
If you have accepted funding from investors, you want to make sure that you have good coverage in place because this is an environment where there will be a lot of second guessing, and there will be claims against officers and directors when companies go south. And one concept that might not be familiar to some is tail coverage. So if you have coverage, which is on a claims made basis, and when a claim is made, unfortunately your company goes out of business, right? Investors may still claim against the directors of the now-dead company. So tail coverage, which can be bought for a period of years, covers a board for decisions it made while the company was alive, for claims that are brought to fight that are-- for claims that are brought in a defined period of time after the claims are made. So those are my ten points. I wanted to raise one other issue, which isn't the point, because unfortunately it's kind of the end of the story, which is in solvency.
So there are a couple of flavors in the solvency. There is Chapter 7, which is liquidation. So the company is just sold off. That can cross with Chapter 11, which is reorganization. So the company's debts are restructured. Our creditors agree to whatever they're getting in the restructuring, and then the company can move forward with its dead obligations, at least significantly reduce, and hopefully start with somewhat of a fresh start.
You know, in general, to really even enter the Chapter 11 process, you really can't be running on fumes, because you're going to need to have some ability to cut deals with creditors, and that is going to require some degree of liquidity. So you really, you know, if you want to have kind of the opportunity to fight another day, you're going to want to start the Chapter 11 process, and unfortunately that's where you're headed, sooner rather than later, to give you the greatest flexibility in dealing with creditors. Now, there is a relatively new innovation which actually was added to the bankruptcy code before any of the COVID related craziness started, called subchapter 5, and that's a small business better flavor of Chapter 11, that can cover debts of up to 2.7 million in debts or so--
it's a much quicker process. It's Chapter 11 processes can sometimes drag on for years. But it's a much quicker and less expensive for the bankruptcy that smaller companies with limited amounts of debt obligations may seek to pursue. And one important thing if your company ends unfortunately going belly up, always make sure that you have enough money in the bank to pay unpaid taxes, and unpaid wages as I mentioned before.
These are areas where, under some circumstances, directors and officers of companies could be personally liable if their companies go out of business, and haven't met those obligations. Why don't I stop now? I have one more point I wanted to cover, but are there any other questions? You know, I've stuck to kind of 10 points, but if there are any kind of card environment related questions that anybody on the call has, I'd be happy to answer them. Okay, we have a raised hand. >> Okay so we're going to, if you're okay with it, we can allow this person to talk that just raised their hand.
>> Sure, please. >> Sure. >> Hi. >> Hi. It looks like your microphone is on. Oh, but they-- >> Can you hear me? >> Oh yeah.
>> I just posted. >> Yes we can hear you. >> [Audio cutting in and out] to best practices for reopening. Do we know yet what those are? >> So, the short answer is no. And to make the short answer even more frustrating, it's likely to vary place to place. I think, you know, I think at level one is whatever the government specifies.
So if the government in your-- and that is going to unfortunately be a 50 state effort the way things look now. And may further vary by municipality. So if the government tells you that people have to be at least six feet apart, make sure they're six feet apart. The, where it's going to get more sensitive and really case by case, you know, are things specific to your business. So let's say, you know, you have to package orders. And to do that, you just can't space people six feet apart.
Right? So then the question is going to be, you know, what kind of PPE do you need to provide your employees for you to have been taking reasonable safety precautions? Right? Is it going to be, you know, K95 masks? Will paper, or surgical masks be enough? And those are going to be unfortunately very case by case issues. You know, if you look at-- we have no precedents for anything like this. But in general, when you look at kind of, you know, public safety related precautions, and other legal areas, cases frequently point to kind of industry standard practice, or best practices that are put in place, so you know, if you're looking to reopen a business, you know, probably, if at all possible, try not to be the first one. And closely monitor what others are doing, because, you know, if unfortunately somebody comes down with a case, and wants to bring a case against you down the road, and it's claiming that it was workplace generated, you want to be in a position to say hey, I followed the government guidelines, and based on what other businesses were doing around me, I was doing at least as much as they were doing, and even better, they'll say and hey, I added these three additional measures to make sure.
>> Thanks. >> Great. There are two more in the Q&A section too. So the first one is what happens if you are in a coworking space like we work? >> Yeah, so, we work, I have a couple of clients who have had these issues, and I don't want to say like we work with-- the stuff that I'm talking about has been, has been you know, pretty publicly reported.
We work in a lot of locations, at least based on the public reports and have not been particularly flexible, you know, they are-- they, you know, step number one is to read your agreement with them carefully. And to the extent you have outs, you know, use them. We're-- we kind of were in better grounds for rework tenants now, in a situation, or let's say in New York, where you're actually just not allowed to go to their locations. So I think you're in a stronger legal position, you know, I think to say, you know, I'm not going to pay you for month X, because I'm not allowed in your business. Where I think it's going to start getting more complicated is with the gradual reopening, well now you're going to have a situation, maybe not in New York anytime soon, but let's say if you're working in Atlanta, but Atlanta is still in a lockdown, but you know, pick your jurisdiction which is reopening, where from a legal perspective, you are allowed in the rework facility, and you're choosing not to go, I think you're going to have a much tougher time there.
>> Okay and the next question is, do you have any general advice about how to hire vendors in the near future to best determine their financial stability? What about existing vendors, who are showing signs of distress? >> There are really concerns that [inaudible] where you can get some information on the credit worthiness. You know, it is-- particularly with smaller, private companies, it's really hard to judge, and I think part of it is if you know, there are a couple of pieces to this puzzle. First, if they're kind of commodity suppliers, you know, wind up your second source as soon as possible, and maybe even start some order of volume there, so you have the relationship in place, rather than calling somebody up in a panic because your supplier failed. Where your supplier is kind of unique to you, it's either manufacturing something, customer review, I think that's where you have got to start having the conversations.
And as I mentioned before, there is, again, I wouldn't, as a lawyer, there's a real temptation to kind of over-lawyer the situation, which is going to have a lot of legal liabilities, so I think, you know, polite conversation is the first step. But in situations where the supplier is critical, and you have genuine fears about them, make sure before there is a contractual right, where you can actually send them a formal notice, and say hey, I have doubts about your ability to perform going forward. Please confer to me that you will be able to do XYZ per our contract by date X. And if they fail,
if they don't provide that assurance, you can, and again, I wouldn't do this at home. I talk, I work this process through with counsel, but assuming the answer is, you know, assuming you've done it right, and they don't confirm their liability, right? You should go ahead and start lining up the second source. If they come back in and say oh, no, we're going to perform, that's a trickier situation and it's going to be a little harder to build a case. But at the end of the day, you know, unless you have a contractual exclusivity with them, I would still, in most cases, if you have a real fear about the viability of a supplier, get that second source up and running. It might have a financial impact, but if it's a critical source supplier, you can't take that chance.
Okay. Let me-- just a couple of closing thoughts. First point is communicate. So you know, in general, there is a natural human tendency to kind of hide bad news. And everybody has got bad news now. So you're not outstanding, you're not an incompetent manager for having bad news occur to your company.
Everybody has it. And in a lot of cases, it has nothing to do with how well run the business was prior to all of this. This is just, you know, a different world. I told my sons, I said, you know, I must have missed this day in grown-up school, because, you know, there is no playbook for what we're going through. So understand that.
And overcommunicate. You know, let people know how you're doing. Get a sense of how they're doing.
Because the earlier potential problems are surfaced, the more time people have to mitigate against the resulting consequences. What you want to avoid is giving surprises, or receiving surprises. Because then your options are almost always going to be a lot narrower.
And if you have, you know, for those of you that have investors, and have boards, there's always a tension. You know, you don't like sharing bad news with the board. Here, I would, you know, be really up front.
Again, and in a lot of cases, it's just not a reflection of you, it's kind of-- it's not us, it's them, it's the environment that is creating all this, and hopefully you're blessed with a strong board of people that have experience, and that can actually have value and advising you on these tough decisions. And you know, hopefully if you don't have a board, but this is the time to lean on your mentors, and get that feedback. Now, don't look to reinvent the wheel.
And benefit from the stakes of others. Keep in mind, you know, that it's really hard to undo a bad reputation. You have tough decisions to make. But hopefully we're going to get to a new normal, and you know, you're going to want to pick up and continue to grow your business. A lot of the decisions you're going to have to make now don't have a lot of options. So you know, it's bad options to worse options, and people can get hurt as a result of your decisions.
But the way in which you make those decisions, the way in which you communicate those decisions, those are the things that are going to kind of travel with you, when we get out of all this. And you should always keep that in mind. You know, to the extent you can show flexibility, show it.
If you can't show flexibility, at least show empathy and recognition of the cost you are imposing on others, and be helpful to the extent you can. You know, this is a time when reputations will be made, and broken, and it's really hard to repair a bad one. I kind of tried to capture, and I did this actually in another presentation that I made, put this in a process. What you really should be doing is a constant process of evaluation of where you stand in actions. So the acronym I came up with is RIAR squared, first R is reassess, right? All the business plans you had on February 1, they were irrelevant. Throw them out.
Figure out where you are now. I is inventory. Catalogue your relationships. Make sure you have the agreements that govern those relationships even toward government programs. Take stock of the different issues you need to address.
A, get them through the analysis phase. Figure out, you know, which relationships you want to preserve, and which ones you want to cancel, which ones you want to modify. The R is respond with those plans, that analysis into action. And then the final R, which I can't stress enough, is repeat. You're going to have to keep on doing this.
We're not going to be at a steady state, where you can kind of even be, you know, even in good times, you should never be on autopilot. But we're not even going to be close to comfort zones for the foreseeable future. And so this is a process you're going to constantly have to revisit. You say if the environment will change, economic environment will change, and you're going to have to respond in real time, as I said before, we've got a playbook.
I've-- I published a bunch of different content over the last few weeks of various issues that relate to the fallout from all this craziness. Some of them, you know, are specific to startups. Otherwise, others are bartered to any small business. We'll be distributing this presentation after the-- after the webinar is over, and if you do get a chance to read it, I think you'll find them helpful. So thank you for staying, through all ten points. I hope you found it helpful.
This is my contact information. And if you can just run something by me, want to ping me for a point, you know, feel free to do so. Or if you have any questions on this presentation, so thank you everyone, and most of all, stay safe.
2021-01-29 13:20
