Restaurant and hospitality businesses are dealing with unprecedented and severe impacts due to the COVID-19 pandemic and more directly, the growing number of social distancing requirements and restrictions on travel, along with governmental orders to stay at home.
Since the pandemic outbreak has left some company earnings guidance unclear, several publicly traded companies within the restaurant and hospitality industries have withdrawn their guidance. Small businesses in these industries also face increased uncertainty.
Employment Issues & Temporary Closures
A large number of full-service restaurants are operating at only a fraction of capacity, if not completely closed – either due to government mandate or as a means to preserve cash in anticipation of reopening after limitations are lifted. With their flexibility in inventory and supply chains, those with the resources have rapidly shifted to carry out and delivery models; some are even providing produce baskets and butcher shop cuts to customers.
Most hotel rooms and ballrooms remain vacant despite exemptions from state and local close-down orders and social distancing requirements. Due to this, many hoteliers have decided to shut their doors for the time being. According to the recent Senate stimulus bill, which is expected to be approved by the House and signed into law, the Small Business Administration has expanded and modified its loan programs to offer relief to people within the restaurant and hospitality industry.
Additionally, all businesses in the restaurant and hospitality industry are expected to receive various tax benefits, and larger operations may be eligible to receive loans under the Treasury Department’s larger bailout program. Restaurants and hospitality businesses need to do their best at the moment to prepare for the return to normal service after this time.
All employers, including those in the restaurant and hospitality industry, face many challenges, such as reduced staffing needs, remote work requirements, employees without childcare, temporary location closings, and the threat of COVID-19 spreading in the workplace. Employers in the restaurant and hospitality industries may find their staffing needs greatly reduced as state and local governments continue to pass orders requiring the temporary closure of certain nonessential businesses.
Most employers place employees on a furlough without pay, but the employee can keep their benefits based on the plan’s terms. A COBRA plan would be in effect if the coverage is not available. At least a portion of the furlough may be paid using accrued PTO by the employer. Unpaid furlough benefits may be available under state law if the employee is eligible.
To assist their employees, some employers provide limited paid leave for a limited amount of time. Family First Coronavirus Response Act (FFCRA) was signed into law by President Trump on March 18. It allows employees to take limited paid leave as well as FMLA leave in the event of COVID-19-related absences. In addition to the WARN Act, employers should also check whether their state’s mini-WARN laws apply if a location is closed, a group is laid off, or an extended furlough occurs.
Companies are understandably concerned about the spread of COVID-19 in the workplace among employees who cannot work from home. The CDC recommends deep cleaning, handwashing, and social distancing in the workplace at this time for employees who cannot work remotely.
If an employee displays any of the symptoms of COVID-19, they should be sent home. A company may (but is not yet legally required to) notify its employees of an employee’s diagnosis of COVID-19 and monitor the symptoms closely. The employee’s name must not appear on such notice.
Financing & Commercial Real Estate Issues
When necessary, companies should review their existing financing arrangements to identify any obstacles to maximizing liquidity. Borrowers often have to satisfy various conditions as of the date of borrowing to obtain credit. A company that is concerned about achieving these funding conditions in the future may draw on existing available credit proactively. In such agreements, the borrower certifies that all representations and warranties remain true and correct and that no material adverse changes have occurred since an earlier date.
The COVID-19 regulations and mandates have prompted the scrutiny of certain clauses in commercial leases involving restaurants and retail properties. The existence of such lease provisions may make it difficult or impossible for tenants to comply with social distancing recommendations and government-mandated closures. Many leases contain force majeure clauses, which can excuse a tenant’s failure to comply with continuous operation requirements or mandatory operating hours, which depend on the lease’s specific terms along with the law in each state. The tenant may be able to avoid lease default in case of non-performance for continuous operation or mandatory operating hours provisions with force majeure provisions, however, in most cases, those provisions will not excuse the tenant’s financial obligations.
Renters and landlords must be proactive in reviewing their leases, communicating with each other, and consulting with attorneys for guidance based on the current business climate, including whether new COVID-19 legislation may apply. During the term of the lease, landlords and tenants might consider short-term rent reductions or abatements; such reduced rent payments could be repaid or amortized later or given in exchange for longer-term commitments.
It would be wise for landlords and tenants to record their agreements regarding temporary interruptions in operations and other obligations that are currently infeasible due to the current economic climate. Furthermore, tenants and landlords should consider any disruptions that may affect stated timelines for construction or disbursement of tenant allowances.
Business interruption insurance may be an option for tenants in the restaurant and hospitality sectors, and their insurance coverage may cover reduced or closed operations in response to COVID-19 requirements. In addition, businesses that have been forced to suspend operations may be required to notify their insurers.
Exemptions for Essential Services
Businesses in the restaurant and hospitality industries need to determine if they are exempt in jurisdictions with a mandated stay-at-home orders and if so, to what extent. The U.S. considers certain categories of workers and business operations critical, which are included in most state and local orders. As outlined in the Department of Homeland Security (DHS)’s March 19 Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response (CISA, part of DHS). CISA considers take-out and quick-service food operations to be critical, while in-person dining is not.
Local and state laws exempt food service and restaurant businesses from closure orders in a similar manner. CISA does not include hotels on the Critical Industry Security Area list, but they do generally not face closure orders from state or local governments. It is generally required in all cases that these businesses meet social distancing guidelines to ensure the safety of their guests and staff, as well as close gathering places such as restaurants and bars within the hotels.