Teleworking and an Employer’s Woes of Record Keeping

Portrait of Byrona J. Maule

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In this era of Covid-19, many employees who have never had the opportunity to telework are now, out of necessity, teleworking.  This creates many challenges for employers – and none is more important than the employer’s obligation to exercise reasonable diligence in tracking teleworking employees’ hours of work.

The Wage and Hour Division of the United States Department of Labor (WHD) issued Field Assistance Bulletin 2020-5 (FAB 2020-5) today on the employer’s obligation to track a teleworking employee’s hours of work pursuant to the Fair Labor Standards Act (FLSA).

FAB 2020-5 acknowledges the employers’ obligation to pay its employees for all hours worked – even if the work was not requested, if the employer “suffered or permitted” the employee to work.  This includes work performed at home.  If an employer knows or has reason to believe that an employee is performing work, the employer must count those hours as hours worked.  An employers’ knowledge may be either actual or constructive.

Employers may exercise reasonable diligence in tracking an employee’s teleworking hours by having a reasonable reporting procedure for unscheduled time and then compensating employees’ for all reported hours.  An employer may not prevent or discourage employees to accurately report all hours the employee works. If the employee fails to use the reasonable procedure “the employer is not required to undergo impractical efforts to investigate further to uncover unreported hours of work and provide compensation for those hours.”  If an employee fails to report unscheduled hours worked through the employer’s established procedure, the employer is generally not required to investigate further to uncover unreported hours worked.

FAB 2020-5 explores when an employer has “reason to believe that an employee is performing work.”  An employer has actual knowledge of the employees’ regularly scheduled hours, and an employer may have actual knowledge of hours worked, through employee reports or other notifications.  An employer has constructive knowledge if the employer should have acquired knowledge of such hours through reasonable diligence.  Reasonable diligence is defined as what the employer should have known – NOT what the employer could have known.  “Though an employer may have access to non-payroll records of employees’ activities, such as records showing employees accessing their work-issued electronic devices outside of reported hours, reasonable diligence generally does not require the employer to undertake impractical efforts such as sorting through this information to determine whether its employees worked hours beyond what they reported.”  Examples given of impractical efforts included in FAB 2020-5 included sifting through CAD records and phone records to determine if an employee was working unreported hours. However, Bulletin 2020-5 does not give a definitive rule that an employer never has to consult records outside of timekeeping records, noting it depends on the circumstances, and there may be instances where an employer’s non-timekeeping records may be relevant to issue of constructive knowledge of an employee’s unreported work hours.

In order for an employer to leverage the most protection from an employee seeking wages for unreported hours, an employer should:

  1. Have a reasonable policy/procedure setting forth clearly that an employee is to report all hours worked, whether scheduled or unscheduled.
  2. The employer should not discourage an employee from utilizing the procedure.
  3. The employer should train on the policy, or otherwise assure that employees are aware of the procedure, and when to use the procedure.

If an employer undertakes these steps, and an employee fails to utilize the procedure to report unscheduled hours worked, the employer’s failure to pay for the unreported hours worked should not be a violation of the FLSA.

For more information on this alert and its impact on your business, please call 405.552.2453 or email me.

Keep up with our ongoing COVID-19 resources, guidance and updates at our RESOURCE CENTER.

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Does COVID-19 constitute a material adverse effect?

Gavel to Gavel appears in The Journal Record. This column was originally published in The Journal Record on August 6, 2020.

In addition to a vast human toll, COVID-19 has wreaked havoc on businesses, markets and supply chains. With infections still spreading, businesses have suffered cash and liquidity constraints and anticipate such suffering to continue.

The pandemic also presents unique risks to parties in acquisition agreements, such as risks concerning the financial viability of the target company. Parties often address these risks by including material adverse effects, or MAE, clauses.

Generally speaking, an MAE is an event, circumstance, change or effect that presents a material threat to the business of the target company. MAE clauses account for this possibility and allocate risk among the parties.

Such clauses are frequently used as conditions to closing and qualifiers to the seller’s representations. If the target company suffers an MAE as defined in the agreement, the clause allows the buyer to unilaterally terminate the deal without being considered in breach of contract. The seller can qualify representations made about the condition of the target company, making it more difficult for a buyer to assert a breach. Also, exclusions to the definition of an MAE are identified, such as industrywide market conditions.

One increasingly common issue is whether COVID-19 constitutes an MAE. The following questions may help determine the answer and assist parties in the negotiation stages:

  • Are there MAE exclusions such as epidemics, pandemics and natural disasters?
  • Has COVID-19 resulted in unique issues for the target company that are disproportionate to other companies in the same industry?
  • Is the buyer obligated to use certain efforts to close the deal notwithstanding events that affect the financial condition of the target company?
  • What other limitations apply to an MAE? For example, can events only occurring after executing the agreement qualify as an MAE?
  • Have the parties contractually shifted the burden to the seller to prove that an MAE has not occurred?

While these questions may provide guidance on the issue, establishing whether an MAE has occurred is a highly fact-intensive issue that depends on the unique circumstances involved and the specific language used in the acquisition agreement. It should also be noted that buyers have faced a significant burden in court to show that any event meets the criteria of an MAE. As more parties litigate the issue, the courts will play an important role in establishing precedent that will shape how parties negotiate acquisition agreements.


Potential Legal Recourse for COVID-19 Losses

By Phillips Murrah Director, Clayton D. Ketter

The continuing uncertainty surrounding the COVID-19 global pandemic is causing significant disruption to business operations.  In addition, recent restrictions on operations is likely to further cause various businesses to lack the financial capabilities to meet ongoing obligations.  Such business may have various contractual and legal rights that may serve to ease their financial pain.  Several of these are analyzed below.

Clayton Ketter

Clayton D. Ketter is a Director and the Firm’s Litigation Practice Group Leader. Clay has extensive experience in financial restructurings and bankruptcy matters.

A. Business Interruption Insurance

The first place many businesses may look for relief when forced to temporarily close due to the COVID-19 pandemic and related government restrictions is a business interruption insurance policy.  Business interruption insurance generally compensates a business for lost income suffered in the event the business is forced to temporarily cease operations due to an unforeseen event such as a fire or natural disaster.  Some policies also provide coverage for issues with a business’s supply chain that are outside of the business’s control.

Every business interruption insurance policy will contain various exclusions from coverage.  After the SARS outbreak in 2003, it became common for insurance companies to seek to exclude from coverage losses sustained from communicable disease outbreaks, such as the current COVID-19 pandemic.  Such exclusions may prevent coverage in the current situation.

Many business interruption policies also require that covered losses be tied to physical damage to a business.  A typical example would be a business that was forced to close because its building was damaged by a fire or natural disaster.  A general slowdown in business related to a broad disaster is unlikely to meet this requirement, because there is no corresponding physical damage to the specific business.  Some policies also provide coverage when ingress or egress to a business is limited or prohibited by a governmental authority.  Those too, though, often require some specific physical damage to have been suffered.

However, the precise wording of the insurance policy, which will vary from policy to policy, is critical to determining coverage.  Even small variations in policy language can have large impacts, particularly in an unprecedented situation such as the one we are currently facing.  Thus, business owners should carefully review their specific policy and seek legal counsel for any potential issues.

B. Force Majeure Clauses

Another potential source of relief for specific contractual obligations is a contractual provision known as a force majeure clause.  The term force majeure covers a broad range of provisions that generally excuse a party’s performance under a contract when external events, such as an act of god, have rendered such performance impossible.  While there is no single standard force majeure clause and they can take many forms, a common example would be a provision providing:

In the event either party is unable to perform its obligations under the terms of this Contract because of acts of god or other causes reasonably beyond its control, such party shall not be liable for damages to the other for any damages resulting from such failure to perform or otherwise from such causes.

Specific clauses may explicitly set out circumstances that constitute a force majeure event, such as strikes, wars, and natural disasters.  It is also common for provisions to set out certain obligations that are not excused by a force majeure event.  For example, commercial real property leases often provide that a tenant’s obligation to pay rent is not excused by a force majeure event.

While force majeure clauses are common, most do not explicitly provide that a global pandemic will constitute a force majeure event.  Without a specific reference, parties seeking to invoke such a provision will have to rely on general terms such as act of god.  Such general terms are subject to differing interpretation by courts.  For instance, the Oklahoma Supreme Court has defined an act of god as “some inevitable accident that could not have been prevented by human care, skill and foresight, but which results exclusively from nature’s cause, such as lightning, tempest and flood.”  City of Purcell v. Subblefield, 139 P. 290 (Okla. 1914).  Whether a global pandemic such as COVID-19 would fit within that definition remains to be seen.

Another issue with the applicability of a force majeure clause is the extent that performance was affected.  Specific clauses will use a variety of standards to excuse performance, such as impracticability, impossibility, or illegality.  These differences will have a significant impact on whether a force majeure clause applies.  For example, restrictions on how businesses are permitted to operate in the current environment continue to evolve.  Those restrictions may make performance of a contractual obligation impracticable, but not necessarily impossible or illegal.  Thus, a business that has been statutorily restricted from operating would likely have a stronger argument that a force majeure clause applies than one whose operations have been impaired by the restrictions.

Ultimately, whether a party’s performance under a contract will be excused due to the COVID-19 pandemic is going to largely depend on the terms of the specific contract coupled with the facts of each party’s individual situation.  Thus, it is recommended that a contracting party carefully review the language of the contract at issue with a legal professional.

C. Governmental Taking

There may be other contractual provisions that could also provide relief.  For instance, it is common for commercial real property leases to excuse performance when the underlying property has been taken by condemnation or eminent domain.  An enterprising tenant could attempt to argue that governmental restrictions on the business’s operations constitute a condemnation because the tenant’s rights have been “taken” for the greater good of the public.  Such arguments appear to be completely untested.  However, as with the other issues raised herein, the ability to utilize such arguments is going to heavily depend on the specific terms of the agreement at issue.

D. Chapter 11 Bankruptcy

While the forced closure of a business may result in a general reduction in certain contingent expenses, fixed costs such as rent and loan payments are likely to continue.  Upon reopening, many business, despite being profitable, are likely to face liquidity issues due to the temporary cessation in income.  For such businesses, the first step should be to attempt to reach a consensual resolution whereby the outstanding obligations are restructured by agreement.  However, when an out of court workout cannot be reached, a bankruptcy under Chapter 11 may present a viable option.

Chapter 11 is designed to allow a debtor to restructure its debts so that it can repay creditors in an orderly manner.  Often, this involves extending the period for repayment.  For instance, a business that is facing a large amount of debts currently due, might be able through a Chapter 11 bankruptcy to repay those debts over time through a series of payments.  Thus, Chapter 11 may provide an otherwise profitable businesses that has incurred substantial debts as a result of the current crisis a path to continue operating and repay its debts in a structured manner.

E. Conclusion

Ultimately, a party’s rights and obligations will depend on the specific facts and circumstances at issue, including the language of the parties’ agreement.  To the extent a business is facing such issues due to the current pandemic and associated response, it is advisable to discuss the specific situation with a qualified legal professional.