Rescuing employment contracts in times of disruption – a COVID-19 case study

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It is undeniable – the COVID-19 pandemic has turned the world on its head, and employment contracts have not been spared. Employers are in a quandary over how to deal with employees as social distancing and lockdowns appear to be the only guaranteed means of containing the spread of the virus and disease.

In Ghana, the now partially lifted three-week lockdown showed that in addition to some work being incapable of being performed remotely, remote working is hindered by lack of logistics, unreliable internet connectivity and unscheduled power cuts. If the lockdown is re-imposed or a similar situation emerges in future, how do employers facilitate social distancing or endure lockdowns and still generate revenue to discharge their fundamental obligation (i.e. paying employees’ salaries), if employees cannot work?

In this paper, I posit that employers can survive a COVID-19-style disruption without terminating employment contracts by adopting measures such as mandatory leave or unpaid leave for employees.

A more sustainable option is for employers to enter into novation contracts with employees to vary the terms of the employment. I conclude that the inclusion of force majeure provisions in employment contracts is imperative to ensure that employers survive another disruption in future.

In Ghana where government support for employers and employees during this pandemic is somewhere between non-existent and inadequate, more questions arise, such as:

  • should employees be made to take mandatory leave or be furloughed ie take unpaid leave?
  • should employees be terminated or declared redundant?
  • will employees and trade unions be amenable to these measures?
  • can employment contracts be suspended for a period.

This two-part article will discuss the options available to employers.

Compulsory Annual Leave

During the COVID-19 lockdown, employers had the option of sending employees on their statutory annual leave. The mandatory leave option is backed by the Labour Act, 2003 (Act 651) (“Labour Act”), which provides that an employer, shall where possible, give employee at least 30 days’ prior notice of the date an annual leave commences.

By inference, it is the employer who decides the start date of an employee’s annual leave, although this may not necessarily be the practice. The provision however permits an employer to disregard the notice, where it is impossible to do so. This annual leave approach is cost effective as employers may recover some of the lost manhours when work eventually resumes. This approach is however not sustainable in the long term as annual leave days are finite.

Unpaid Leave

On exhaustion of annual leave, employers consider furloughing i.e. unpaid leave for employees. Unlike annual leave, furloughing is not backed by statute and is purely contractual. Although common in employment contracts, manuals or collective agreements, unpaid leave provisions usually permit employees only, to take time off to attend to personal obligations.

An employer must therefore obtain the express consent of its employees for unpaid leave. This option may likely meet with resistance from employees and trade unions. And the resistance may have some basis as employees’ personal expenses do not lessen in these times. If employees do not agree to being furloughed, the next logical option may be to terminate the employment of employees if the lockdown persists or is re-imposed.

Termination

Termination of employment though a drastic option, only requires an employer to give notice or pay the salary in lieu of notice. However, an employer risks an inference of a redundancy in a mass termination. Under the Labour Act, redundancy occurs if an employer contemplates major changes in production, programme, organisation, structure or technology or a complete close down of the business which will result in terminations of employment or diminution in employees’ terms and conditions.

Judicial decisions indicate that a redundancy situation exists where the business ceases; the place of business is moved; and the business no longer requires the same number of employees to carry out work which the employees were actually engaged in or any other work they could have been asked to do.

Regardless of the intent, a termination could be deemed to be a redundancy due to its downsizing effect, which invariably re-organises or restructures the establishment. To avoid disputes, employers may take the path of least resistance and declare redundancies. But redundancy comes at a cost of a redundancy or severance pay, which employers may not be able to afford especially at a time when productivity is either non-existent or at its lowest.

Since employment contracts are also governed by general principles of contract, there may be other legal factors that would apply. Part II of this article will deal with how frustration and force majeure may come into play in these or similar circumstances.

Frustration

Contract law principles are applicable to employment contracts and may be instructive in considering the overall impact of the COVID-19 pandemic on employment contracts. The first relevant principle is the doctrine of frustration.

Under Ghanaian law, frustration involves a mixture of common law and provisions of Part I of the Contracts Act, 1960 (Act 25) (“Contracts Act”). Common law rules determine when frustration has occurred, while Part I of the Contract Act deals with the consequences of frustration. Frustration occurs where an external event of a kind that is not the fault of either party, renders further performance of a contract impossible or radically different from what was originally contracted. Whether frustration has occurred or not is a question for the courts to determine.

In doing so the courts will (i) construe the contract to discover the scope of the original obligation, (ii) examine the situation after the external event to ascertain what would be the new obligation, and (iii) compare the original obligation with the new obligation to ascertain whether it would be radical or fundamentally different. Under the Contracts Act, if the court determines that a frustrating event has occurred it will discharge the parties from further performance.

In a lockdown, employment contracts arguably become fundamentally different: simply, employees cannot work to earn salaries. An employer may apply to the courts to be released from further performance of the contract. The duration and costs of such court action however does not make this a feasible option. Employers may consider novating the employment contracts, that is replacing contracts with new ones that contain furloughing provisions so that the contracts could be suspended for stated periods or until normalcy returns.

Novation

‘Novation’ means substituting a new contract in place of an old contract. Employers and employees may novate their contracts to permit new terms such as unpaid leave, suspension of employment, new working hours, new conditions of work such as ‘flexitime’ and working from home, and reduction in salary for events such as the COVID-19. It is also advisable to include force majeure provisions. Although force majeure is common in commercial contracts it is rare to find them in employment contracts, and it is to this that we now turn.

Force Majeure

Force majeure is a term in a contract that excuses or suspends the performance of a contract in whole or part if certain events happen. The usual events include acts of God (such as an earthquake), war, riots, government intervention and extreme weather.

A party invoking the force majeure clause, must show that the inability to perform the contract was due to events (i) beyond the party’s control, (ii) the party could not reasonably have been expected to consider in entering the contract, and (iii) that could not be avoided. Including a force majeure clause would hold contractual obligations in abeyance until the disruption abates. However, novating employment contracts at such a time could bring up claims of duress arising from economic pressure.

Duress Claims

The doctrine of duress arises where a party is forced to contract by some form of improper or illegitimate pressure. This makes the contract voidable, so that it may be set aside at the instance of a party in court. To succeed in a claim for duress, the complaining party must show that they had no other reasonable alternative but to agree and that after entering the contract they took steps to avoid it.

Further, the party must prove that they would have suffered catastrophic consequences if they had not agreed to the terms. Catastrophic consequences mean disastrous, calamitous, shattering, appalling, terrible, ruinous or tragic consequences. In determining whether there were available alternatives, the court may consider whether the claimant had a real or realistic alternative and could have resisted the pressure.

Pressure will be illegitimate where the party applying the pressure knows that it would be a breach of the existing contract if the threat was implemented. A party’s protests may be relevant in determining that the party was under economic pressure with some coercive effect. A party will not succeed in setting aside the contract if they have expressly or impliedly affirmed the contract or allowed time to lapse.

Employees claiming economic duress are not likely to succeed until they show that some sort of illegitimate pressure was applied. An employer who has a legal right to sever the employment relationship by the termination with notice, redundancy or even frustration would not be applying illegitimate pressure nor be breaching any terms of the employment by exercising its rights. Consequently, a claim of duress, without more, is not likely to succeed.

It is possible for the employment contract to survive the COVID-19 or similar disruption without termination if parties are willing to work together and adopt and adapt measures such as mandatory leave or furloughs. A more sustainable option may be novating the existing contracts to vary the terms of the employment to meet current realities. The inclusion of force majeure provisions in these and future contracts appears imperative so that such contracts would better survive the COVID-19 pandemic and other similar events in future.

>>>The writer is an Associate at Bentsi-Enchiill, Letsa & Ankomah

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