COVID-19 and employment agreements: What are employers' options?

Businesses throughout New York are undergoing unprecedented disruptions due to the COVID-19 pandemic. As a consequence, they may be forced to make difficult, cost-saving decisions such as whether to reduce compensation, furlough employees or discharge them altogether. At-will employees who are not subject to collective bargaining agreements generally have no protection against actions taken for legitimate business reasons. However, employers do not have the same unfettered discretion with respect to employees with employment agreements. Employers should carefully analyze the language of each agreement before taking any action to avoid exposing themselves to potential breach of contract claims.

Discharge and termination of agreement

An employment agreement is like any other contract, and courts will look to its plain language to determine the rights and remedies of the parties. Employers who wish to discharge an employee and terminate the agreement should consult the contract provisions concerning term and termination.

Related: 10 steps to take after a layoff or furlough

Employment agreements may or may not provide for a fixed term. If there is no fixed term, they are usually terminable by either party without cause. See Arbeeny v. Kennedy Executive Search, 71 A.D.3d 177, 178 (1st Dept. 2010) (agreement provided that “employment may be terminated by [either party] at any time, with or without cause or prior notice”). This type of employment agreement sets forth the parties’ understandings with respect to certain work conditions but does not promise employment for a specific time period. Employers may sever such employment relationships due to COVID-19 issues as long as they comply with any notice requirements, including payment of compensation during the notice period.

By contrast, an employment agreement that contains a fixed term requires employment for a designated time period unless a termination event occurs. For example, an employer may be permitted to terminate the agreement for “cause” such as insubordination, breach of the duty of fair dealing, and other misconduct. See, e.g., Trieger v. Montefiore Med. Ctr., 15 A.D.3d 175, 175-76 (1st Dept. 2005); Harmon v. Adirondack Cmty. Coll., 12 A.D.3d 746, 748 (3d Dept. 2004); Bradford v. Weber, 138 A.D.2d 860, 862-83 (3d Dept. 1988). The “cause” provision tends to focus on the conduct of the employee, and thus is unlikely to permit termination of employment for reasons related to COVID-19.

Employers should examine the agreement for a force majeure clause, which expressly excuses performance upon the occurrence of unforeseen events. These provisions are not standard in employment agreements, and courts will not write one into the contract. See Gen. Elec. Co. v. Metals Res. Grp. Ltd., 293 A.D.2d 417, 418 (1st Dept. 2002). If the agreement contains a force majeure clause, its scope is important as some courts will excuse a party’s nonperformance “only if the force majeure clause specifically includes the event that actually prevents a party’s performance.” Kel Kim v. Cent. Markets, 70 N.Y.2d 900, 903 (1987). For example, the agreement may provide for termination if there is an “unforeseen condition, circumstance, war, epidemic, governmental restriction, administrative decision, [or] Act of God.” Rothenberg v. Lincoln Farm Camp, 755 F.2d 1017, 1018 (2d Cir. 1985) (emphasis added).

Language such as this likely would encompass COVID-19. There may be other issues to consider, including whether performance is excused only temporarily during the pandemic or permanently, and whether there are duties to mitigate. See PT Kaltim Prima Coal v. AES Barbers Point, 180 F. Supp. 2d 475, 484 (S.D.N.Y. 2001).

In the absence of a force majeure provision, employers may consider contract defenses such as impossibility and frustration of purpose. It is not enough that the employment agreement became more financially burdensome than contemplated. Under New York law, “a change in market conditions or an increase in the cost of performance” will not excuse performance. Health-Chem v. Baker, 737 F. Supp. 770, 776 (S.D.N.Y. 1990). Under the doctrine of impossibility, performance is excused if it is rendered impossible due to “the destruction of the means of performance by act of God, vis major, or by law.” Ebert v. Holiday Inn, 628 Fed. App’x 21, 23 (2d Cir. 2015). Frustration of purpose is “limited to instances where a virtually cataclysmic, wholly unforeseeable event renders the contract valueless to one party.” Bierer v. Glaze, CV-05-2459 (CPS), 2006 WL 2882569, at *6 (E.D.N.Y. Oct. 6, 2006).

While such defenses have been narrowly applied in the past, courts may be more receptive given the overwhelming impact of COVID-19 on businesses. For example, these doctrines might conceivably apply—or be expanded to apply—if the employee is unable to work, either remotely or on-site, because of Governor Cuomo’s PAUSE order. See, e.g., Bush v. Protravel Intern., 192 Misc.2d 743, 753 (Civ. Ct. Richmond Cnty. 2002) (holding that contract defenses were available when performance was prevented by governmental orders issued after September 11th attacks).

Alternatives to termination

Reduction of compensation. Employers may wish to retain the services of contract employees, particularly those with executive functions who may be necessary to steer the business through the COVID-19 crisis. In such situations, there may be cost-saving measures that do not violate the employment agreement.

Employers may reduce an employee’s base salary if it is not fixed in the employment agreement. Indeed, some agreements specifically provide that salary is subject to adjustment in the employer’s discretion. See Arbeeny, 71 A.D.3d at 178 (agreement provided that “salary shall be reviewed by Management from time to time, and any adjustment to such salary shall be in the sole discretion of Management”). Under New York Labor Law, employers must provide written notification of reduction in compensation before the change is implemented. See NY Labor Law §195.

Even if the salary amount is set, there may be other components of compensation that can be reduced or eliminated. Bonuses properly structured as discretionary do not constitute wages and employees have no vested right to payment. See N.Y. Labor Law §190(1); Truelove v. Northeast Capital & Advisory, 95 N.Y.2d 220, 225 (2000). By reducing or eliminating discretionary bonuses, employers may lower the total compensation package while remaining in compliance with the terms of the agreement. Alternatively, an agreement that requires an employee to work a certain number of hours may allow for a reduction in compensation proportionally with any reduction in hours caused by lack of work — a practice that was utilized during the 1918 influenza pandemic. See Newman v. Garfinkel, 176 N.Y.S. 530 (App. Term 1919).

However, employers should examine the agreement to ensure that the compensation change does not provide the employee with justification to depart if he or she is critical to its operations. Some employment agreements contain a “good reason” clause which permits an employee to terminate the contract if there is a reduction in compensation. See In re Arbitration Between Atherton & Online Video Network, 274 F. Supp. 2d 592, 593 (S.D.N.Y. 2003) (agreement defined “good reason” to include “any reduction of [employee’s] base salary”). In addition, the salary of overtime-exempt employees cannot be reduced below the applicable threshold or the exemption will be lost. See 12 NYCRR 142-2.14.

Furlough/reduction of duties. Employers may also desire to retain contract employees who are necessary to the resumption of the business at a future date but who are not needed at the present. A furlough, which can take the form of a temporary reduction in work hours or a leave of absence, might be an option.

Furloughs are typically not expressly provided for in employment agreements. Nevertheless, employers should see if there is any language in the agreement that may permit it. For example, the agreement might not require job duties to be performed continuously or on a full-time basis. The agreement might also permit an employer to reduce duties or hours worked. See Harmon, 12 A.D.3d at 747 (agreement provided that employer retained its right to “’assign or reassign[,] … add to, subtract from, or modify’ [employee’s] duties at any time”). In these situations, and depending on the compensation provisions, it may be permissible to furlough an employee without violating the terms of a contract.

Conclusion

In the end, there is always the possibility that the language of the employment agreement is unambiguous and the employee is entitled to full payment for the full term. Employers are in uncharted waters when it comes to asserting contract defenses because of COVID-19. Rather than relying on arguments that are uncertain and untested, employers may endeavor to obtain the consent of the employee to terminate the agreement upon mutually-agreeable terms. Alternatively, employers may negotiate amendments, supported by adequate consideration, such as a temporary salary reduction or an unpaid furlough. Many contract employees are high-level executives who understand business constraints and may be willing to work with the employer to find an acceptable solution under these challenging circumstances. A negotiated approach respects both the contract rights of the employee and the economic imperatives of the employer.

Frances Kulka Browne is a partner in the law firm of Brody & Browne and an adjunct professor at Fordham Law School. Erika Ghaly is an associate at the firm.