Impact of the emergency measures against spread of the coronavirus

In the connection with the declaration of the state of emergency due to possible health threat by the COVID-19 [1] and due to the related emergency measures, the business activities became dramatically limited in the last few days within the whole territory of the Czech Republic.  These emergency measures have significant impact on the entrepreneurs. We would like to inform you on the legal basis and legal impacts of the situation described hereof in this article.

For easier orientation, the text of this article is divided into the following parts:

1. Emergency measures imposed in order to prevent spreading of the virus and compensatory damages
2. Impact on contractual relations
3. Labor law issues
4. Information regarding the program COVID Loan

1. EMERGENCY MEASURES IMPOSED IN ORDER TO PREVENT SPREADING OF THE VIRUS AND COMPENSATORY DAMAGES

The emergency measures are declared by the government pursuant to Sec.  5/a – e and Sec. 6 of the Act No. 240/2000 Sb., on the crisis management and on amending certain other acts (hereinafter referred to as “Crisis Act”). Crisis act inter alia contains and regulates the government liability for the consequences caused by such declared emergency measures, pursuant to Sec 36 of the Crisis Act. Pursuant to abovementioned Section, the government is obliged to pay damages caused to the natural persons and legal entities in causal nexus with the emergency measures and exercises performed pursuant to the Crisis Act.

In this case the liability of the government is strict, i.e. the government is liable without fault. The Crisis Act does not require the damage to be caused by illegal decision or by maladministration, unlike the liability of the government pursuant Act No. 82/1998 Coll., on the liability for damage caused within the exercise of public authority by decision or maladministration, or any other general act.

The liability of the government is based on the occurrence of the following assumptions:

(a) Execution of the emergency measure,

(b) Damage, and

(c) Causal nexus between the damage and the execution of the crisis measure. [2]

Pursuant to the Crisis Act, government can be released from the liability only in case of proving that the injured party causes the damage himself (burden of proof lays upon the government).

Claim for damages needs to be brought before the relevant body for the crisis management in period of 6 months since the injured party learned about the damage, but no longer than 5 years since the damage occurred. If the time expires without bringing the claim before the relevant body, the claim expires ex lege. [3] In current situation, it is crucial to bring the claim for damages caused by the emergency measures in legal period of 6 moths.

Regarding the unprecedented emergency measures taken by the government due to the current coronavirus pandemic, we cannot anticipate the attitude of the government towards the damages, however this kind of liability is included in the Czech law explicitly.

In connection with the abovementioned, we recommend to the entrepreneurs to register the damage in order to successfully bring the claim before the relevant body of crisis management.

In the same time, the entrepreneurs should try to mitigate the consequences of the emergency measures, i.g. by minimizing the labor costs (please see the point 3 below) or in case of closing the establishment trying to prevent spoilage of food.

2. IMPACT ON CONTRACTUAL RELATIONS

CORONAVIRUS AS THE CHANGE OF SUBSTANTIAL CIRCUMSTANCES

Pursuant to Sec. 1765 of the Act No. 89/2012 Coll., Civil Code (hereinafter referred to as the “Civil Code”) it applies that if there is a change of circumstances such substantial  that it creates a gross disproportion in the rights and duties of the parties by disadvantaging on of them either by disproportionately increasing the cost of the performance or disproportionately reducing the value of the subject of performance, the affected party has the right to claim the renegotiation of the contract with the other party. The condition under which the renegotiation can take place is that the affected party proves that it could neither have expected nor affected the change, and that the change occurred only after the conclusion of the contract or the party became aware thereof only after the conclusion of the contract. Having regard to the fact that this is a directory provision, abovementioned should apply only if the affected party did not assume the risk of changing circumstances. However, such a clauses are often in the business practice.

CORONAVIRUS AS LIBERATION REASON FOR DELAY

If the delay with fulfilling specific contractual obligation occurs, contractual party in delay can pursuant to § 2913 of the Civil Code release from the duty to provide compensation if he proves that he was temporarily or permanently prevented from fulfilling his contractual obligation due to an extraordinary, unforeseeable and insurmountable obstacle created independently of his will. For the sake of completeness, please be aware that force majeure within this particular section does not relieve the obliged party of its obligations, it only enables to release from the duty to provide compensation.

Generally, pandemic has nature of such an obstacle, and so it is enabled to use this liberation reason in causal nexus with the breach of the contractual obligation.

In specific cases the situation will depend on the time of conclusion of the contract and how relevant was the at the moment of conclusion current development (un)predictable – from the practical point of view, such a moment seems to be at the latest the declaration of the state of emergency on the territory of the Czech Republic, or specific moments in connection with the individual prohibitions included in the emergency measures.

However, pursuant to the Civil Code it won´t be possible to use the liberation reason in cases, where the obstacle have arisen when the contractual party was already in default of performing his contractual obligation, or if the contractual party was contractually required to overcome such an obstacle.

Beyond the abovementioned, we would like to point out that the liberation reason connected with pandemic of coronavirus can be used only for the contracts for which this situation can be considered as unpredictable. This means it can be used only for contracts concluded before the pandemic, or before it could be predictable that the pandemic will occur on the territory of the Czech Republic (we would rather not specify the exact moment). This means that it is necessary to regulate the liberation reasons in connection with the pandemic in the currently concluded contracts, because it cannot be possible to use the liberation reason pursuant to the Civil Code for the pandemic is now existent meaning it is no longer unpredictable.

We recommend you to think about the contractual regulation of the specific liberation reasons connected with this pandemic before concluding any contract in this situation.

3. LABOR LAW ISSUES

OBSTACLES TO WORK ON THE SIDE OF THE EMPLOYER

Where the employer does not enable the employee to work according to the employment contract because of the obstacles that were not cause by the employee, the employer is obliged to pay the employee appropriate compensation of the wage.  Obstacles to work on the side of the employer are regulated in Sections 207 to 210 Act No. 262/2006 Coll., the Labor Code (hereinafter referred to as the “Labor Code”). During the current state, the so called other obstacles to work on the employer side take place [4], e.i. impossibility to work for the obstacles on the side of the employer pursuant to Sec. 208 of the Labor Code (in such a case the employee shall be entitled to compensatory wage or salary in the amount of average earnings) and impossibility to work within the scope of weekly working hours due to a temporary drop in sales of the employer´s products or due to a drop in demand for services rendered by the employer pursuant to Sec. 209 of the Labor Code (partial unemployment).

Partial unemployment means that the employees do not go to work or they go to work only for the part of the determined working hours and the employer is compensating them the wage for the period for which they would normally work. The advantage of the partial unemployment is that it operates with possible time flexibility, which means that, unlike real unemployment, the employment relationship is preserved and can be fully restored after the crisis is over. Pursuant to Sec. 209 of the Labor Code, the amount of the compensatory wage can be decreased after the agreement with labor union, however it must be always minimum of 60 % of the average earnings. If there is no labor union within the employer, such an agreement can be replaced by internal regulation.

CONTRIBUTION DURING THE PARTIAL UNENMPLOYMENT

Contribution during the partial unemployment is regulated by Sec. 115 Act No. 435/2004 Coll., on the employment (hereinafter referred to as “Act on Employment”). Pursuant to this section, the Labor Office may provide the employer (who is not listed in Sec. 190/3 of the Labor Code) [5] with a contribution during the partial unemployment based on the agreement concluded between the employer and Labor Office, prior approved by the government.  Such an employer must be in situation, when:

• Is unable to allocate work to the employee in bigger amount than 20 % a week´s working hours; moreover
• Must be already compensating the employee while submitting the application (currently pursuant to Sec. 208 or 209 of the Labor Code), whereas until concluding the agreement with the Labor Office on the contribution, the employer commits himself to provide to the employee compensation amounting at least 70 % of the average earnings; and at the same time
• In the agreement with the Labor Office, the employer commits himself not to terminate the employment agreement with the employee during the period of the contributions intended for wages for such an employee (reasons for the termination pursuant to Sec. 52/a – c of the Labor Code).

The agreement with the labor union or approved internal regulation that determines the amount of the wage compensations should be inter alia annexes to the application. Moreover, in the annexes should be included detailed description of the reasons on which the employer applies for the contribution, measures that have been already introduced by the employer in order to mitigate the solve the issue, list of the concerned establishments of the employer, and description of the prediction concerning the overcoming of the partial unemployment.

The amount of the approved contribution should be pursuant to Employment Act 20 % of the average earnings of the employee, however maximum amount is 0.125 multiple of the average earnings in the national economy according to the 1.-3. quarter of the previous year.  Contribution can be provided only during the obstacle of the work due to the partial unemployment, nut no longer than for the period of 6 months with the possibility of one repetition for the same period of time, although the government can decide differently.

Pursuant to Sec. 115/4 Act on the Employment the government will provide by the regulation the beginning and the end of the period designated for the submission of application, reasons for which can be applied for the contribution, some other conditions relating to the material reasons of this tool of the active employment policy that can help to identify causal nexus between the situation of the employer and the reasons for the activation of such a tool, including its schedule, and the sample application for the contribution.

However, the regulation of the government was not yet approved, nonetheless, the Ministry of Labor and Social Development is in reaction to pandemic preparing so called Program for the protection of employment. Regarding the available public information, the program should include e.g. contribution to the wage losses for the employees that cannot work due to the quarantine.

QUARANTINE/INCAPACITY TO WORK

If the employee has been quarantined by his general practitioner or other public health authority in accordance with extraordinary measures of the Ministry of Health or due to subsequent government resolutions a quarantine has been ordered or if the employee has been temporarily unable to work due to illness, this constitutes pursuant to Sec. 191 of the Labor Code an obstacle to work on the side of the employee.

In such a case, the employee is entitled to receive wage or salary compensation paid by the employer for the first 14 calendar days of the period of quarantine or incapacity to work amounting 60% of his average earnings. Employee will from the 15th calendar day of quarantine or incapacity to work receive sickness benefit from the sickness insurance system.

If another temporary incapacity to work arises after the termination of the quarantine [6] or temporary incapacity to work on the following day, the temporary incapacity to work is in accordance with Sickness Insurance Act considered as a continuation of the previous temporary incapacity for work (but not if the incapacity to work was recognized for another insured activity, i.e. for another employment of the employee or self-employment).

CONCERNS ABOUT THE SPREAD OF THE DISEASE

If the employee has not yet been subject to quarantine or incapacity to work, but considers that he/she may be a disseminator of the disease (for example, he/she has been in countries where are already more cases of coronavirus but there is no quarantine for such travelers or he/she travelled via big international airports etc.) it seems as a suitable solution to agree with the employee on the performance of work in the form of home office.

However, since it is an agreement on change of the work place, the employee is not obliged to accept such a possibility. Where the nature of the performed work allows, the employer and the employee may agree on the performance of the work in the form of Home Office, even if the employee has been ordered to be in a quarantine. In such a case, the employee is entitled to usual wage/salary – not its compensation or sickness benefit.

Other possible tools to prevent the spread of the disease by the employer are also changes in the working schedule or taking a holiday by employee, but agreement with the employee is also necessary, to effectively prevent the spread of disease, as the employer is obliged to notify the working schedule or to determine the period of leave by the employees in writing at least 14 days in advance.

In addition to the above, the employer may also comply with the employee’s request for leave without compensation for wages or salaries.

4. INFORMATION ABOUT THE COVID LOAN PROGRAM

The Ministry of Industry and Trade is already introducing and preparing programs to facilitate the economic situation of entrepreneurs whose economic activities are limited due to the occurrence of coronavirus infection and related crisis measures.

On March 9, 2020, the Government of the Czech Republic approved the COVID loan program [7], which aims to support small and medium enterprises in the form of interest – free loans of CZK 500.000 – CZK 15 million.

More detailed terms and conditions of the COVID loan program are available on the website of the Czech – Moravian Guarantee and Development Bank (Českomoravská záruční a rozvojová banka), which, in cooperation with the Ministry of Industry and Trade, introduced this program. [8]

To the date of submission of the application the applicant for a loan must meet the specified conditions, in particular it has to be a micro, small or medium- sized enterprise as defined in the Annex I to Commission Regulation No 651/20143 and the financed project must be implemented in one of the economic activities referred to in Annex No. 1 to the Call (e.g. retail, catering facilities). Eligible expenditures to which the loan may be drawn are:

1. a) the acquisition of small tangible or intangible assets, provided that they are recorded as an expense and are not recorded as tangible fixed assets;
2. b) acquisition and financing of stocks;
3. c) other operating costs / expenditure of the beneficiary, including pre-financing of claims supported by accounting documents.

In view of the above, the COVID Loan can be used to cover both rent of the premises and also employee wages (these expenses are also explicitly mentioned by the Czech-Moravian Guarantee and Development Bank in questions and answers to the program published on the Bank's website). Eligible expenses paid from the COVID Loan must be supported by accounting / tax documents that must be clear, specific and up-to-date.

The acceptance of applications for support started on March 16m 2020 an according to the published Call, applications will be terminated by December 30, 2020 or until the depletion of allocation. According to the Call, the allocation of funds amounts to CZK 600.000.000, however, given the enormous interest on the part of entrepreneurs [9], a significant increase is currently under preparation according to available information.

As the situation changes continuously in days or hours, we will keep you informed about further developments.

 

[1] The Government of the Czech Republic declared a state of emergency for the whole territory of the Czech Republic for a period of 30 days with effect from March 12, 2020 as of 14:00.

[2] Judgment of the Supreme Court of 22 October 2009, file no. No. 25 Cdo 3798/2007

[3] In cases worthy of special consideration, the crisis management body may grant compensation even after the deadline for submitting the application or even without submitting the application, but no later than 5 years after the occurrence of the damage.

[4] These are the so-called other obstacles, which are not mentioned in the Sec. 207 of the Labor Code, which regulates downtime caused by operational causes and interruptions caused by natural disasters, which are obstacles that we can usualy encounter.

[5] State, territorial self-governing units, state funds, etc.

[6] Based on consultation with the Czech Social Security Administration, we have been confirmed that temporary incapacity for work for the purpose of interpreting Section 55 (4) of the Sickness Insurance Act also means quarantine.

[7] In the resolution of the Government of the Czech Republic and press releases available on the Government’s website, both the term COVID Loan and COVID Guarantee appear, given the wording of the previous press releases, both terms seem to apply to the interest-free loan program.

[8] https://www.cmzrb.cz/podnikatele/uvery/uver-covid/

[9] According to the information available on the website of the Government of the Czech Republic, 437 COVID Loan applications amounting CZK 800,000,000 were received as of March 16, 2020.