Impact of COVID-19 on the Restaurant & Hospitality Industry

March 26, 2020
Firm Publication

The impact currently being felt by businesses in the restaurant and hospitality industries as a result of the COVID-19 pandemic and, more directly, the rapidly expanding social distancing requirements and travel limitations, as well as the growing number of governmental stay-home orders, has been unprecedented in its breadth and severity.  A number of publicly traded restaurant and hospitality companies have withdrawn earnings guidance in the last week until they have more clarity on the pandemic, and small businesses within these industries face even greater uncertainty.

Most full-service restaurants are operating at small fractions of capacity, if not closed entirely—either as a result of government order or as the least bad option to preserve cash in hopes of re-opening once limitations are lifted.  Those with the resources to be flexible, including ready inventory and supply chain advantages, have rapidly shifted focus to carry-out and delivery models, and some are even making produce baskets and butcher shop cuts available to customers.  While hotels are generally exempt from state and local closure orders, social distancing requirements and limitations on group gatherings are keeping most guest rooms and ballrooms empty.  As a result, many hoteliers both large and small have elected to close their doors for now.

The federal stimulus bill recently passed by the Senate, and expected to be approved by the House and signed into law, includes dedicated relief to employees and businesses within the restaurant and hospitality industries through expansions and modifications of existing Small Business Administration loan programs. In addition, all businesses in the restaurant and hospitality industries are expected to benefit from various forms of tax relief, and larger operations may be candidates under the larger bailout loan program to be administered by the Treasury Department. We are continuing to monitor the status of these developments and will keep you updated as details emerge.

In the meantime, businesses within the restaurant and hospitality sectors need to make sure they do what they can to best position themselves for a return to normal service following this period.

Employment Issues

Employers across all industries, and especially in the restaurant and hospitality industries, are facing extreme challenges, such as the reduced need for staffing, need for remote work, employees without childcare, temporary location closures, and protecting employees from the spread of COVID-19 in the workplace.

Reduced staffing needs or temporary closures

As state and local governments continue to pass orders mandating the temporary closure of certain nonessential businesses, employers in the restaurant and hospitality industries may find themselves with severely decreased staffing needs.  Many employers are placing employees on an unpaid furlough, which allows employees to remain on the employer’s benefit plans depending on the terms of the plan.  If not, COBRA coverage would commence.  An employer may allow an employee to use accrued PTO to pay for at least a portion of the furlough.  Subject to applicable state law, the employee may be eligible to receive unemployment compensation for the unpaid portion of the furlough.  Some employers are also choosing to provide paid leave for a limited amount of time to assist their employees during this difficult time.

On March 18, President Trump signed the Families First Coronavirus Response Act (FFCRA) into law which provides limited paid leave to employees impacted by COVID-19-related absences, as well as COVID-19-related FMLA leave.  A detailed summary of the employment-related provisions and answers to some frequently asked questions can be found in our FFCRA alert and on-demand webinar.

Employers should also consider the WARN Act and any applicable state mini-WARN laws that may apply in the event of a location closing, a group layoff, or a furlough lasting for an extended period.

COVID-19 in the workplace

Many employers are understandably concerned about the spread of COVID-19 in the workplace among those employees who are unable to perform their work from home.  At this time, deep cleaning, handwashing and social distancing in the workplace are among the CDC’s top recommendations for employees who cannot work remotely.

Any employee who has a fever or shows any other COVID-19-related symptoms should be sent home immediately.  If an employee is diagnosed with COVID-19, the employer may (but is not yet legally required to) inform its workforce that an employee has been diagnosed with COVID-19 and that employees should continue to closely monitor their symptoms.  Of course, any such notice must not identify the diagnosed employee by name. Additional guidance can be found here.

Restaurant and hospitality employers should also pay close attention to local health department guidance on whether an employee diagnosis must be reported to the local health department.

Financing Issues

Given the current environment of economic uncertainty, if they haven’t already, companies should carefully review their existing financing arrangements to assess any impediments to maximizing liquidity, if needed.  Lines of credit typically include various conditions to borrowing that must be satisfied as of the date of borrowing.  Some companies may want to draw on existing available credit proactively if they are concerned about meeting these conditions to funding in the future. One such condition is the borrower’s certification that all representations and warranties in the loan agreement remain true and correct, including that no material adverse change has occurred since an earlier specified date (most commonly the date of the most recent audit before the date of the agreement). A more detailed analysis of material adverse change considerations can be accessed here.

Another condition of borrowing is the absence of any events of default under the agreement, which includes compliance with any financial maintenance covenants. Companies should be stress-testing their financial covenant models during this time and if a covenant default appears likely, they should approach their lenders early to begin discussions about a waiver or other relief. Lenders are likely to be inundated with such requests over the coming months, so beginning the conversation early is advisable. Finally, if funds are needed quickly, a company might consider borrowing at the higher “alternative base rate,” which is usually available on the date of the borrowing request (or the following day), versus the lower “LIBOR rate,” which usually requires three business days’ advance notice, and then converting to the LIBOR rate.

A business located in an area with a declared emergency by the U.S. Small Business Association (SBA) may qualify for an economic injury disaster loan due to COVID-19 if it is unable to meet its obligations and pay its ordinary and necessary operating expenses and satisfies certain other SBA requirements. The pending federal stimulus bill is expected to expand the scope of eligibility. An analysis of the SBA relief provided in the bill in its current form as passed by the Senate as of the date of this publication can be found here.

Commercial Real Estate Issues

Certain provisions included in commercial leases involving restaurant and retail properties are now being scrutinized in light of the COVID-19 preventative measures and mandates. For example, many such leases contain provisions requiring continuous operations or mandatory operating hours that may be difficult or impossible for a tenant to comply with given social distancing recommendations and/or government-mandated closures.

Force majeure clauses are found in most leases and may excuse a tenant’s performance under continuous operation provisions or mandatory operating hour requirements, but the applicability and usefulness of such clauses depend on the exact language in the lease and applicable state law.  Though force majeure provisions may help a tenant avoid a lease default for non-performance of continuous operation/mandatory operating hour provisions, most leases will not excuse a tenant’s monetary payments even if the premises are closed by government mandate.  Commercial landlords and tenants are encouraged to be proactive in reviewing their leases, communicating with their respective tenants and landlords, and consulting with an attorney to determine appropriate actions in the current environment, including the applicability of any new, COVID-19 legislation or governmental orders.

Landlords and tenants may want to consider short-term rent abatements or rent reductions; such abated/reduced rent payments could be repaid or amortized later in the lease term or exchanged for longer-term commitments by tenants.  Landlords and tenants should memorialize their agreements related to temporary interruptions in operations, co-tenancy requirements and other obligations that are being rendered impossible or impractical in light of the current circumstances.  Landlords and tenants should also consider any ramifications that the current disruptions may have on stated timelines for construction and/or tenant allowance disbursements.

Commercial tenants in the restaurant and hospitality sectors will also want to examine what type of business interruption insurance they may carry and the ability to claim such insurance for reduced or closed operations due to COVID-19-related requirements. In addition, businesses that have been required to suspend operations may be required to inform their insurance carriers under property and liability insurance policies.

Exemptions for Essential Services

In jurisdictions impacted by governmental stay-home and mandated closure orders, businesses in the restaurant and hospitality industry need to confirm whether they are exempted, and if so, to what degree.  With respect to impact on businesses, most state and local orders are incorporating or relying to some degree on the categories of workers and business operations deemed critical by the U.S. Department of Homeland Security (DHS) in its March 19 Memorandum on Identification of Essential Critical Infrastructure Workers During COVID-19 Response, published by the Cybersecurity and Infrastructure Security Agency (CISA), which forms part of DHS.  The guidance is available here.

In the CISA list, restaurant carry-out and quick-serve food operations are considered critical, while in-person dining is not.  Most state and local orders include similar language when exempting restaurant and food service businesses from closure orders.  Hotels are not included in the CISA list as critical businesses, but generally are exempt from state and local closure orders to varying degrees.  In all cases, these businesses are generally required to comply with social distancing requirements to ensure the safety of their staff and guests, and to close gathering places, such as in-hotel bars and restaurants.

Business Licensing

Even as restaurants shift from offering on-site, sit down service to a delivery based service, they will still be considered “food establishments” under most applicable laws, including in Tennessee, as long as they continue to employ regular, full-time employees and prepare food outside the confines of “the principal residence of the proprietor.” They should, therefore, continue to abide by the same regulations and standards that were observed during regular sit-down service.

It should also be noted that several states, including Tennessee, give state officials broad authorization to take reasonable steps to contain infectious diseases.  For example, in Tennessee,  “[w]hen the commissioner” of agriculture, or any authorized representative, “has reasonable cause to suspect possible disease transmission by an employee,” the commissioner may take a number of actions, including, but not limited to the “immediate closing of the facility until, in the commissioner’s opinion, no further danger of disease outbreak exists.” Tenn. Code Ann. § 53-8-218 (3).

States also generally impose limitations on how local governments can regulate food service establishments.  For example, in Tennessee, while state law authorizes local governments to “regulat[e] zoning, building codes, locations, hours of operation, or the issuance of permits,” state law mandates that the state is “the exclusive regulator of food and drink sellers, vendors, vending machine operators, food establishments, and food service establishments in this state.”  See Tenn. Code Ann. § 53-8-223.  At first blush, this may seem to be in tension with the actions of certain Tennessee local governments, including Nashville’s Safer at Home Order. Nonetheless, such orders are valid under certain state’s laws, assuming the state gives local governments “the power and authority to . . .  provide for the health and safety of persons and property” in times of public emergencies.  Tenn. Code Ann. § 58-2-110(3)(A).

As developments related to COVID-19 continue to unfold, our attorneys are keeping a close eye on updates from multiple government agencies that directly affect the restaurant and hospitality industry. Visit the Bass, Berry & Sims COVID-19 Response Resource Center for the latest developments.  In the meantime, for guidance with navigating state rules and recommendations during the COVID-19 pandemic, please contact the authors of this content.