Mechanisms to reduce the economic impact of COVID-19

In view of the difficult economic situation generated by the health crisis of COVID-19, we will try to inform you about some measures and/or actions that companies can apply to guarantee the continuity of their business:

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In labour matters

In labour matters, it is recommended that measures be taken in two directions. On the one hand, to apply mechanisms that mitigate the risks and responsibilities derived from the propagation of the virus in the labour field and, on the other hand, to try to reduce the negative economic effects derived from the possible cessation or reduction of the business activity.

With regard to risk and responsibilities mitigation, we recommend

- As far as possible, implement teleworking while the risk of infection lasts.
- Design and implement action protocols, aimed at raising awareness among staff and establishing guidelines to prevent transmission among employees, suppliers and customers.

With regard to measures to try to reduce negative economic effects, companies can consider the following:

- Adaptation of working hours and shifts.
- Granting paid leave, creating pockets of hours for when activity is reactivated, or on basis of vacation and/or days of personal business.
- Granting of leave of absence, reductions in working hours or unpaid leave.
- Implementation of temporary employment regulation (ERTE), for the temporary suspension of employment contracts or reduction of working hours, for economic, technical, organizational or productive reasons, or for reasons of force majeure
- Implementation of redundancy programmes for the termination of employment contracts for economic, technical, organisational or production reasons or for reasons of force majeure

On employment in the private sector

In relation to contracts already signed, it is recommended that a procedure be established for reviewing and analysing those contracts that have greater strategic economic relevance for the organisation in order to analyse the effects of the health crisis as an event of force majeure.

The review should determine:

- Whether or not the contract falls under force majeure causes.
- In case it is included, the impact of the commitments made should be analysed.
- If there is no clause regulating force majeure, the impact of the provisions of articles 1105 (exclusion of liability) and 1184 (extinction of obligations) of the Civil Code and the doctrine of «rebus sic stantibus» on those bilateral contracts of successive nature whose performance has become excessively onerous as a result of the health crisis must be analysed.

For all new contracts, it is recommended that an express clause be included, tailored to each specific case, regulating the effects of force majeure events, and in particular those arising from health crises.

In the area of public sector employment

With regard to those companies that operate with public sector entities, it is recommended that the specifications of the public contracts signed and in force be reviewed in detail in order to ascertain the real scope of the rights and obligations incumbent on the company-contractor.

In general, the following aspects should be taken into account:

If the public contract affects services that cannot be interrupted, the company must adopt measures that allow the health and safety of the workers to be reconciled with full compliance with public law obligations.
The general rule that governs this area is that non-compliance by the contractor allows the Administration to impose the penalties provided for in the specifications in the event of partial non-compliance or delay or, in another case, to agree to the unilateral termination of the contract which may result, in addition to the obligation to compensate the Administration, in the company being prohibited from contracting in the future. However, the consideration of the COVID-19 as the cause of this situation will imply relaxing the rigour in the application of the rules, considering the concurrence of an impeding cause of force majeure, although it is not expressly contemplated as such by article 239 LCSP.
The suspension of certain activities (such as teaching, education, culture, senior citizens’ centre, etc.) implies the suspension of the public contracts linked to them (professional services, canteens, etc.). Law 9/2017 sets out the obligation to compensate the contractor for proven damages under the concepts listed in Article 218. The deadline for claiming compensation is one year from the date the contract is ordered to be resumed.
The Administration has a series of prerogatives by virtue of which it can agree to the suspension of the contract, its modification or even its termination. The modification of the contract could result in a greater burden for the employer and will be binding as long as the alteration of the amount involved does not exceed 20% of the initial contract price. If this occurs, the contractor must be compensated for the economic consequences of the modification, maintaining the economic equilibrium of the contract.
Although article 211.1.g) LCSP contemplates as a cause for termination «the impossibility of performing the service in the terms initially agreed» (in this case a specific compensation of 3% of the amount of the service not performed is provided) and the serious and exceptional circumstances in which we find ourselves may lead to this, these provisions cannot be considered as a blank entitlement to terminate contracts, but require sufficient justification of the unique and specific reasons that prevent performance.

Apart from the above, the situation generated by the suspension of many activities, the implementation of security measures and, ultimately – for now – by the declaration of the state of alarm, will lead to new public needs that will have to be met with the degree of urgency that general interests – the true determining criterion for any decision in this area – demand.

For these situations, the LCSP provides for urgent processing, in which the deadlines are reduced by half if there are needs that cannot be postponed or if the contracts are to be awarded more quickly for reasons of public interest (Article 119); and, above all, for emergency processing (Article 120) in which no contract is required, and it is possible to directly order the execution of what is necessary to remedy the event that has occurred or to satisfy the need that has arisen, or to freely contract the object of the contract, in whole or in part, without being subject to the formal requirements established by law.

Royal Decree 463/2020, of 14 March, which declares the state of alarm for the management of the health crisis situation caused by COVID-19, covers some of the situations and circumstances we have mentioned. Thus, for example, Article 9 contemplates containment measures in the field of education and training; or Article 14.2.b) measures in the field of transport, with a 50% reduction in public road passenger transport services subject to public contracts). However, most situations. Although most of the situations that will require a detailed analysis will undoubtedly arise in the day-to-day scenario of needs still, unfortunately, changing and evolving.

In tax matters

Royal Decree Law 7/2020, of 12 March, has agreed that the tax authorities will grant self-employed persons and small and medium sized companies payment deferral of tax debts corresponding to all those returns-settlements and self-assessments whose deadline for presentation and payment is between 13 March and 30 May 2020, inclusive. It also includes the possibility of deferring the payment of those tax debts which, according to the General Tax Law, cannot be deferred, such as withholdings and payments on account, VAT payments charged and collected and the instalments corresponding to corporate income tax.

The conditions for the postponement are as follows:

- The deadline will be six months.
- No interest on arrears shall accrue during the first three months of the deferment.

Only those taxpayers with a volume of transactions equal to or less than 6,010,121.04 Euros may apply this measure of an exceptional nature. This deferral may only be requested for debts equal to or less than €30,000 Euros.

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On the other hand, the Madrid City Council has communicated the approval of the following measures:

- 25% rebate on the full amount of the following taxes: (i) Tax on Real Estate, in relation to those properties used for leisure and hotel and commercial purposes, as well as (ii) Tax on Economic Activities, in relation to those taxpayers who pay municipal tax under the headings of leisure and restoration, commercial, travel agencies and large stores. The above-mentioned allowances will be conditioned on maintaining the average number of employees during the tax period.
- A one-month moratorium on the payment of certain taxes in 2020, such as the Tax on Mechanical Traction Vehicles, Vehicle Passenger Fee and ATM Fee, which will be paid on a voluntary basis in 2020 between 1 June and 1 July.

In the area of financial aid

Royal Decree Law 7/2020 of 12 March has agreed:

- The opening of a specific financing line through the Official Credit Institute for an amount of 400 million Euros to meet the liquidity needs of companies and self-employed workers in the tourism sector, as well as related activities that are being affected by the current situation.
- The postponement of the repayment of loans from the General Secretariat for Industry and Small and Medium-sized Enterprises.
- The Social Security allowances are extended for discontinuous permanent contracts that are made between February and June 2020 in the tourism, commerce and hotel and catering sectors linked to tourism activity.

Regarding liquidity problems or risk of insolvency

Spanish law provides the entrepreneur with various instruments to deal with liquidity problems or risk of insolvency, including

- Out-of-court payment settlements:

This mechanism allows SMEs with a liability of less than 5 million Euros to paralyze, for a period of three months, in general, possible executions on company assets, and to obtain an agreement with creditors with deferrals of up to 10 years, withdrawals and other measures that will facilitate the viability of the company.

- The pre-competition (Article 5 bis) of the Bankruptcy Law):

The implementation of this mechanism makes it possible to initiate a process of refinancing and restructuring of the debt without having to activate the insolvency proceedings. Its implementation generally paralyzes the executions on assets necessary for the development of the business activity, and avoids responsibilities of the administrators in case of insolvency.

- Approved refinancing agreements:

The legislation allows for judicial approval of agreements with financial creditors under certain requirements. The approval implies that the effects of the agreement, which must be adhered to by creditors representing at least 51% of the financial credits, can be extended to those financial creditors who have not signed it, without the need to apply for an arrangement with creditors. An agreement with creditors can be obtained with deferments of up to 10 years, withdrawals and other measures that will facilitate the viability of the company.

- Agreement within the framework of an arrangement with creditors:

The application for the insolvency proceedings in form and time limit allows for the paralization of payment of the existing debts and to limit the personal liability of the company’s administrators in relation to the company’s debts. An agreement with creditors can be obtained with deferments of up to 10 years, withdrawals and other measures that will facilitate the viability of the company.

In contentious matters

Account must be taken of the exceptional regime with regard to legal actions and limitation periods established in Royal Decree 463/2020, of 14 March, which declared the state of alarm for the management of the health crisis situation caused by COVID-19.

The current deadlines and terms of the cases before the Courts have been suspended. Also the periods of limitation of rights and of expiration of actions are suspended. The suspension will last for the duration of the state of alert decreed, which has been set at fifteen days.

If you would like more information on any of the issues discussed, you can contact the lawyers listed below directly: