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Hughes Krupica: Protecting your Thai business

Guidance on protecting your small/medium Thai business during an extended COVID-19 pandemic

  Bangkok / Boat Lagoon

As we enter into the 10th month from the time the first case of COVID-19 (which at the time was referred to as the “novel coronavirus”) was diagnosed in Wuhan, China in December 2019, it is becoming more certain that we are in this for the long-haul. It is already clear that the pandemic has wrought havoc on the local economies of the major tourist markets in Pattaya, Chiang Mai, Samui and Phuket as those markets must have international arrivals, which have been effectively closed since early. Long-term residents in Phuket report that the effect of the prohibition on international arrivals is most evident in the heavily touristed areas of Patong, Karon and Kata ,turning them into surreal “ghost towns” with businesses remaining shuttered and once heavily-trodden roads devoid of all human life.

At the end of June, the World Bank reported that Thailand’s economy will shrink at least 5% this year, but that number is more likely to be closer to 10%. More recently, Thai bank economic teams are suggesting a 7-9% reduction. And although the economic impact is immediately clear in the tourist markets, over the intermediate run with a projected reduction of economic activity in Thailand close to 10% of GDP or more for the whole year 2020, the impact will inevitably spread beyond those industries that rely on tourism to other businesses. We can therefore effectively bank on COVID-19 being here to stay, at least for the foreseeable future, and with the world adjusting to “new normals” and “2-metre” social distancing rules, those of us running businesses in Thailand should take a close examination at ways we can legally protect our businesses from what might well be an extended period of economic drought.

The typical rules of obligations are set in stone: if one party agrees to something in exchange for something else, the party that made the promise must perform under the terms of that agreement. However, in times like this, the law does allow some leeway to this set-in-stone principle; that is why it is important for managers and owners to get together as soon as possible and agree how to make the necessary adjustments and arrangements to protect their businesses from enduring economic downturn. The nuances of business and law likely require competent counsel for detailed guidance, but for purposes of this article, the below is an overview of two key parts of small and medium enterprise which owners and managers can look to in considering what changes should, or could, be made in order to prepare.

 

Employment

Unfortunately, when economies are not doing well, the first to feel the pain are employees of small and medium businesses that are often not eligible for government aid programmes. These businesses are forced to make tough decisions in reducing staff size and ceasing completely hiring activity. The impact on workers is therefore often most immediate and many small and medium businesses in Thailand are already reporting having reduced their staff by making team members redundant.

Earlier in the year, the government announced that laid-off employees could seek assistance through the social security office for loss of salaries, which in a way generated a moral hazard for businesses seeking to make their staff redundant, even though the social security scheme did not provide a legal exception to pay applicable severance. Many businesses rushed into redundancies anyway, explaining to their staff the scheme at the time of informing them of the decision to let them go. Undoubtedly, that led to many employees not being paid their entitled severance pay without consent.

For those businesses that find themselves with bloated salary lists, but wish to stay above-water while being fair to their long-time staff, and at the same time shudder at the prospect of paying severance during economic downturn when cash reserves are so vital, there might be other legal options available for consideration.

First, you could negotiate with your employees and obtain consent for reduced roles and salary reductions. Some businesses opted for this method, taking a middle ground between laying off and keeping the business operating with a skeleton crew. Businesses often find that employees are willing to consent to role adjustments in times like these, knowing that the labour market is harshly affected by the pandemic and economic downturn. The key is consent so that severance pay is not triggered when making the role and pay adjustments.

If consent to staff reductions is not possible, and the affected business must make a change to stay in business and hold out through the pandemic, the law actually provides a legal method of reducing salaries without consent by notice only under Section 75 of the labour code of Thailand. Under Section 75, where an employer is affected by a force majeure event that causes the employer to not be able to operate their business normally under the circumstances, and the employer needs to suspend a part of their operations due to the event, the employer can reduce their staff salaries to 75% of normal for the period of the force majeure event – which in this case would be the COVID-19 pandemic. The employer in such case is required to notify the labour inspector that they have elected this option.

Although a 25% reduction may not alleviate all the financial problems created by the current economic decline, it may be an option to consider for some business who are looking for a moderate payroll reduction cushion during the pandemic, but cannot negotiate with their staff a reduction in salary with consent. It should be noted that Section 75 refers to salary benefits only and not a reduction in other benefits such as holiday leave pay and overtime pay.

 

Contracts & other obligations – force majeure

It is recommended that all small and medium businesses immediately, if they have not already done so, review ALL (each and everyone one) of their existing contractual obligations to consider potential ways to relieve some financial pressure through negotiation of amendments to terms. The sooner this is looked at the better, as some relief programmes announced earlier in the year may be disappearing soon if they have not already. For example, when the pandemic became an immediate concern for Thailand back in March, the government asked for large businesses, land owners and banks to try to make special concessions for debtors, tenants and borrowers. Banks immediately followed suit and offered temporary reductions in principal and/or interest payments for loans, whereas some landowners offered rent-free periods or reduced rent for those small and medium businesses that enquired. It is clear, however, that many businesses have not attempted to take advantage of the possible concessions, and managers and owners are now reporting that banks and landowners are now less-willing to agree to reductions stating that “the economy is starting to get better.”

We can debate whether the economy is improving or not, but for those businesses that now find themselves in a predicament financially, there may be no time to debate. They could therefore consider a legal excuse with respect to some of their contract obligations if they are unable to negotiate more favourable terms directly with the counterparties to their contracts – force majeure.

Not all contracts and obligation instruments expressly mention force majeure as an excuse to performance. However, The Civil and Commercial Code of Thailand imputes force majeure into many general and specific contracts as a term implied by law. Although potentially litigious, and therefore a lawyer should be consulted, small and medium business that have no other options readily available, and are in dire financial territory, may be forced to invoke force majeure to excuse performance of agreements for a period of time through the pandemic. The Code states that a force majeure event – meaning any event the result of which could not be prevented even with appropriate care – may excuse performance of a party to a contract, even where the agreement does not specifically refer to force majeure. It is therefore a potential legal right that may be invoked as a legal excuse, where an event prevents performance, such as the COVID-19 pandemic.

It should be noted that I am not simply recommending that businesses go out and start sending letters to all of their contract counterparties invoking force majeure, but that it is considered as an option to excuse some contractual obligations on review of all the business obligations as mentioned in this article above. Careful examination is necessary and, if feasible, only with competent counsel at your side to review all available options as the legal effect of invoking force majeure may have various implications. There also may be other options available to business owners to make adjustments, and therefore looking at employment and contracts should only the starting point. This may seem like a huge task for some businesses, but when long-term viability is on the line, in what appears more and more likely to be a long-term economic decline, negotiating or agreeing (even with force majeure) more favourable business arrangements might be necessary to business survival and the ability to live through this unprecedented pandemic.


By Robert Krupica, Senior Partner of Hughes Krupica.
Hughes Krupica is a law firm which specialises in Dispute Resolution; Corporate Transnational and Domestic Law; Real Estate; Hospitality; Construction Contract Support; Transnational Structuring and Compliance; Transnational Commercial; and Litigation, operating in Bangkok and Phuket, servicing clients in relation to their business activities in Thailand and in other regions of Asia

GPS coordinate: 7.962140, 98.385884

 Contact info:

Hughes Krupica Consulting (Bangkok) Co. Ltd

Phuket Office:
23/123-5 Moo 2, Kohkaew Plaza, 
The Phuket Boat Lagoon, Tambon Kohkaew, Amphoe Muang, Phuket 83000
Tel:+66 76 608 468 

Bangkok Office:
179 Bangkok City Tower, Fifth Floor,
South Sathorn Rd, Sathorn, Bangkok 10120
Tel: +66 2 872 173

[email protected]
www.hugheskrupica.com

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