LEGAL UPDATE ON COVID-19 ISSUES IMPACTING DEALERSHIPS

In our effort to keep BSM dealer clients and industry friends informed during the ever-changing legal landscape resulting from the COVID-19 pandemic, we provide the following update. We sincerely hope that you, your families and your dealership team are staying safe and healthy.

State and Municipal Orders Closing Non-Essential Businesses

With the rise of government directives regarding the closure of non-essential businesses, it is important that dealers think ahead and attempt to mitigate any potential losses which may arise as a result of such an order.

Dealership Operations Subsequent to Non-Essential Business Closure Orders

Most of these orders force all non-essential businesses to close for an indefinite period of time. The only businesses that are allowed to remain open are those that are explicitly exempted in the orders. For the most part, there has been a carve out for the automotive industry. The favored language tends to be: “Gas stations and auto-supply, auto-repair, collision centers and related facilities.” This has been interpreted to clearly allow service departments to remain open but has placed sales operations into a gray area.

In certain instances it may be necessary to seek written clarification from the governmental agency regarding what aspects of dealership operations are deemed to be essential. Many state and local municipal governments have not taken into consideration the fact that customers’ leases expire, requiring the purchase or lease of another vehicle, or that many citizens have a pressing need to purchase a vehicle, especially if they have previously utilized public transportation which now places them at heightened risk of contracting the Coronavirus. Once this has been explained, some jurisdictions have issued interpretative guidance that allows sales to occur by appointment only or virtually with delivery to the customer off-site. However, there are still many locations within which there has been no such clarification from the governing authorities. In states like California, the clarification has come in the form of a directive that vehicles sales may be made only to those qualifying under the “essential business” category.

Virtual Sales Operations and Off-site Deliveries

For dealers who are able to continue sales operations in some form, many customers desire to purchase a vehicle without ever visiting the dealership. Such sales activities are no longer prohibited in most jurisdictions. However, some states still prohibit off-premises sales activities, even in these trying times.

Dealers should keep in mind that the Federal Trade Commission has reiterated that there is no 3-day cooling off period for off-premises motor vehicle sales.  Also, most OEMs and vehicle financing entities are issuing helpful guidelines for best practices for virtual vehicle sales. Dealers should pay close attention to, and implement where appropriate, these guidelines so as to avoid any future issue arising when audited by the OEM or vehicle financing entity.

Of particular note to dealers in some states, transactions may also be registered and titled completely electronically. For instance, the Florida Department of Highway Safety and Motor Vehicles recently announced that this function is available, which further enhances the ability to conduct virtual sales.

If the dealership is permitted to service customers in the showroom, it is critical that the dealership follow all applicable state and federal guidelines for maintaining a clean and disinfected workplace. Likewise, it is critical to follow state and federal guidelines on keeping your employees and customers healthy through social distancing, keeping hands sanitized, etc.

Finally, if you are limited in your sales operations to selling or leasing vehicles to “essential businesses,” it is imperative that you retain records verifying confirmation that the customer falls within the state or municipality’s definition of “essential businesses.”

Impact of Closure Order on OEM Dealer Agreement Obligations

As most dealers are likely aware, the vast majority of OEM Dealer Agreements contain provisions indicating that it is a material breach of the dealer agreement to abandon or discontinue dealership operations for a specified period of time (typically 7 – 10 days).  However, dealers should not be overly concerned about these provisions if they are ceasing full operations in order to comply with a State, County, or Local Order mandating temporary closure during the COVID-19 pandemic. The majority of these Dealer Agreements include language stating that the termination rights are not triggered if such failure is caused by “acts of God” outside of the dealer’s control or would otherwise be unlawful. The recent closure circumstances are certainly within this language and manufacturers would be ill-advised to attempt to put pressure on dealers who have suspended operations in response to a government order.  Additionally, most state laws governing the dealer/OEM relationship prohibit franchise terminations that are not for good cause. It is our belief that any attempt to terminate a dealership because a dealer complied with a government mandate during a pandemic would indeed be unreasonable and unlawful.

Pending Vehicle Orders

Dealers should be mindful of any current (or future) vehicle orders or deliveries they have scheduled.  Under most states franchise laws, dealers only have an explicit right to turn down deliveries when they did not order those vehicles. This means that dealers could potentially be forced to accept scheduled delivery of vehicles and parts even though a dealership is temporarily closed due to the pandemic.

As such, we advise dealers to keep a close eye on state and local directives, and to be prepared to modify any vehicle orders accordingly. If for any reason a dealer cannot cancel an order after it closes in an attempt to comply with a government order, it is important for the dealer to know who bears the risk of loss or liability for damages in the event anything happens to the shipment before delivery is accepted.  In those states which provide that the risk of loss is with the manufacturer or distributor up until the dealer accepts the delivery, the dealer has potential leverage in negotiating over the delivery.

Making Changes to Staffing Levels

During these uncertain times, dealers across the country are having to engage in the unwelcome task of evaluating their workforce and deciding whether it aligns with expected demand in the market. As such, many dealers are examining ways to maintain flexibility in their staffing levels. As long as your dealership does not have any employees on specified term employment contracts, employees of dealerships in many states are classified as “at-will.” At-will employees can be terminated or have their pay changed at any time as long as it is not done on the basis of discrimination. Options for maintaining satisfactory staffing levels include terminating employees, furloughing employees or shifting salaried or commissioned employees to hourly wage earners.

Terminating employees permanently ends the employment relationship but also ensures that those terminated employees qualify for unemployment assistance as well as COBRA benefits.  Large numbers of terminations (i.e., 30% or more of the salaried workforce at a single location) can trigger potential notice requirements under the Federal WARN Act.

Furloughed employees are sent home and not paid while they are not needed.  As it currently stands, furloughed employees do not qualify for unemployment assistance and eligibility for benefits varies based on the terms of the employer’s benefits plans.  Note, though, that furloughed employees must be re-offered their old employment position when the dealership begins to staff those positions again.

Finally, employees can be moved to hourly wage based pay plans. Employers must ensure that if a salaried or commissioned employee worked any amount of time in the pay period before the change occurs that he or she receives their entire salary or commission for that pay period before moving to an hourly pay plan. Salaried employees moved to hourly pay plans are treated the same for benefits as other hourly wage earners.

The above considerations should also be balanced in light of the expected Congressional Legislation (detailed below) that provides certain benefits to small business that retain staffing levels.

Federal Emergency Paid Sick Leave Act

The Emergency Paid Sick Leave Act was signed by the President on March 18, 2020, and its provisions take effect on April 1, 2020. The Act mandates that certain employers provide paid sick leave to employees who are affected by COVID-19. This Act only applies to employers with fewer than 500 total employees. Note that affiliated dealerships may be included in the total employee count. However, the Act will apply to the vast majority of motor vehicle dealers.

If you qualify as an “employer” under the Act, then you must provide paid sick leave to employees who are unable to work (or telework) for any of the following reasons:

• the employee is subject to a federal, state, or local quarantine or isolation order related to COVID–19;
• the employee has been advised by a health care provider to self-quarantine due to concerns related to COVID-19;
• the employee is experiencing symptoms of COVID–19 and seeking a medical diagnosis;
• the employee is caring for an individual who is subject to an order as described in subparagraph (1) or has been advised as described in paragraph (2);
• the employee is caring for a son or daughter of such employee if the school or place of care of the son or daughter has been closed, or the child care provider of such son or daughter is unavailable, due to COVID–19 precautions; or
• the employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services in consultation with the Secretary of the Treasury and the Secretary of Labor.

Full-time employees are entitled to up to 80 hours of paid sick leave, and part-time employees are entitled to a number of hours of paid sick leave equal to the average number of hours they work over a two-week period. The employer will be reimbursed for these payments through their payroll tax account.

Lastly, there are rules governing how the employee count is to be made for dealers with multiple dealership entities, which should be understood before concluding that your business qualifies under the Act.

Federal Coronavirus Aid, Relief and Economic Security Act

Yesterday, President Trump signed the Coronavirus Aid, Relief and Economic Security Act or CARES Act. Some of the notable provisions applicable to motor vehicle dealerships within the CARES Act include:

• The federal government will supplement unemployment benefits for furloughed workers for up to four months, while allowing them to continue to collect health benefits from employers.
• Small business interruption loans would be available to companies with 500 or fewer employees during the period beginning Feb. 15, 2020, through June 30, 2020. Certain loans may be forgiven with no negative tax consequence for qualifying small businesses.
• The federal government will issue a $1,200 rebate check per taxpayer plus an additional $500 per dependent child for taxpayers following below certain minimum income thresholds.
• The Act restores Net Operating Loss offsets to 100% of taxable income for 2018, 2019 and 2020 tax returns. The Act reinstates the 80% limit on Net Operating Losses to taxable years beginning after Dec. 31, 2020.
• The Act provides a quarterly credit against certain employer payroll taxes available to employers that have experienced a full or partial suspension in their operations (and, in some cases, a significant decline in gross receipts) due to COVID-19.
• In addition to the small business loan program described above, the Act provides a separate $500 billion fund where the Treasury Department is authorized to make COVID-19 loans, loan guarantees and other investments in support of eligible businesses.

The attorneys at Bass Sox Mercer are staying abreast of the ever-changing legal landscape impacting motor vehicle dealerships during the coronavirus outbreak and are prepared to assist our dealer and dealer association clients during this difficult time. Any questions related to this Alert can be directed to Richard Sox, Esq., at rsox@dealerlawyer.com or by telephone at (850) 878-6404.

The foregoing information is provided for educational purposes only and is not to be construed or interpreted as legal advice.