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EFFECT OF COVID-19 ON NIGERIA’S ECONOMY AND AVAILABLE LEGAL OPTIONS FOR EMPLOYERS

EFFECT OF COVID19 ON NIGERIA’S ECONOMY AND AVAILABLE LEGAL OPTIONS FOR EMPLOYERS

 

The COVID-19 pandemic has been sudden and significant. The move from business as usual to crisis response is drastic and far-reaching. While truly exceptional, the pandemic illustrates the importance of proactive business planning and robust risk management systems, with companies’ ability to respond to shocks and adapt to changing circumstances are closely monitored.

Beyond the tragic health crises and reduced human social interactions, the economic uncertainties, and disruptions that have resulted come at a significant cost to the global economy. The United Nations Trade and Development Agency (UNCTAD) put the cost of the outbreak at about US$2 trillion in 2020.

 

Most central banks, rating agencies and independent economic experts around the world have taken solace in the prediction that the impacts might be sharp but short-lived, and economic activities would return to normal thereafter. This line of thought mirrors the thinking of the events that shaped the 2007 global financial crisis.

 

However, it is quite instructive to note that the 2007 crisis which emanated from the United States’ subprime mortgage crisis was mainly an economic phenomenon, with it’s fallout spreading across many regions of the world. When compared to COVID-19, the 2007 crisis could be described as minor and manageable. The tumultuous events that COVID-19 had spread across the globe cut across every facet of human existence and the consequences may linger beyond the second half of 2020.

COVID-19 has also very much brought to limelight the role and impacts on employees. The recent events have reminded both individuals and companies how they depend on humans for essential functions, while also illustrating the fragile position of many professions. Eighty-one percent of the global workforce lives in countries with mandatory or recommended workplace closures, and projections indicate that the reduction in economic activity and working time in Q2 2020 could add up to a decrease of an equivalent of 195 million full-time positions globally, albeit that related countermeasures will likely result in lower redundancy levels than that. Nevertheless, direct and indirect workforce consequences are vast and companies and investors alike should be mindful of not overlooking the long-term implications, as well as lessons, regarding human capital.

COVID-19 has created a lot of anxiety among employees since the immediate response has rightly focused on acute needs of people. Government’s near-term resiliency measures serve an important purpose, we should not lose sight of the fact that, even though the strategies currently being deployed to the citizenry are geared towards the poor and not necessarily those in the informal sector, it emboldens the palpable fear that has engulfed the global labour sphere.

 

The sad news from Canberra, Australia centres on Virgin Australia, the nation’s second-largest airline disclosure it had entered voluntary administration, seeking bankruptcy protection after a debt crisis worsened by the coronavirus shutdown pushed it into insolvency. Virgin Australia is one of the first major airlines to seek bankruptcy protection in response to the pandemic.  Recent news from the United States of America is not exciting both on the monumental loss recorded by America Airline to the tune of $2.2billion, Delta Airlines pegged its loss to $534 million and South West acclaimed loss of $94 million dollars.

 

Here in Nigeria, following the suspension of flights occasioned by the COVID-19 pandemic, the management of Arik Air, one of the major airlines in the country, has announced an 80% pay cut for all members of staff of the company with effect from April. Besides, as from May 1st, 2020, 90% of the staff will proceed on leave without pay until further notice. The possibilities to properly prepare beforehand may have been somewhat limited in this case, but it can be agreed that strategic, well-reasoned thinking is better than intuitive, gut reacting.

 

The slowdown in the global economy and lockdown in some countries, such as America, UK, South Africa, Italy, Spain and most Eurozone economies and beyond, as a result, COVID-19 has also taken its toll on the global demand for oil. The decline in oil demand is estimated to surpass the loss of nearly 1 million barrels per day during the 2007-2008 recession. This is also coming at a time when two key players in the global oil industry – Russia and the OPEC cartel – are at loggerheads on the decision to cut output. The unequivocal oil price war started between these two global oil market giants may have more dire consequences on the oil price that has started to dive.

Before the pandemic, the Nigerian government had been grappling with weak recovery from the 2014 oil price shock, with GDP growth tapering around 2.3 percent in 2019. In February, the IMF revised the 2020 GDP growth rate from 2.5 percent to 2 percent, as a result of relatively low oil prices and limited fiscal space. Relatedly, the country’s debt profile has been a source of concern for policymakers and development practitioners as the most recent estimate puts the debt service-to-revenue ratio at 60 percent, which is likely to worsen amid the steep decline in revenue associated with falling oil prices.

 

These constraining factors will aggravate the economic impact of the COVID-19 outbreak and make it more difficult for the government to weather the crisis. With oil being Nigeria’s major source of foreign exchange, amid the steep decline in oil prices, the International Monetary Fund says Nigeria’s economy is expected to shrink by 3.4 percent this year and Africa’s largest economy could face a recession lasting until 2021.

 

In Nigeria, efforts were already being made to bolster aggregate demand through increased government spending and tax cuts for businesses.  The public budget increased from 8.83 trillion naira ($24.53 billion) in 2019 to 10.59 trillion naira ($29.42 billion) in 2020, representing 11 percent of the national GDP, while small businesses have been exempted from company income tax, and the tax rate for medium-sized businesses has been revised downwards from 30 to 20 percent.

Unfortunately, the COVID-19 crisis is causing all components of aggregate demand, except for government purchases to fall. Even though the country is still sluggishly grappling with recovery from the 2016 economic recession which was a fall out of global oil price crash and insufficient foreign exchange earnings to meet imports, downward review of the budget and contractions in public spending could be devastating on poverty and unemployment.

In the words of the futurist Alvin Toffler, “the illiterate of the 21st century will not be those who cannot read and write, but those who cannot learn, unlearn, and relearn”. This might not feel like the top priority while we find ourselves in the eye of the storm, but exploring and implementing the lessons learned will be invaluable in weathering future shocks.”

In the spirit of economic recovery and growth sustainability, the Nigerian federal budget for the 2020 fiscal year was prepared with significant revenue expectations but with contestable realizations. The approved budget had projected revenue collections at N8.24 Trillion, an increase of about 20percent from 2019 figure. The revenue assumptions are premised on increased global oil demand and stable market with oil price benchmark and oil output respectively at $57 per barrel and 2.18 Million Barrels Per Day.

The emergence of COVID-19 and it’s increasing incidence in Nigeria has called for drastic review and changes in the earlier revenue expectations and fiscal projections. Compared to events that led to recession in 2016, the current state of the global economy poses more difficulties ahead as the oil price is currently below US$12 with projections that it will dip further going by the price war among key players in the industry.

Sadly, the nation has terribly underachieved in setting aside sufficient buffers for rainy days such as it faces in the coming days. In addressing these daunting economic challenges, the current consideration to revise the budget downward is inevitable. However, certain considerations that are expected in the review must not be left out. The assumptions and benchmarks must be based on attainable thresholds to ensure optimum budget performance, especially on the non-oil revenue components.

Even though the country is still sluggishly grappling with recovery from the 2016 economic recession which was a fall out of global oil price crash and insufficient foreign exchange earnings to meet imports, downward review of the budget and contractions in public spending could be devastating on poverty and unemployment.

 

Indeed, this is not the time to be short-sighted. Life and business will return to something resembling normality in due course and while we don’t know what the new normal will look like, we do know the process is not going to be easy, and companies need to be ready to manage the new realities and capitalize on the opportunities. For this, they need skilled, healthy and committed employees.

 

What we have seen, however, is abundant news about mass layoffs, pay cuts and in some cases while the same employers increase CEO compensation. The last unemployment report released by the National Bureau of Statistics (NBS) rank Nigeria 21st among 181 countries with an unemployment rate of about 23.1percent. The country has also been rated as the poverty capital of the world with an estimated 87 million people living on less than $2 a day threshold.

Due to the colossal loss suffered by many companies, several firms are reported to have looked into other alternative (viable) methods to reduce reliance on human engagement than ever before such as the deployment of artificial intelligence and robotic sciences.

What then are the legal options available to business owners  to legitimately reduce cost on human capital in view of the fact that, countless offices have been closed and, invariably  employees are unable to render services bearing in mind not all businesses can be conducted remotely. Even in instances employees are capable to perform their tasks from home, employers are incapacitated keep the staff actively engaged.  It is expedient to add that not every type of work can be discharged effectively online.

The unavoidable consequence is the paucity on business revenues to sustain payment of staff salaries amongst other personnel related expenses. Expectedly, employers will be constrained to decisively manage this challenge. The below are some statutorily options and/or common mutually agreed terms capable to deal with these ugly scenario.

 

  1. Inclusion of force majeure clauses in the contracts of employment.
  2. Nature of the employer’s industry and the effect of the COVID-19 restrictive measures of it.
  3. Employee’s job specifications
  4. The consequence of the restrictive measure on the employer’s capacity to duly engage the employee.
  5. The employees’ viability to deliver.

 

Consideration will be given to employees under the contemplation of those referred to as “workers” in the Labour Act.

 

  1. TERMINATION BASED ON FRUSTRATION

 

A contract could be frustrated on the occurrence of an event which make performance of the contract unattainable, unachievable, impossible, illegal, or totally different from that which the parties agreed/envisages at the time the contract was executed.

 

In such scenario, the parties are released and/or discharged from continuous observance and/or further performance of the contract by operation of law. The apex court’s decision in A.G., Cross River State v A.G., Federation & Anor. (2012) LPELR -9335(SC)) suffice here.

 

In the A.G., Cross River State case (supra), the Supreme Court held that the doctrine of frustration is applicable to all categories of contracts.  Accordingly, it does not matter that the contract in question is an employment contract.

 

2  TERMINATION BASED ON REDUNDANCY

In the situation the aftermath of the COVID-19 crisis on an employer’s enterprise is not sufficient to ground frustration, resort can lead to depletion in the volume of work available to be carried out by the employees.

The crucial factor in redundancy is that the continuous engagement of the concerned employees would have invariably become needless/redundant/needless/unnecessary due to the reshuffling/restructuring/ reorganisation of the running/operations prompted by the demand/exigency to reduce expenses and increase profit.

 

See the case of Union of Shipping, Clearing and For-warding Agencies Workers of Nigeria v Management of Transaltic Nig. Ltd. (unreported judgment of the National Industrial Court in Suit No. NIC/14/87 delivered on 26th February, 1988)

 

 

  1. INTERIM/PROVISIONAL SUSPENSION OF EMPLOYMENT

 

As the name implies, employment can be temporarily suspended where such provisions are contained in the contract.  The principles of contract law are also applicable in this respect. (Olaniyan&ors. v Unilag&anor. (1985) LPELR -2565(SC) 133).

 

Therefore, a contract of employment may be delayed or suspended on the ground of the occurrence of a force majeure event, on the premise that the contract makes express provision for it (Addax Petroleum Development Nigeria Limited v Loycy Investment Company Limited &anor. (2017) LPELR-42522 (CA)).

But for workers within the contemplation of the labour Act, such terms need not be included.  Section 17 of the Labour Act also permit an employer who, due to a interim/provisional/temporary emergency or other events/circumstances beyond the employer’s control, is incapable to actively engage its employees where the situation last  7 days or more, in order to avoid paying salaries to the employees, can suspend their employment subject to the approval a labour officer.  In this instance, employees are only entitled to wages only on the first day of the period.

 

Without an iota of doubt, an employer has the capacity to suspend salary under the respective contract of employment pending the return to normalcy. It is inconsequential that the relevant contract of employment does not expressly contain (a) a force majeure clause, or (b) a provision, which permits the suspension of the employment of the employee.

 

 

This point was further reinforced by the decision of the NICN in Mr. Sule O. Usman v Union Bank of Nigeria Plc (unreported judgment of the NICN in Suit No. NICN/LA/56/2012 delivered on 21st May, 2014.) wherein the court held that section 15 of the Labour Act does not seek to grant a right to wages for any period that work was not done, whether employment contract is expressed to exist. It should be noted Section 17 is only limited in operation to employments regulated by the Labour Act.

 

 

  1. VARIATION OF EMPLOYMENT

 

The principle of variation of contract includes definite review/alteration of contractual obligations by the mutual agreement of both parties (Unity Bank v Olantunji (2014) LPELR-24027 (CA)).

 

Section 7(2) of the Labour Act provides for ground for change in the terms and conditions of employment during the subsistence of the contract of employment.  Affected employees have the freewill to either accept the review/change, expressly or by conduct, that is, accept the new terms of employment or refuse the alteration. See Ajayi v Texaco Nig. Ltd (1987) 9 – 11 SC) It is noteworthy that Nigerian law permit variation of employment where the affected employee(s) agreed to it, otherwise the employer is at liberty to terminate the employee’s employment.

 

There is no gainsaying that utilization of any of the above mentioned options would deepen the already existing economic woes. Unemployment and hardship can also lead to demoralization, depression, and other psychological traumas, lowering affected individuals’ productivity and attractiveness to employers.

 

Many of these negative consequences are most prevalent when unemployment is recurrent or extended. If this downturn turns out to be as short as it is sharp, one can hope that the loss of human capital, the resulting damage to the economy’s productive capacity, and the pain and suffering that come with them will be limited.

 

Investments by firms will be impeded largely due to the uncertainties that come with the pandemic-limited knowledge about the duration of the outbreak, the effectiveness of policy measures, and the reaction of economic agents to these measures—as well as negative investor sentiments, which are causing turbulence in capital markets around the world.

 

The crisis has led to a massive decline in stock prices, as the Nigerian Stock Exchange records its  worst performance since the 2008 financial crisis, which has eroded the wealth of investors. Taking into consideration the uncertainty that is associated with the pandemic and the negative profit outlook on possible investment projects, firms are likely to hold off on long-term investment decisions.

On the other hand, government purchases will increase as governments, which typically can afford to run budget deficits, utilize fiscal stimulus measures to counteract the fall in consumer spending. However, for governments that are commodity dependent, the fall in the global demand for commodities stemming from the pandemic will significantly increase their fiscal deficits.

In Nigeria’s case, the price of Brent crude was just over $26 a barrel on April 2nd but as at now is below $15, whereas Nigeria’s budget assumes a price of $57 per barrel and would still have run on a 2.18 trillion naira ($6.05 billion) deficit. Similarly, with oil accounting for 90 percent of Nigeria’s exports, the decline in the demand for oil and oil prices will adversely affect the volume and value of net exports.

 

Indeed, the steep decline in oil prices associated with the pandemic has necessitated that the Nigerian government cut planned expenditure. In fact, on March 18th, the minister of finance announced a 1.5 trillion naira ($4.17 billion) cut in nonessential capital spending.

 

The restrictions on movement of people and border closures foreshadow a decline in exports. Already, countries around the world have closed their borders to nonessential traffic, and global supply chains for exports have been disrupted. Although the exports from countries that devalue their currency due to the fall in the price of commodities (like Nigeria), will become more affordable, the limited markets for nonessential goods and services nullifies the envisaged positive effect on net exports.

 

It is not unexpected that many companies would have difficulty repaying their loans during these period. This become a huge challenge where the terms of these loans does not envisage the outbreak of a pandemic of this nature and at such, since financial institutions are also reporting losses, it is logical for this sector to experience intense pressure which may give rise to scramble for any available liquidity from its obligors while those that fall short stand the risk of seizure of cash, assets, collaterals by the order of court not limited to appointment of receiver/managers or liquidators over such endeavours. It is therefore instructive for organisations that are aware of its vulnerability at these critical time to expeditiously approach legal advisers to avoid grave dangers.

 

The way forward is glaring to the discerning, which is not other than that deliberate reduction of government capital expenditures, scaling down of overhead cost of MDAs while focus should be concentrated on the provision of adequate and sustainable capital {at affordable interest rates} to the critical sectors of the economy while government close scrutiny should be deployed on import waivers for the pharmaceutical companies.

 

 

Funmilola Salami Esq., CMC, A.CIMC, FIMC

Managing Partner,

The Maverick – Forte Legal

www.maverickfortelegal.com

www.maverickmetierconsulting.com

maverick@maverickfortelegal.com

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