In a recent judgment*, the South Gauteng High Court placed two Johannesburg restaurants into business rescue after they failed to pay employee salaries during lockdown. The court did not accept the restaurants' defence that it could not pay salaries due to the impact of the nationwide lockdown. The judgment relates mostly to the principles applicable to business rescue,
force majeure and impossibility of performance. This e-alert deals only with the part of the judgment relating to the payment of employees' salaries. In summary, we do not believe that this High Court judgment is correct on the facts or in law. Employers who applied the no work no pay principle during lockdown and who claimed TERS benefits for their employees should not be distressed about their course of action, which was correct.
The employers in this matter operate different restaurants under the Mezepoli and Plaka brands. They have not been able to operate due to the lockdown and as a result, their employees were last paid their salaries on 26 March 2020.
Even after the introduction of level 4 and level 3 of the nationwide lockdown, the employers decided to only resume operations again once the lockdown has been completely lifted.
The employers communicated with employees through a series of memoranda regarding non-payment of salaries and temporarily laid off employees from 1 April 2020.
The employers also applied for relief from various entities (including landlords, the Department of Small Business Development, the Small Enterprise Development Agency). In an attempt to salvage a portion of employee salaries, the employers also applied for relief under the UIF's Temporary Employee Employer Relief Scheme (TERS). In April 2020, the employers advanced TERS benefits to employees in anticipation of receiving payment of these benefits from the UIF.
Due to non-payment of salaries, a group of managerial level employees (applicants) instituted proceedings at the High Court to place the employers under business rescue in order to ensure that the employers remained profitable and that they could pay certain costs (including employees' salaries) for the next 14 months.
Force majeure and supervening impossibility of performance
The employers argued that the force majeure principle excused them from their obligation to pay their employees. They further argued that they should not be placed under business rescue as they were factually not in any form of financial distress.
Where force majeure is not included contractually, a party may be able to rely on the common law principle of supervening impossibility of performance.
The court found that neither force majeure nor supervening impossibility of performance applied and that the employers therefore had to pay their employees' salaries during lockdown.
The court based its finding on three key reasons:
Tender of service by employees: The duty on the employer to pay employee salaries is not triggered by the actual performance of work by employees but rather from the tendering of service by employees. The court's view was that, despite the lockdown, the employees were able to tender their services to the employers and therefore, the employers were not discharged from their obligation to pay the employees.
Payment of employee salaries: The lockdown did not prevent the employers from discharging their obligation to pay employee salaries. The level 5 lockdown regulations incorporated "implementation of payroll systems to the extent that such arrangement has not been made for the lockdown, to ensure timeous payments to works" as an essential service. The court's view was that therefore, even under the level 5 lockdown, the employers were technically able to process payment of employee salaries.
TERS benefits: Despite the fact that the purpose of TERS is to prevent employees losing income due to Covid-19, and the fact that the employers advanced a portion of expected TERS payments to the employees, the court found that the employers remained liable for payment of employees' salaries from April 2020.
Correctness of this judgment
Since the commencement of the lockdown regulations on 27 March 2020, many employers have not been able to operate their businesses. As a result, many employers imposed the principle of no-work-no-pay on employees due to economic hardship. The employers relied on the principles of force majeure or supervening impossibility of performance to justify the imposition of no-work-no-pay. The reliance on this principle is justified as the lockdown represents a government-imposed decision, outside the control of employers. As much as employees may have been able to tender their services and employers were willing to accept their services, employees who were not performing essential services were not legally permitted to do so.
We do not believe that this judgment is correct on the facts or in law. The legal position following this judgment is however somewhat saved due to a decision** handed down by the Labour Court ironically on the same day of this judgment. In this judgment, the Labour Court correctly held that the employer had no legal obligation to pay employees during level 5 and level 4 of the lockdown as employees were not legally able to work.
The court said as follows -
"The reality in law is the employees who rendered no service, albeit to no fault of their own or due to circumstances outside their employer's control, like the global Covid-19 pandemic or the national state of disaster, are not entitled to remuneration and Macsteel could have implemented the principle of 'no work no pay' "
Employers who applied the no work no pay principle during lockdown and who claimed TERS benefits for their employees should therefore not be distressed about their course of action, which was correct.