The impact of the coronavirus (COVID-19) pandemic on the global sports industry and its affiliated sectors is substantial and unprecedented. Constructive stakeholder engagement at all levels is crucial to ensuring business continuity. Organizations should be cognizant that decisions made now will attract post-crisis scrutiny, and start planning for post-pandemic recovery and growth.
In April 2020, only 1% of scheduled sports events with an attendance of at least 5,000 were projected to have taken place—in January 2020, that figure was 100%. Sports events that have either been cancelled, postponed, or suspended during 2020 include the following:
We previously explored issues specific to the English Premier League, which on April 17 announced that it remained committed to completing all matches in the 2019–2020 season.
All of these live sports events are vital revenue-generators for competitive sports clubs, organizational bodies, broadcasters, sports betting firms, events management firms, ticket vendors, equipment suppliers, and hospitality providers, among others. Revenues for the global sports industry in 2020 are currently projected to reach only 54% of those projected before the COVID-19 pandemic. Many businesses that were considering exciting growth opportunities at the beginning of 2020 are now implementing business continuity plans and taking unprecedented actions to ensure their survival. Alternatively, the budding esports industry is seeing an increase in viewership as it becomes the “only game in town.’’
Below we explore the key considerations for companies within the sports industry as they navigate the current crisis and move into the next phase of recovery and growth. Notably, September 2020 may see a projected 28% increase in scheduled sports events globally as leagues and event organizers hope that lockdown rules will be relaxed sufficiently by that point.
Employment Arrangements
Many sports organizations have needed to temporarily reduce staff numbers and/or secure salary reductions and/or bonus deferrals.
United Kingdom
In the United Kingdom, the Coronavirus Job Retention Scheme may help sports organizations that are struggling to retain employees pending a resumption of live sports events. Under the scheme, employers who had a PAYE payroll scheme on or before March 19, 2020 can furlough employees who were on the payroll (and notified to HM Revenue and Customs) on or before that date and apply for a government grant to cover a proportion of their wage costs.
The grant will cover 80% of the furloughed employees’ “usual monthly wage costs,” up to a cap of £2,500 (approx. $3,100) a month, plus the associated Employer National Insurance contributions and minimum automatic enrollment employer pension contributions due on that wage. “Usual monthly wage costs” cover regular payments that an employer is obligated to make, including regular wages, nondiscretionary overtime, nondiscretionary fees, and nondiscretionary commission payments. Discretionary payments are excluded.
UK employers wishing to claim a grant under the scheme must apply through a dedicated online portal established by the UK government, which went live on April 20, 2020. The scheme is currently open until the end of June.
Several football clubs in the United Kingdom have already taken advantage of this scheme, although employers should be mindful of political and societal pressures associated with claiming government money at a time when players and executives receive considerably higher levels of pay.
Sports organizations in the United Kingdom should also be aware that off-payroll working rule (IR35) reforms in the private sector have been delayed until April 6, 2021, in order to assist businesses and individuals in dealing with COVID-19. The postponement of these reforms may lead to off-payroll officials, sports stars, coaches, agents, production workers, and other freelancers requesting a reprieve from implementing the reforms until next year. It also gives sports companies a further year to prepare for the changes in this sphere.
United States
In the United States, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) provides tax credits for “eligible employers,” including those whose trade or business operations fully or partially shut down due to COVID-19-related government orders, in order to incentivize businesses to retain their employees through the crisis. The Paycheck Protection Program and loan forgiveness program under the CARES Act may also benefit sports organizations during this crisis.
Hospitality businesses in the United States that rely on catering for live sports events may wish to consider important relief specific to them under the CARES Act.
Payment Considerations
For higher-salaried personnel, for whom government-aided schemes may not be feasible, sports organizations may need to encourage salary reductions or bonus deferrals. Competitive sports clubs may especially be mindful of these options if broadcasting revenues, which in the United Kingdom are usually paid over the summer, do not materialize to the extent expected.
Several European football clubs announced in April 2020 that players and coaching staff accepted pay freezes and/or reductions. Unless provided for in employment contracts, implementing temporary salary reductions will require consultation with employees and, if applicable, trade unions or other representative bodies and mutual consent.
In the United States, the MLB has reduced salaries for its major and minor league players and will prorate salaries if the season takes place with a reduced number of games. NBA players have agreed to a 25% salary cut starting on May 15, while NHL players will receive their full salaries for the remainder of the season. For the US leagues’ arena staff, many teams have committed to paying their staff through the shutdown, or owners and players have set up funds to assist these personnel.
While under normal circumstances, employees and their representatives may be unlikely to consent to such measures, where the alternative may be closure, there may be more willingness to reach an agreement. Any discussions of salary reductions should be approached carefully, with both parties’ consensus and with external legal advice, to ensure that proposals do not enable an employee to argue that there has been a repudiatory breach of contract by their employer that entitles them to claim constructive dismissal.
For bonus schemes, milestone payment provisions will need to be analyzed. For example, loyalty bonuses payable upon the completion of each season or transfer window may leave open to interpretation the meaning of “completion,” while tournament-based bonus payments may be particularly impacted by event cancellations.
Whether a bonus payment can be deferred will depend on the terms of the bonus scheme and whether it is discretionary or contractual. Sports employers should give consideration to contracts of employment, any relevant schemes or policies, and any implied terms. If the bonus is contractual, the terms will determine whether it can be deferred, regardless of the financial position of the organization or any other reason for the proposed deferral. If, however, the bonus is discretionary, the employer may have more scope to defer. In doing so, it should be mindful that any exercise of its discretion is subject to limits and the implied term of trust and confidence, but the COVID-19 pandemic is likely to be a relevant consideration in this context.
Sports employers may also consider seeking employee consent to waive or defer bonus entitlements, which, as above, employees could be more open to in circumstances where layoffs and redundancies are expected alternatives.
Sports organizations should also consider whether any employment contracts due to expire at the end of the current season should be extended to cover any period of postponement. In English football, players’ employment contracts typically run until June 30. Organizations may negotiate new long-term contracts or put in place short-term extensions on existing salary terms, although sports agents may be contractually entitled to renewal fees as a result.
Going forward, it may be advisable for contracts to be reviewed to ensure they include appropriate provisions (such as an employer’s right to unilateral extension and layoff) to address the future cancellation of sports events due to pandemics or government action. In the United States, nonprofessional sports leagues like the National Collegiate Athletic Association (NCAA) are granting an extra season of eligibility to all spring-sport athletes whose seasons were cancelled, but it is up to each university to determine how much, if any, scholarship aid to offer these returning student players.
Commentary
For each of the above options, sports organizations should engage employees constructively and communicate the necessity of decisions to their survival and how such decisions were made, including which stakeholders were consulted. Once the worst of the COVID-19 pandemic has passed, stakeholders may examine whether enough was done and whether the right actions were taken by sports organizations. Already in response to media scrutiny, two UK football clubs reversed their decisions in April 2020 to furlough match-day staff while retaining players and coaches on full pay.
As jurisdictions contemplate lifting pandemic-related workplace restrictions, sports organizations should start considering how the workplace will be reopened. This will include addressing issues such as developing social distancing plans and screening protocols (both for staff and for members of the public who interact with staff at their workplace), drafting policies on tracking and monitoring COVID-19 tests, and conducting a comprehensive review of policies on leave, furlough, and compensation plans. The MLB and its players have already agreed to certain safety measures that must be in place before the 2020 season can begin.
Many sports organizations rely on an international workforce that may now be restricted by government regulations to remaining in their country of work.
The UK government announced that foreign nationals holding visas expiring between January 24, 2020 and May 31, 2020 and who are currently unable to return to their home countries due to COVID-19-related travel restrictions or self-isolation will be able to extend their visas until May 31, 2020. The UK Home Office also announced that it is now possible for individuals currently in the United Kingdom who hold leave expiring between January 24, 2020 and May 31, 2020 to switch to long-term UK visas while in the United Kingdom. If an individual intends to remain in the United Kingdom beyond May 31, 2020, a valid extension application should be submitted prior to the expiry of their current visa.
For UK employers, Tier 2 and Tier 5 sponsors are not required to report a change of circumstances for employees who are working from home due to the COVID-19 situation. In addition, Tier 2 and Tier 5 sponsors are not required to withdraw sponsorship if they consider there are exceptional circumstances when an employee is absent from work without pay for four weeks or more. Furthermore, employers are now allowed to carry out right to work checks on employees by video call.
The US administration announced in March 2020 travel restrictions on a broad range of nonexempt individuals from Europe and Asia, which was later extended to include nonexempt individuals traveling from the United Kingdom and/or Ireland.
As the COVID-19 pandemic continues to impact most countries around the world, governments have introduced travel restrictions, temporarily suspended flights, imposed mandatory home isolation measures, and suspended services for some immigration procedures, as well as closed some government agencies. For employers looking to move essential employees globally, and/or repatriate them to their home countries, we’ve compiled a list of current immigration updates to consider.
Refunding Tickets
Terms and conditions of event tickets or season tickets should be analyzed for a customer’s entitlement to refunds in the event of postponement or cancellation, and to ensure that liability for indirect and/or consequential losses is excluded. The UK Consumer Rights Act 2015 (CRA) will override terms and conditions governed by English law to entitle customers to a full refund of the face value of their ticket if purchased directly from the primary ticket vendor.
Insurance Claims
Sports organizations should also analyze whether event cancellation insurance policies and the fact pattern leading to a cancellation would cover any loss of revenue and/or payment of refunds. Typically, this type of specialty insurance policy is purchased for a specific event and, like other insurance coverage, will depend on the exact wording of the policy and applicable exclusions. Even under policies that include coverage for communicable diseases, some coverages will not be triggered if an organizer cancels merely due to the threat or fear of a communicable disease.
Organizations arranging multi-event exhibitions or tournaments should consider each such event and document the reasons for cancellation and all losses, including lost profits and expenses. Before and after cancelling an event, a policyholder should analyze its cancellation insurance policy for all potential coverage and follow all policy terms, procedural requirements, and deadlines to preserve its rights. Going forward, sports organizations will of course want to check whether any event cancellation insurance policies for future events exclude losses from a cancellation based on COVID-19 (or similar wording).
Alternatively, business interruption coverage may respond to the COVID-19 pandemic. In general, business interruption coverage provides a policyholder with protection against lost profits when a business suffers physical loss or damage to property from an insured event that interrupts the operation of the business. For the sports industry, it is arguable that the physical loss or damage requirement is satisfied either by the physical damage of respiratory droplets of infected persons coughing or sneezing on the surfaces of an event venue, or by the venue’s use, functionality, or reliability being impaired due to the threat of COVID-19 contagion.
However, there are important challenges to keep in mind with respect to business interruption coverages and the COVID-19 pandemic in addition to the “physical loss or damage” requirement. For example, certain policies contain exclusions that purport to exclude loss resulting from a “virus.” Wording in these exclusions may vary, and how such exclusions may apply to exclude or limit coverage for a policyholder’s losses will also vary. Other policies may expressly provide coverage for losses arising out of a defined list of diseases. Since the precise terms contained in any particular insurance policy can vary, each business interruption claim presents its own unique set of challenges.
In light of this, various regulatory and legislative actions are being taken that may impact business interruption coverage. In the United Kingdom, the chair of the Treasury Select Committee wrote to the Association of British Insurers that “many will be looking to their insurer for both flexibility and assurance” and requesting details on the approach of insurers with respect to business interruption insurance.
In the United States, the New York Department of Financial Services issued a letter calling for insurers to explain “whether contamination related to a pandemic may constitute ‘physical damage or loss’” and to “describe what type of damage or loss is sufficient for coverage under the policy.” Several US state commissioners for insurance have made statements encouraging insurer flexibility.
Solvency Issues
Several international and national sports bodies are considering emergency funds to provide financing for distressed organizations. Sports organizations will want to ensure that any noncompliance with industry rules on financial fair play or solvency are waived by authorities, as appropriate, in order to gain breathing room to deal with the COVID-19 pandemic.
For companies that are particularly badly affected, UK measures to suspend wrongful trading liability for directors may assist. This would otherwise bring personal liability if directors do not take available steps to minimize losses to creditors if the directors knew, or ought to have known, that there was no reasonable prospect of the company avoiding insolvency.
The UK government has also announced a new moratorium on insolvency for companies for which the prospect of rescue is more likely than not, among other conditions, and a new restructuring procedure for both solvent and insolvent companies that enables a company to bind all classes of creditors.
Sponsorship and Broadcasting
Sponsorship revenue can be vital for sports clubs, but it is not usually tied only to the continuance of live events. Sponsorship payments in respect of sports gear and digital media should not, in principle, be frustrated by the cancellation of live events as the requisite exposure can still be achieved through online sales and advertising.
However, sports organizations and sponsors alike will be checking that triggers in their sponsorship agreements concerning on-field performance, financial covenants, or key personnel are not breached by the impact of COVID-19. Dialogue with sponsors may be the best approach in order to restate the objectives of the sponsorship and adapt it to the changed behavior of target audiences during lockdown periods. In particular, both parties may wish to address within amended sponsorship contracts any extended period of season completion.
Broadcasting contracts will of course be directly impacted by the cancellation of events. Some broadcasters are already offering their customers the ability to cancel or roll over their subscriptions and may expect sports organizations to agree to similar actions. Many broadcasting agreements include specific mechanisms to address any inability to perform or deliver certain rights, but parties should carefully review and agree whether such mechanisms are applicable to the COVID-19 crisis. Ancillary sectors to the sports industry, such as online betting, have developed virtual live events that may offer alternative revenue opportunities by granting or extending exclusive intellectual property licenses.
Force Majeure
If need be, a contract may include a force majeure clause that might be invoked. Force majeure clauses typically allow for a contract to be terminated or for a party to avoid liability for nonperformance upon the occurrence of certain specified events or unforeseen events beyond the reasonable control of either party. Force majeure is historically a civil law concept and not present in common law jurisdictions such as the United Kingdom and United States, for which this option is solely a matter for the contract.
In the event that one party seeks to invoke force majeure for the impact of COVID-19, both parties should take into account the following:
For contracts governed under English law, the concept of frustration is another option. This enables a contract to be brought to an end if, without default on either side, contractual obligations have become incapable of being performed because a supervening event would render performance radically different from that which was contemplated by the contract. Whether a sporting event is cancelled or merely delayed will be highly material to the analysis. Upon frustration, the UK Law Reform (Frustrated Contracts) Act 1943 allows for recovering of advance payments, expenses incurred in performing the contract, and certain nonmonetary benefits.
Supply Chain
As revenues and business operations increasingly move online, IT and other managed service providers have become critically important. From our perspective, the focus has been on keeping systems available and operating, with an inevitable emphasis on essential services, as working practices have transitioned to a more virtual model.
Elsewhere in the supply chain, certain sports equipment suppliers have repurposed their businesses to supply personal protective equipment to be used in the fight against COVID-19. Motorsports teams have deployed their engineers to assist in the production of respirators. Some hospitality suppliers have repurposed toward the provision of essential foods and beverages for vulnerable individuals despite the fact, whether now or in the future, that it may stretch resources if live sports events resume while the repurposed services are still needed.
Many suppliers will inevitably need to adapt their services for post-crisis delivery involving, for example, staff screening, socially distanced venues, and partial live audiences at sports events. In papering supply agreements during the COVID-19 crisis, sports organizations should anticipate and address these issues where they involve hosting or participating in live sports events.
The rapid escalation of the COVID-19 pandemic has required swift decisionmaking by sports organizations to secure the financial security, commercial continuity, and confidence and assurance of their personnel. Many decisions may have been taken against the backdrop of rapidly changing commercial circumstances and legislative and regulatory amendments, and so it is crucial that the rationale, processes, and communication of such decisions be recorded in the event that they are later challenged by stakeholders.
For our clients, we have formed a multidisciplinary Coronavirus COVID-19 Task Force to help guide you through the broad scope of legal issues brought on by this public health challenge. We also have launched a resource page to help keep you on top of developments as they unfold. If you would like to receive a daily digest of all new updates to the page, please subscribe now to receive our COVID-19 alerts.
Trainee solicitor James Mulligan contributed to this LawFlash.
If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers:
London
Louise Skinner
Nicholas Moore
Orange County/Washington, DC
Jeffrey S. Moorad
Boston
John J. Concannon III
New York
David A. McManus
Washington, DC
Sharon Perley Masling