Coronavirus Guide to Business Hibernation

Jeff Wall’s photograph based on the prologue of “Invisible Man” a celebrated novel by Ralph Ellison considered to be the greatest African-American writer of all time.

” Please, a definition: a hibernation is a covert preparation for a more overt action.”

– Ralph Ellison, Invisible Man, 1952

In harsh climates when food is scarce, bears and some other animals sleep through winter because they use up more energy maintaining their body temperature and in foraging for food than they would receive from eating the food they are able to find. This is also true of businesses now during this pandemic and forced lockdown.

Professionals such as accountants and lawyers who are normally very circumspect, compliant and coy about selling themselves in public, have recently very quickly jumped into the business guru bandwagon by dispensing webinar wisdoms and live-streamed tips to clients and strangers they have never met on how to survive through this unpredictable period that each day is looking leaner and tougher.

Companies are advised to tighten their belts at a time when they are also told that they have a legal and moral duty to pay full salaries to all their staff who are not working and staying at home.

Business owners are exhorted to stay positive and be willing to adapt and innovate. But they must if possible keep everything the way it was so that the situation can and will return smoothly and quickly back to before. As employers they are not allowed to change any job position, working hours and pay. To get staff to accept any of these changes a business owner must first convince them (via Zoom of course) that his plan is good for everyone in the long run and by appealing to their sense of desperation, gratitude or pity.

Like the latest memes such as stay at home to save lives, be responsible by not working or being alone in this together, the advice about the law we have been hearing sums up the paradoxes and dilemmas of Covid-19.

This pandemic is different from all past crises we know, not just because it affects and can harm more people and spread to more places but also because the response it brings out in people is so contradictory and confusing. 

We are now dealing with the ‘unknown unknowns’, to use a term coined by ex-US Secretary of Defense Donald Rumsfeld when he was asked about the alleged weapons of mass destruction during the war on Iraq in 2002.

With so much that we don’t know and not knowing even more of what we don’t know, isn’t it better for us to postpone planning or committing too much until we figure things out? Shouldn’t a business be like a bear in the depth of a long dark winter adapt for survival by going into hibernation to conserve energy and resources till when the season is kinder and food becomes more plentiful and easier to find?

Malaysian labour laws only give companies the choice to either continue with terms they have agreed with their staff or lay them off if they cannot afford to keep them. Options such as pay reduction, shorter working hours or unpaid leave are core changes to the terms of employment. To carry out any such cost cutting, companies must first get their employees to agree. A boss, under labour law, has no right to force his workers to take a pay cut or insist that they take unpaid leave.

Covid-19 is a textbook case of commercial frustration. This is a crisis on a dramatic and shocking scale. Countries across the world, on lockdown mode to contain the virus, are creating the conditions for the worst economic downturn since the Great Depression.

In Malaysia employment contracts are at the risk of frustration under section 57(2) of the Contracts Act 1950. Due to restrictions on movement and commercial activities by MCO that have now lasted for 6 weeks and are still continuing with no indication of when these will end or what social distancing laws will there be after that, many employers should now be able to legally say that their contracts with their workers have been frustrated. To be fair, these companies ought to be allowed to treat their employments as ended and no longer valid.

Labour is a special species of contracts where government often steps in in time of crisis on the side of workers. But this time the problem is so much larger in size and repercussions. Tackling it will overwhelm any policy makers in the period ahead unless countries pass laws to freeze contracts and save them from breach. This is what Singapore and Denmark did recently in passing their Covid legislations. Since 2009 Australia has its Fair Work Act that allows the employees to be stood down on no wages when they cannot do useful work due to matters outside the employer’s control such as inclement weather and now Covid-19.

While most companies are making hard decisions about cashflow, income and monthly survival, more of them have reached a point where they must cut staff back to the number they really need in order to protect the jobs of those that stay. 

As the country enters further into an indefinite period of lockdown and an uncertain social, financial, commercial, health and logistical aftermath, the logic of hibernation will be harder to ignore.

A clear-headed way out of this quagmire is first for both employer and workers to accept that a situation giving rise to frustration of contract exist now. Next is for both sides to agree in good faith to avoid frustration by allowing the employment contract to hibernate and to stand down the workers so that money, jobs, and relationships can be protected and preserved. By hibernating, companies and staff are in fact agreeing to save the employment from frustration.

Any staff who is willing and able to work remotely or at home should be given freelance assignments and income to sustain himself during hibernation. The rest will need to think of ways to monetize their other skills or hobbies. Companies can only help those who are willing to learn new skills to prepare for life and work after Covid 19. Paying a person just to sit at home without having to work or contribute does not make social or commercial sense even in weird times like this.

This will give the company the time, money and focus it needs to conserve its resources, plan its recovery and transform itself internally for the big changes and opportunities that will certainly come its way when the crisis is over.

Asking staff to sacrifice by taking a pay cut or go on unpaid leave now so that they will have the same pay and job waiting for them is committing to a promise you may be forced to break. Neither does it make sense to pay staff in full for not working or decide now whom to sack or keep when things and situations are so unclear and changing day by day.


“If it is to your advantage, make a forward move; if not, stay where you are. Anger may in time change to happiness, annoyance can revert to joy. But a State that has been destroyed cannot be brought back to life. Hence the enlightened ruler is heedful, and the good general full of caution. This is the way to keep a State at peace and an army intact.”

(19-22, The Art of War, 12)

In our next post we will tell you about HERA – the Hibernation of Employment and Resumption Agreement and the steps to take in hibernating your business and standing down your employees while at the same time providing them with freelance work and alternative income.

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Lim Yew Yi and Kerk Boon Leng

Doing Airbnb: short-stay side hustle or tourist accommodation business?

Malaysia has recently come out with guidelines to regulate the renting of Short-Term Residential Accommodations (STRA) on digital platforms.

Among those platforms the most popular and successful is Airbnb, a company founded in 2008 by two unemployed designers, Brian Chesky and Joe Gebbia who rented out air bed in their flat in San Francisco to supplement their incomes. Up to today 500 million stays have been booked through Airbnb and now each night in more than 100,000 cities around the world 2m people sleep in an airbnb.

Hotels in Malaysia, once known for selling some of the cheapest five-star rooms in Asia, have complained that STRA are steadily stealing their guests and causing prices and profits to fall. At the same time, management of condos argue that allowing owners to turn apartments into a hotel creates nuisance to residents and spoils the spirit of community and neighbourliness.

The truth is most STRA in Malaysia are not places where guests get to stay with locals in their spare room, enjoy a cooked breakfast and in the evening watch netflix with the hosts’ children before snuggling up in bed surrounded by homey appurtenances. Most if not all are actually properties bought and furnished by their owners for investment or with the view of turning them into short-term rented accommodations to pay for the mortgage.

If you are a STRA owner, here are some things you should think about before the new law comes into effect:


Set up a legal entity

Set up a legal entity such as a private company (Sdn Bhd) or limited liability partnership (PLT) for the STRA business. Both Sdn Bhd and PLT enjoy lower corporate tax than you as a human person. Besides all your business related expenses like advertising, cleaning, petrol, meals and monthly data plan can be deducted from tax. 

PLT is cheaper and easier to form and maintain compared to Sdn Bhd as there are no secretarial or audit fees to pay. The only thing is that you need at least two local partners to form a PLT. 

Unless the profits from the business touch RM500,000 a year or as a foreigner you are not allowed to form a PLT, it is better to use PLT than Sdn Bhd as your entity.

If the law later prevents you as a non-Malaysian from running STRA then forming a Sdn Bhd with 51% local shareholding may be the way to go.

From there on the entity will run the STRA business while you as the owner of the property be the landlord.

Create a Tenancy

After the legal entity is formed you must as the owner and landlord of the property prepare a tenancy agreement to rent it out to that legal entity to operate the STRA business on the premises. The rent under such tenancy can be fixed at a modest sum to only cover bank interest and building service charges so that the bulk of profits is shifted over to the STRA entity to pay a lower corporate tax.

Read the Building Bye-Laws

Talk to the Building Management and check the house rules (now called Bye-Laws) to make sure you are allowed to turn your property into STRA. Even if you can, you need to comply with the rest of the bye-laws especially regarding access cards, parking, noise and keeping of pets.

Tourism Tax

Check if you need to pay Tourism Tax. The government has made three changes this year to its decision on how much and who should pay this tax. The official website has not been updated but it seems that only foreign tourists need to pay RM10 per room for each night they stay in a STRA that has more than 4 rooms.


How to brew the Golden Tea : Franchising in Malaysia

Oranger Photos

Looking at the lifestyle outlets sprouting up in shops and malls these days gives people the impression that franchising is the easiest way to start a business. With planning, knowledge and of course money, it can be.

Franchising is when a business owner gives you the right to use his brand, product, business system to operate your business in return for payment.

A. The Basic Questions

Prospect

Does the food fad you saw recently in a Taipei night market or latest fashion brand in Milan’s Quad d’Oro fit the tastebuds of Cheras or dress sense of Damansara?

Concept

Franchise is a unique business concept. It is not a buyer-seller relationship but a comprehensive and inter-dependent relationship between you (franchisee) and the owner (franchisor). Are you ready for a relationship?

Documents

The business you are going to run is spelt out in thick and complex legal documents : disclosure document, operation manual, training manual and the franchise agreement. Do you know what you are getting yourself into ?

B. Franchise or Licence?

Protection

Unlike overseas, in Malaysia franchising is a regulated business that is monitored under the Franchise Act. As long as the business is operated using a franchise system, the franchisor must register the franchise before it can be sold to you. If not, any agreement you sign for the franchise is not valid and both parties would be committing an offence under the law.

Documents such as the franchise agreement, disclosure documents and the financial report of the franchise must be submitted to the franchise registry every year. The law also spells out the duties and responsibilities of the franchisor and franchisee owe to each other.

If you choose a licence instead, parties have the freedom to negotiate the terms they wish but are then exposed to the risks of unequal skills, bargaining positions and vagaries of the marketplace.

Transparency

The franchisor is by law required to give you a copy of the franchise agreement and disclosure documents at least ten days before the signing of the franchise agreement.

In licencing, you must rely on information given to you by the Licensor or revealed by company search, CTOS search or due diligence performed by your lawyer.

Flexibility

It is normally hard to negotiate terms of the franchise with the franchisor. The operation manual and terms in the franchise agreement are usually uniform across all franchise outlets.

A license agreement on the other hand is more flexible and can be changed to tailor-suit the licensee.

Control

The franchisor controls how the franchise business is being run via the operation manual and the franchise agreement.

Under sections 26 and 27 of the Franchise Act you must keep the confidential information obtained from the franchise secure and not to operate a business similar to the franchise at least two years from the termination of the franchise agreement.

Duration

The minimum period for a franchise is five years [Section 25 of the Franchise Act]. Depending on the kind of business this period can sometimes be longer.

There is no minimum period for a license. It is entirely up to the parties how short or long they want the license to be.

C. Important terms in a Franchise

All terms in the franchise that you agree with the owner must be set down in writing and signed. The important ones are:

Operation (Management and Training)

This is the heart and soul of the franchise. Understanding the how, what and who of the franchise is not just good for business, it is survival.

Exclusivity

The franchise gives you exclusive rights to a geographic area. No competitor franchisee is allowed to set up shop in your exclusive zone.

Intellectual Properties

As franchisee, you are authorised to use the trademarks, the recipe, copyright materials of the franchise. In some cases, the franchisor will set some limits as to their use.

Cooling off Period

You can still change your mind about going into the franchise within seven (7) days after signing the franchise agreement. By relying on the cooling off period clause you can terminate at this point but you would need to pay all the costs incurred to date.

Fees

This is the price you need to pay for the franchise. The main fees are the royalties and marketing fees.

Third party suppliers

As franchisee you are only allowed to get your goods and services for the business from certain suppliers nominated by the franchisor. You can be in breach of your franchise if you buy your goods or services from parties outside of the franchisor’s list of suppliers.

Renewal

At the end of the franchise period as long as you have complied with all the terms, you are entitled to renew the franchise by giving six months notice in writing to the franchisor.

If the franchisor decides not to renew the franchise he must compensate you either by paying you a reasonable sum or buying back the franchise from you

Termination

A franchise cannot be terminated for the first five years unless both parties agree mutually to cancel or if the cancellation is by court order.

D. Getting Started

Registration

You must register yourself as a franchisee within fourteen days after you signed the franchise agreement (Section 6B of the Franchise Act).

Review

By regularly reviewing the operation of the franchise it will help you implement new operation system and marketing plan more effectively.

Training

As franchisee you must run the business properly according to the operation and training manuals and ensure that all the staff are properly trained.

Communication

It is good practice to keep the franchisor informed about the business with suggestions and feedback. Communication is important in building a good franchise relationship.

Support

In exchange for payment of fee and royalty, the franchise owner is obliged by law to assist you as franchisee in making your franchise business a success.

Andrew Yoon, Barrister-at-Law (Middle Temple)