The Act is unprecedented in many ways, including the protections it affords various nonemployee segments of the workforce.
The Coronavirus Aid, Relief and Economic Security Act (CARES Act) is now law, having been enacted the same day Congress passed the bill. The Act is unprecedented in many ways, including the protections it affords various nonemployee segments of the workforce, such as gig-economy workers, sole proprietors, independent contractors and the self-employed, who have never had many of the protections afforded employees. Equally significant is the relief immediately available to employers to incentivize employee retention, but they must act quickly and decisively. For larger employers, the employee-retention incentives are welcomed relief, but they should be aware of the onerous obligations and stringent restrictions attached.
The following are highlights of the CARES Act for employers of all sizes and industries to consider:
Employer Incentives to Retain Workers
Paycheck Protection Program
Small businesses (with 500 employees or fewer): Employers with fewer than 500 employees may qualify for a loan under the Paycheck Protection Program administered by the Small Business Administration (SBA) up to the lesser of $10 million or 2.5 times the average total monthly payroll costs incurred in the one-year period before issuance of the loan. Wages in excess of $100,000 are not forgivable and therefore are not included in this calculation. Employers may use the funds for a wide range of purposes, including employee-related expenses[1]. The loans require no personal guarantee and are capped at a 4 percent interest rate. No fees attach to the loan and there is no prepayment penalty.
To qualify for the loan, employers must provide a good faith certification that: (1) funds are earmarked to retain workers and maintain payroll, (2) uncertain economic conditions necessitate a loan to remain operative, and (3) they have neither applied for, nor received, funds for a similar or duplicative purpose. The SBA must release regulations no later than April 11, 2020, including application details.
Employers struggling to manage operations, mounting costs and dwindling workforces may seek to shore up their operations by applying for loan forgiveness. Loans are eligible for forgiveness up to 100 percent of the aggregate amount of certain expenses borrowers both incurred and paid during the eight-week period immediately following the loan origination date, including: payroll payments, mortgage-interest payments, rent payments and utility payments. Amounts in excess of the original principal are not eligible for forgiveness.
Employers should be warned the amount of forgiveness they are eligible to receive may decrease in proportion to any reductions in the number of full-time employees or in the total salary or wages, exclusive of wages in excess of $100,000 (greater than 25 percent), during the applicable period of February 15 to April 26, 2020, as compared to the prior year. Employers may requalify for 100 percent loan forgiveness by hiring additional employees and restoring their original workforce and wages numbers no later than June 30, 2020. The government will continue to guarantee any loan amounts that do not qualify for forgiveness through the maximum maturity date of 10 years from the date the borrower applied for loan forgiveness. The SBA is required to release further guidance regarding loan-forgiveness application process no later than April 26, 2020.
Food Services and Accommodations Establishments with Multiple Locations: Employers with more than one location, each with 500 employees or less, may qualify for the Paycheck Protection Program loan so long as they are part of the accommodation and food-services sector, which includes full restaurants, limited-service eating establishments, bars, locations that serve food and drinks, traveler accommodations, RV parks and recreational camps and rooming and boarding houses[2].
Employer Considerations: Employers would be wise to consider all other relief options covered in the Act prior to committing to one that may disqualify them from loan eligibility. The Act authorizes $349 billion to small business loans, and is by far the most substantive relief available to qualified employers under the Act.
Employee-Retention (Payroll) Credit
The Act provides for an advance or refundable credit against payroll tax[3] liability equal to 50 percent of their employees’ wages. The maximum qualified wages taken into account is $10,000, so the maximum credit per employee is $5,000[4]. Eligible employers had businesses or operations in existence in 2020 that experienced (1) full or partial suspension of operations due to a COVID-19 shutdown or order or (2) a decline of gross receipts by 50 percent compared to the same quarter in the year prior. The Act suspends penalties for employers who withhold payroll taxes so long as doing so was in anticipation of refundable under this provision, an advance credit. Alternatively, employers may wait for the IRS to issue a refund in the amount of the credit. Employers who receive the payroll-retention credit are ineligible to receive a loan under the Paycheck Protection Program.
Employers with 100 or more employees are eligible for the credit only with respect to those employees who the employer retained but are unable to work due to COVID-19.
Delayed Payment of Payroll Taxes
Employers may delay payment of employer-side payroll taxes during the period between March 27, 2020, and before January 1, 2021. Employers may make the payments over a two-year period, half in 2021 and half in 2022. Employers who take advantage of the delayed payment relief are ineligible to receive a loan under the Paycheck Protection Program.
Short-Time Compensation
The Act authorizes funding for employers who opt to reduce employee hours instead of resorting to layoffs. This “short-time” compensation, available through December 31, 2020, will supplement at 100 percent the employees’ reduced wages with a prorated unemployment benefit.
Unemployment Assistance
Expansion of Workers Eligible for Unemployment Insurance: The Act provides unemployment insurance to segments of the workforce affected by COVID-19 and to whom these benefits had never been available, including gig-economy workers, independent contractors, the self-employed and those not otherwise covered by state unemployment laws, or who have exhausted their benefits.
Enhanced Unemployment Benefits: The Act provides funding through December 31, 2020, for immediate benefits in those states that opt to provide unemployment benefits as soon as employees become unemployed, instead of waiting an additional week. Moreover, the Act authorizes an additional $600 payment per week for up to four months (may be more than employee’s wages), and a 13-week extension of state benefits.
Economic-Stabilization Relief
The Act authorizes a total of $500 billion in loans and loan guarantees to businesses and municipalities hardest hit by the COVID-19 pandemic: $46 billion is earmarked for certain businesses, including cargo air carriers, passenger air carriers and businesses necessary to national security, and the remaining $454 billion to municipalities, states and certain “eligible businesses” that have not otherwise received adequate economic relief (loans or loan guarantees), provided under the Act. The Secretary of the Treasury is required to provide application details and further guidance regarding these loans no later than April 6, 2020. The duration of these loans will be as short as possible, but in no case longer than five years, and guaranteed at an interest rate set by the Secretary of the Treasury in an amount no less than a rate based on market conditions.
Eligibility
Eligible businesses (and nonprofits) that qualify for a portion of the $454 billion must have between 500 and 10,000 employees, and certify the following:
COVID-19 Impact
- The uncertainty of the economic conditions (on the date of the application) require such a loan to continue operations. This does not include companies that are debtors in bankruptcy proceedings.
Employee Retention
- Funds will be used to retain at least 90 percent of its workforce, at full compensation and benefits through September 30, 2020;
- It will restore at least 90 percent of its workforce that existed as of February 1, 2020, along with all compensation and benefits to its workers no later than four months following the termination of the public health emergency[5];
- It will not outsource or offshore jobs for the duration of the loan, plus two years, following full repayment of the loan.
Collective Bargaining
- No abrogation of existing collective bargaining agreements for the loan term plus two years following complete repayment of the loan; and
- It will remain neutral in any union organizing effort for the full loan term.
U.S. Company/Workforce
- Created or organized in the United States or under the laws of the United States and that have significant operations and a majority of its employees based in the United States;
Shareholder Impact
- Will not pay dividends on common stock or repurchase equity securities listed on a national stock exchange of the applicant or its parent while the loan is outstanding (unless required by contract in effect prior to March 27, 2020).
Limits on High-Salary Compensation
Before taking advantage of this economic-stabilization relief, employers should be aware of the significant salary restrictions that come attached:
- Salaries $425,000 and above: Executives and officers of companies who are recipients of the economic-stabilization loans and who received $425,000 or more in total compensation in 2019 can receive no compensation in excess of the amount they earned in 2019. This salary cap remains in place for the duration of the loan term and for one year following full repayment of the loan.
- Salaries $3 million and above: Executives and officers employed by loan recipients, and who received $3 million or more in total compensation in 2019, can receive no compensation in excess of $3 million, plus 50 percent of the excess over $3 million of total compensation they received in 2019.
Air Carrier Worker Support
Aviation industry recipients of federal loans under the CARES Act are required to meet even more onerous obligations than eligible businesses in other sectors.
Employers Affected: Passenger air carriers, cargo air carriers and contractors who receive economic-stabilization loans.
Eligibility: Applicant must enter into an agreement with the federal government or otherwise certifying the following: (1) it will not conduct involuntary furloughs or reduced pay rates or benefits through September 30, 2020, (2) it will not purchase equity securities from the company, its parent, or contractors.
Conditions for Funding
- Continuation of Certain Air Services: In exchange for a loan under the Act, the Secretary of Transportation is authorized to require an air carrier to maintain scheduled air transportation services as it deems necessary to ensure services to any point served by that carrier before March 1, 2020. This grant of authority is limited and is scheduled to expire in 2022.
- Salary Limitations: Relief would also require limits on high-level salaries, imposing a total-compensation cap of $425,000 for those workers whose earnings in 2019 exceeded that amount, and a cap of $3 million for employees whose income exceeded that, plus 50 percent of the excess over $3 million. Salary caps will remain in place up to two years following repayment of the loan. Severance pay is limited to two times the employee’s salary.
About Duane Morris
Duane Morris has created a COVID-19 Strategy Team to help employers plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage.
For More Information
If you have any questions about this Alert, please contact Eve I. Klein, any of the attorneys in our Employment, Labor, Benefits and Immigration Practice Group, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact.
Notes
[1] Employee-related expenses include, payment of wages, salaries and commissions, employer-side payroll taxes, paid sick leave, paid vacation, continuation of healthcare benefits during paid sick, medical or FMLA leaves, dismissal or separation, etc.
[2] As defined by the North American Industry Classification System, Sector 72, this sector includes establishments providing customers with lodging and/or preparing meals, snacks, and beverages for immediate consumption. The sector includes both accommodation and food services establishments because the two activities are often combined at the same establishment.
[3] Social Security and Railroad Retirement
[4] Includes the value of the employees’ health benefits.
[5] As declared by the Secretary of Health and Human Services on January 31, 2020.
Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.