On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), providing much-needed financial assistance to both U.S. employers and employees affected by the COVID-19 pandemic. The key provisions for employers are highlighted below.
Updates to Leave Provisions
The CARES Act includes several amendments to the paid leave provisions of the Families First Coronavirus Response Act (FFCRA), which was enacted on March 18, 2020. For example, the CARES Act makes clear that employees who are laid off after March 1, 2020 and then subsequently rehired are entitled to the emergency family leave and sick leave provisions provided by the FFCRA. The CARES Act also provides funds to federal agencies to reimburse federal contractors for paid leave provided to certain employees or subcontractors who were unable to work as a result of COVID-19 and who are unable to telework. For all FFCRA payments, these amendments waive penalties for failure to deposit taxes, where employers anticipate taking the tax credits under the FFCRA for either the EFMLA paid leave or the paid sick leave.
The Paycheck Protection Program
The Paycheck Protection Program provides up to $349 billion in federally guaranteed loans to small businesses and other organizations that employ 500 or fewer employees and require financial assistance to pay employees and maintain operations between February 15, 2020 and June 30, 2020. Eligible businesses and loan recipients include nonprofit organizations, veteran organizations, sole proprietors, independent contractors, and eligible self-employed individuals. Businesses in the hospitality industry are eligible to receive covered loans if they employ not more than 500 employees per each physical location and are assigned a North American Industry Classification System code beginning with 72 ("accommodation and food services"). Loans extended under the Paycheck Protection Program are nonrecourse, as long as the covered loan proceeds are used exclusively for authorized purposes. Many of the long-standing business loan requirements under existing SBA regulations have been waived, including the personal guarantee and collateral requirements.
The maximum loan amount available under the Paycheck Protection Program is 2.5 times the eligible business's average monthly payments for payroll costs during the one-year period preceding the date on which the loan is to be disbursed, or $10 million, whichever is less. The loans may then be used to fund any of the following between February 15 and June 30, 2020:
- Payroll costs, including but not limited to wages; payments for vacation, parental, family medical or sick leave; and payment of state or local taxes assessed on the compensation of employees;
- Costs related to group healthcare benefits during periods of paid sick, medical, or family leave, and insurance premiums;
- Payments of interest on any mortgage obligation;
- Rent (including under a lease agreement);
- Utilities; and
- Interest on any other debt obligations that were incurred prior to February 15, 2020.
Importantly, employers that use the loan funds for certain approved purposes, including payroll costs, will be eligible for loan forgiveness equal to the amount spent during an 8-week period after the origination date of the loan. However, applicants should be mindful of possible forgiveness reduction penalties, whereby the forgivable amount of the loan will be reduced if an employer reduces its workforce during the covered period or reduces the salary or wages paid to an employee by more than 25% during the most recent quarter preceding the covered period. However, an employer that rehires previously laid off employees, or increases previously reduced wages before June 30, 2020, can avoid certain forgiveness reduction penalties.
It bears noting that Paycheck Protection Program loans can be approved and extended only by qualified SBA lenders, and those banks or financial institutions that have been delegated authority by the SBA and Secretary of the Treasury. To accommodate the demand for covered loans, it is anticipated that the Secretary of the Treasury and SBA will delegate authority to additional lenders.
Expanded Economic Injury Disaster Loan (EIDL) Program And Emergency Grants
The Act expands upon the existing Economic Injury Disaster Loan (EIDL) Program, authorizing up to $10 billion in EIDL loans during the extended covered period of January 31, 2020 to December 31, 2020. Under the expanded EIDL Program, eligible businesses now include small business concerns and private nonprofit organizations with not more than 500 employees. The Act authorizes EIDL loans up to $2 million at fixed annual interest rates of 3.75% (for small businesses) and 2.75% (for nonprofits), with a maximum term of 30 years. Exact loan terms and amortization periods will be determined by the SBA on a case-by-case basis. EIDL loans may be used to pay fixed debts, payroll, accounts payable, and other bills that can't be paid because of the impact of COVID-19. However, it is important to note that EIDL loans are not eligible for forgiveness.
Unlike for Paycheck Protection Program loans, eligible businesses will submit their EIDL loan applications directly to the SBA. To qualify for EIDL, the prospective applicant must: (1) have physical presence in a declared disaster area, (2) conduct eligible business activity, and (3) meet the program's size requirements. U.S.-based small businesses will find that the first criterion is easily met, inasmuch as the SBA has declared disasters in each of the U.S. states and territories. Finally, EIDL applicants must also be able to show that they cannot obtain credit elsewhere.
The Act additionally authorizes the SBA to make emergency EIDL grants (which are, functionally, advances) for up to $10,000 to eligible businesses. Emergency grant proceeds may be used to provide paid sick leave to affected employees, maintain payroll or retain employees, cover increased costs to obtain materials due to interrupted supply chains, pay rent or mortgage, and repay obligations that otherwise cannot be met due to revenue losses. If a grant recipient is subsequently approved for a loan under the Paycheck Protection Program, the grant amount will be reduced from the loan forgiveness amount for the portion of the Paycheck Protection Program loan that is appropriated for payroll costs.
Unemployment Assistance for Employees
The CARES Act creates a temporary unemployment program through December 31, 2020 to provide cash payments to individuals who would not traditionally be eligible for unemployment benefits and who are unable to work as a direct result of the COVID-19 public health emergency. To be eligible, an individual must self-certify that she or he is able and available to work but is unemployed or partially unemployed due one or more of the covered COVID-19 reasons, including because their place of employment is closed as a direct result of COVID-19.
Employees are not eligible for these benefits if they have the ability to telework with pay or are receiving paid sick leave or other paid leave benefits.
In addition, participating states will extend their regular unemployment benefits coverage by an additional 13 weeks, through December 31, 2020. Such states will receive funding to provide eligible workers with $600 in additional weekly unemployment benefit payments, through July 31, 2020. The CARES Act will also subsidize states that eliminate the traditional one-week waiting period for unemployment benefits. Furthermore, the CARES Act will provide funds to cover workers under "short-term compensation" programs, which provide prorated payments to workers who have their hours reduced, but are not laid off, as a result of the COVID-19 pandemic.
Unemployment insurance is administrated by each state, so states will need to enter into agreements with the federal government to take advantage of these benefits. It is not yet known how state unemployment agencies will process claims under these expanded benefits provisions.
Financial Assistance for Severely Distressed Sectors of the Economy
Title IV of the CARES Act authorizes the Secretary of the Treasury to make loans and other investments to states, municipalities, and certain eligible businesses. The businesses eligible for Title IV loans include those with 500 to 10,000 employees, passenger and cargo air carriers, and "businesses critical to maintaining national security." The Act authorizes up to $500 billion in distressed sector loans and other investments to businesses eligible under this provision of the Act.
Notably, Title IV loans are subject to stringent restrictions, including the prohibition on dividends and stock buybacks (unless required under a pre-existing contractual obligation) while a covered loan is outstanding. Furthermore, the Secretary of the Treasury may require that eligible businesses enter into agreements that require recipient businesses to, among other things, maintain at least 90% of their employees until September 30, 2020; refrain from outsourcing or offshoring jobs for the term of the loan and 2 years after completing repayment; and impose strict limitations on executive and officer compensation. The Secretary may additionally require that the borrowing employer agree to remain neutral in any union organizing effort for the term of the loan and to not abrogate existing collective bargaining agreements until 2 years after the loan is repaid.
Business Tax Benefits
The CARES Act grants certain employers the option of deferring payment of the employer's portion of Social Security payroll taxes for 2020 over the following two years, with half of the amount required to be paid by December 31, 2021, and the other half by December 31, 2022.
Certain businesses may also be eligible for an "employee retention" tax credit of 50% of wages (up to $10,000 per employee per quarter) paid after March 12, 2020 (1) in a calendar quarter where revenues are less than 50% of the prior calendar year quarter, or (2) in a calendar quarter where the business has been fully or partially suspended due to government orders limiting commerce, travel, or group meetings. The availability of these credits will depend on the number of employees a business has. For employers of 100 or more employees, the tax credit will apply in either qualifying period but only to wages paid "for which the qualifying employee is not providing services." For employers of fewer than 100, the tax credit will apply even when the employees are working,
Critically, businesses that have had their indebtedness forgiven pursuant to the Paycheck Protection Program are not eligible to defer payment of payroll taxes or receive payroll credit.
There are many other aspects of the CARES Act that may affect businesses, including provisions regarding early withdrawals and loans from qualified retirement accounts. For additional information regarding the CARES Act and other COVID-19 legal issues, please contact Michael J. Volpe at MJVolpe@Venable.com, Nick Reiter at NMReiter@Venable.com, Robin Burroughs at RSBurroughs@Venable.com, Karel Mazanec at KMazanec@Venable.com, or any other Venable Labor and Employment Group attorney. Venable's Labor and Employment Group will continue to monitor and report on developments with respect to the COVID-19 pandemic and will post updates on Venable's COVID-19 Resources Page.