Emergency Loans, Expanded Unemployment Pay, Paycheck Protection, Tax Provisions and More
On March 27, 2020, Congress enacted the Coronavirus Aid, Relief, and Economic Security in its effort to respond to the COVID-19 pandemic. The CARES Act provides various forms of economic assistance to employers to address the economic effects of the pandemic, although this assistance is subject to certain conditions and restrictions.
This alert summarizes the significant provisions of the CARES Act that affect employers and employees.
Expanded Unemployment Benefits for Individuals
The CARES Act includes expanded rights to unemployment compensation for individuals who are unemployed due to various reasons related to COVID-19. Notably, the CARES Act provides a special unemployment compensation program for gig workers, independent contractors, and self-employed individuals, and individual whose work histories might not otherwise qualify.
The Act also provides for payments of an additional $600 per week in unemployment compensation benefits above and beyond what an individual is otherwise entitled to under state law, for up to four months. Further, the CARES Act extends an individual’s ability to receive unemployment benefits by an additional 13 weeks, through December 31, 2020. However, individuals cannot receive unemployment compensation at the same time they are receiving paid sick leave from an employer.
The federal government has incentivized the states to waive the one-week waiting period by funding the costs. In addition, the federal government will fund the expanded unemployment benefits.
Favorable Tax Provisions for Employers
The CARES Act includes some favorable tax provisions for employers as it concerns their employees. As explained below, certain provisions are limited to “eligible employers,” while other provisions are more generally applicable.
Employers may be eligible for a refundable payroll tax credit for employee retention, if they were fully or partially closed due to an order from a government authority limiting travel, commerce, or group meetings due to COVID-19, or faced a significant decline in receipts related to COVID-19. Where applicable, the tax credits are equal to 50 percent of qualifying wages paid to each employee in a particular quarter, up to $10,000 per employee. These tax credits are not allowed where the employer takes advantage of the Paycheck Protection loans.
Employers may also defer the employer share of Social Security taxes owed as payroll taxes. Deferred payroll taxes are required to be repaid over the next two calendar years, with half due by December 31, 2021 and the remainder by December 31, 2022.
The CARES Act makes certain employer payments of employees’ student loans excludable from employees’ gross income. Employers are permitted to make payments, whether to the employee or to the lender directly, of principal or interest for a qualifying student loan up to $5,250 per employee per calendar year. This provision does not provide an additional exclusion to previously existing education assistance payments and applies only to payments made after March 27, 2020. This provision provides employers with an additional tool to promote employee recruiting and retention.
Small Business Loans
The CARES Act creates the Paycheck Protection Program within the Small Business Administration, which provides emergency loans (“Paycheck Protection loans”) through June 30, 2020 to most employers with fewer than 500 employees who were in operation on February 15, 2020 and who paid employees or contractors. For purposes of determining whether a business has fewer than 500 employees, the Act includes individuals employed on a full-time, part-time, or other basis. Certain employers in the lodging and restaurant industries with over 500 employees may also access Paycheck Protection loans.
The maximum amount of the Paycheck Protection loans is the lesser of:
- 2.5 times the average monthly payments the employer made for “payroll costs” during the year prior to the loan disbursement, plus certain outstanding loan amounts; or
“Payroll costs” are broadly defined to include: salary, wages, commissions, and similar compensation (not exceeding $100,000 annualized per employee); payment of cash tips or their equivalent; payment for vacation, parental, family, medical, and sick leave; allowance for dismissal or separation; payment required for group healthcare benefits, including premiums; payment of retirement benefits; payment of state or local tax assessed on compensation to employees; and payments of compensation to or income of a sole proprietor or independent contractor.
Paycheck Protection loans may be used to cover substantially the same payroll costs described above incurred between February 15, 2020 through June 30, 2020, as well as rent, mortgage, and utility payments related to the employer’s business. The loans may not be used to fund compensation for individuals above a cap of $100,000 per year, as prorated for the covered period, or qualifying paid sick leave or paid family leave under the Families First Coronavirus Response Act (FFCRA). Paid leave under the FFCRA is subject to separate tax credits. See our alert: This is How the FFCRA Paid Leave Tax Credits Work.
In addition to meeting the maximum employee threshold referenced above, borrowers must certify that uncertain economic conditions make the loan request necessary to support continued operations and that the funds will be used to retain workers and maintain payroll.
Importantly, these loans are eligible for loan forgiveness of up to 100 percent of the principal for qualifying uses. However, the amount eligible for forgiveness will be reduced:
- Proportionally by the number of full-time equivalents per month during the “covered period” divided by the average number of full-time equivalents per month employed between February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020 (at the employer’s option); or
- For seasonal employers, proportionally by the number of full-time equivalents during the covered period divided by the average full-time equivalents employed between February 15, 2019 and June 30, 2019.
- In addition to the reductions above, by the amount of any reduction in total salary of any employee exceeding 25 percent of the employee’s total salary in the most recent full quarter (excluding employees who were paid over $100,000 on an annualized basis in any pay period in 2019)
However, these reductions in loan forgiveness will not apply to employers who reduced their workforces or laid off or cut employee salaries by more than 25 percent between February 15, 2020 and April 26, 2020, if the employer rehires employees to equivalent levels or restores employee pay by June 30, 2020.
Importantly, for purposes of loan forgiveness, the term “covered period” means the eight-week period beginning on the date of the origination of a covered loan. Accordingly, employers considering applying for loans under this provision should give careful consideration to the timing of their application.
Forgiveness is available for additional wages paid to tipped employees.
Effect on FFCRA
The CARES Act makes various technical corrections to the Families First Coronavirus Response Act (FFCRA), which generally requires private employers of fewer than 500 employees and all federal, state, and local government employers to provide paid sick leave and paid family leave for COVID-19 related reasons.
The CARES Act clarifies that employees who were laid off on or after March 1, 2020, and who had been employed for at least 30 of the 60 days preceding the layoff, are eligible for paid family leave under the FFCRA upon their rehire.
The Coronavirus Economic Stabilization Act of 2020
The CARES Act also enacts the Coronavirus Economic Stabilization Act of 2020 (CESA), which provides $500 billion in loans, loan guarantees, and other investments, which are available to businesses that do not qualify for other assistance under the CARES Act. Approximately $46 billion in funds are allocated to passenger air carriers and certain allied businesses, cargo air carriers and businesses critical to maintaining national security. As a condition of receiving assistance under this section of CESA, recipients are required to agree:
- Not to engage in stock buybacks for 1 year after the loan or loan guarantee is no longer outstanding (including restrictions on affiliates and parent companies);
- Not to pay dividends for one year after the loan or loan guarantee is no longer outstanding;
- To maintain employment at 90 percent of levels established as of March 24, 2020 through September 30, 2020, to the extent practicable;
- To certify it is a business subject to United States law and that has significant operations and a majority of employees in the United States.
With regard to the other $454 billion available under CESA, the Secretary of the Treasury is authorized to implement a program in conjunction with the Federal Reserve to provide financing to businesses with between 500 and 10,000 employees (including nonprofits). Recipients of this assistance must certify, in good faith, that:
- The uncertainty of economic conditions as of the date of the application makes necessary the loan request to support the ongoing operations of the recipient;
- The funds will be used to retain at least 90 percent of the workforce, at full compensation and benefits, until September 30, 2020;
- Not less than 90 percent of the workforce existing as of February 1, 2020 will be restored at full compensation and benefits no later than four months after the declaration of the public health emergency by the Secretary of Health and Human Services ends;
- The recipient is domiciled in, has significant operations in, and has a majority of employees in the United States, and that it is created, organized in the United States or under the laws of the United States;
- The recipient is not a debtor in a bankruptcy proceeding;
- Dividends will not be paid, nor will stock buybacks occur;
- Jobs will not be outsourced or offshored for the loan term plus two years after repayment;
- Existing collective bargaining agreements will not be “abrogated” for the term of the loan plus two years after repayment;
- The recipient will remain neutral in any union organizing efforts for the term of the loan.
CESA Provisions Applicable to the Commercial Air Industry
CESA also provides support specifically to the commercial air industry, appropriating $25 billion in financial assistance to passenger air carriers, $4 billion to cargo air carriers, and $3 billion to contractors (which includes certain employees who provide catering functions or functions on airport property that are related to air transit). This financial assistance is intended to preserve aviation jobs and compensate air carrier industry employees and must exclusively be used to continue paying employee wages, salaries, and benefits.
Air carriers and contractors seeking financial assistance must provide strict assurances to the United States as a condition of receiving assistance. These assurances, which must be contained in the contract providing financial assistance, require the employer to certify that they will:
- Refrain from involuntary furloughs of employees until September 30, 2020;
- Refrain from reducing employee pay rates until September 30, 2020;
- Refrain from conducting stock buybacks through September 30, 2021 (including certain restrictions on affiliates and parent companies); and
- Refrain from paying dividends through September 30, 2021.
Air carriers and contractors may not be required by federal government authorities involved in issuance of the financial assistance described above to re-open their collective bargaining agreements with any unions representing their employees.
In addition, financial assistance is only provided to carriers and contractors who agree to strict compensation limits on officers and highly-compensated employees. Specifically, employees or officers whose total compensation exceeded $425,000 in 2019 (other than those whose compensation was collectively bargained) are prohibited from receiving compensation increases above their 2019 total compensation, or severance benefits more than twice their total compensation in 2019. In addition, individuals whose total compensation exceeded $3 million in 2019 must have their total compensation above the $3 million mark reduced by 50 percent.
For purposes of these restrictions, total compensation is not limited merely to salary; it also includes bonuses, stock awards, and any other financial benefits.
Additionally, the loans or loan guarantees referenced in this section are subject to strict limits on compensation of highly-compensated employees between the time the agreement is executed until one year after the loan or loan guarantee is no longer outstanding.
This alert provides a synopsis of the CARES Act. We anticipate there will be further regulations and guidance pertaining to the CARES Act issued by the Small Business Administration, the U.S. Department of the Treasury and the U.S. Department of Labor, among other government agencies.