On March 27, 2020, President Trump signed into law the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). The CARES Act is a $2.2 trillion stimulus package aimed at offering economic relief to individuals, businesses, industries, and state and local governments during the Coronavirus pandemic.
The following is a summary of the key employment-related provisions of the CARES Act.
The Paycheck Protection Program for Small Businesses
The CARES Act establishes the Paycheck Protection Program, which provides approximately $350 billion in loans to qualifying small businesses. The “paycheck protection” loans are administered by the Small Business Administration (“SBA”) and guaranteed by the federal government through December 31, 2020. The covered period for loans is February 15, 2020 through June 30, 2020.
Eligible Small Businesses
Businesses are eligible for the Paycheck Protection Program if they have fewer than 500 employees. For purposes of the 500-employee threshold, the statute defines employees as “individuals employed on a full-time, part-time or other basis.” In addition, for businesses in the accommodation and food services sector (NAICS 72), the 500 employee threshold is applied on a per physical location basis.
Amount of Paycheck Protection Loans
The Paycheck Protection Program offers loans in the maximum amount of the lesser of (i) the employer’s average monthly payroll costs in the one year before the date on which the loan is made multiplied by 2.5 or (ii) $10 million.
For seasonal businesses, the maximum loan amount is the lesser of (i) the employer’s average monthly payroll costs for a 12-week period beginning on February 15, 2019 or March 1, 2019 multiplied by 2.5 or (ii) $10 million. For new businesses, the maximum loan amount is the lesser of (i) the employer’s average monthly payroll costs incurred between January 1, 2020 and February 29, 2020 multiplied by 2.5 or (ii) $10 million.
Uses of Paycheck Protection Loans
Loans under the Paycheck Protection Program may be used for: (i) payroll support, such as employee salaries and cash tips; (ii) payment for vacation, sick, family or medical leave; (iii) separation payments; (iv) payments required for group health care benefits, such as insurance premiums; (v) payment of any retirement benefit; (vi) payment of state or local payroll taxes; (vii) payment of interest on any mortgage obligation; (viii) rent payments; (ix) utility payments; and (x) interest on any other debt obligations incurred before February 15, 2020.
The Paycheck Protection Program forgives part of the loan for certain borrowers. Specifically, a borrower is eligible for loan forgiveness equal to the amount the borrower spent on the following items during the 8-week period beginning on the date of the origination of the loan: (i) payroll costs (but does not include wages above $100,000); (ii) interest payments on any mortgages incurred prior to February 15, 2020; (iii) rent payments on any lease in force prior to February 15, 2020; and (iv) utility payments for services that began before February 15, 2020.
The amount forgiven will be reduced proportionally if, during the 8-week period after origination, the employer (i) reduces its number of full-time employees; or (ii) reduces the pay of one or more employees who earned less than $100,000 in 2019 by more than 25% of the employees’ total pay as during the most recent quarter.
However, because the loan forgiveness program seeks to incentivize employee retention, there will be no reduction in the loan forgiveness amount if an employer reduces its number of full-time employees or their compensation between February 15, 2020 and April 26, 2020, but subsequently rehires the same number of full-time employees or eliminates the pay reduction by June 30, 2020.
The Employee Retention Credit
The CARES Act also provides eligible employers with a refundable payroll tax credit equal to 50% of qualified wages (up to $10,000 paid to each employee) paid to employees per quarter beginning March 13, 2020 through December 31, 2020.
The tax credit applies to an employer engaged in an active trade or business in 2020 and for wages paid while:
- operations are fully or partially suspended due to a governmental order related to COVID-19; or
- operations were subject to a “significant decline in gross receipts,” which is defined as the period beginning with the quarter where gross receipts declined more than 50% when compared to the same quarter the prior year and ending with the calendar quarter in which gross receipts are greater than 80% of gross receipts for the same quarter the prior year.
For employers with more than 100 full-time employees, the tax credit is only available as to wages paid to an employee that is not providing services due to the circumstances described in (i) or (ii) above. For employers with fewer than 100 full-time employees, all wages qualify for the tax credit.
Notably, the tax credit is not available to employers that take advantage of the Paycheck Protection Program. In addition, the tax credit does not apply to the payroll credits employers are eligible to receive for emergency paid sick leave or family leave pursuant to the recently enacted federal Family First Coronavirus Response Act.
Loan Benefits for Larger Employers
The Coronavirus Economic Stabilization Act of 2020, a subtitle of the CARES Act, allocates $500 billion to provide economic assistance to certain businesses, states and municipalities in the form of loans, loan guarantees and other investments. This provision offers low interest loans through the Federal Reserve to businesses with 500 to 10,000 employees, with no repayment required for at least six (6) months, on the condition that:
- loan support is necessary to support ongoing operations because of current conditions;
- the funds will be used to retain at least 90% of the recipient’s workforce, with full compensation and benefits, through September 30, 2020;
- the recipient intends to restore not less than 90% of the workforce that existed before February 1, 2020, and to restore all compensation and benefits to workers no later than four (4) months after the declared COVID-19 public health emergency is over;
- the recipient is an entity or business that is domiciled in the U.S. with significant operations and employees located in the U.S.;
- the recipient is not a debtor in a bankruptcy proceeding;
- the recipient is a business created or organized under U.S. law and a majority of its employees are based in the U.S.;
- the recipient and its affiliates will not engage in stock buybacks or pay dividends or other capital contributions, except as required by contract as in effect on the date of the enactment of the CARES Act, until the loan is no longer outstanding or one year after the date of the loan;
- the recipient will not outsource or offshore jobs for two years after loan repayment;
- the recipient will not abrogate existing collective bargaining agreements for the term of the loan and 2 years following loan repayment; and
- the recipient will remain neutral in any unionizing effort during the term of the loan.
There are also limits on executive compensation and severance payments for businesses that receive loans under this program. Specifically, until one year after the loan is outstanding:
- an officer or employee whose annual 2019 compensation exceeded $425,000 cannot receive: compensation in excess of their 2019 compensation in any consecutive 12 month-period; or severance or similar benefits upon termination of more than twice their 2019 compensation; and
- officers and employees making over $3 million in calendar year 2019 would be prohibited from earning more than $3 million plus 50% of the amount that their compensation exceeded $3 million in 2019.
The bill makes clear that “total compensation” includes salary, bonuses, awards of stock and any other financial benefits provided by the borrower to an officer or employee.
The Expansion of Unemployment Insurance
The CARES Act expands unemployment insurance by creating a temporary Pandemic Unemployment Assistance program, through December 31, 2020, to provide payments to those not traditionally eligible for benefits, including individuals who are:
- self-employed, seeking part-time work or do not have sufficient work history; and
- unable to work because they are:
- diagnosed with COVID-19;
- sharing a household with someone diagnosed with COVID-19;
- caring for someone in their household diagnosed with COVID-19;
- caring for a household member out of school or other facility closed due to COVID-19;
- under imposed quarantine;
- advised by a medical professional to self-quarantine;
- unable to commence employment due to COVID-19; or
- forced to quit as a result of COVID-19.
Individuals who have the ability to work/telework with pay or who are receiving paid sick leave or other paid leave benefits are not eligible. Benefits are available for the duration of the individual’s period of unemployment or inability to work caused by COVID-19 during the period January 27, 2020 through December 31, 2020, for up to 39 weeks. The CARES Act also provides for a $600 payment per week to each recipient of Pandemic Unemployment Assistance, through July 31, 2020, in addition to the unemployment benefits available to individuals under state law.
The federal government will also pay the first week of unemployment benefits if states waive waiting periods, as many states have done.
And finally, the federal government provides funding for “work share” programs that states have adopted to provide partial unemployment benefits when employers institute working hour reductions or partial furloughs in lieu of layoffs.
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Proskauer’s cross-disciplinary, cross-jurisdictional Coronavirus Response Team is focused on supporting and addressing client concerns. Visit our Coronavirus Resource Center for guidance on risk management measures, practical steps businesses can take and resources to help manage ongoing operations.