By Daniel Finerty and Oyvind Wistrom
On March 27, 2020, President Trump signed the “Coronavirus Aid, Relief, and Economic Security Act,” or the CARES Act (“Act”), the most dramatic financial legislation yet in response to the COVID-19 pandemic. In total, the Act provides $2 trillion in financial assistance, a portion of which is allocated to American businesses, in addition to clarifying and delaying the terms of some business obligations going forward.
Changes and Clarifications to the Families First Coronavirus Response Act
The Act provides a few clarifications and makes modest changes to the extended Family Medical Leave Act provisions in the Families First Coronavirus Response Act (FFCRA). Those changes include definitional changes and clarifications as to the limitation on paid leave:
- An addition to the definition of “eligible employee” (defined as employed for at least the last 30 calendar days) to include an employee who was laid off by the employer March 1, 2020 or later, worked for the employer for at least 30 days in the last 60 calendar days prior to the lay-off and was subsequently rehired by the employer. (Section 3606.) Therefore, employers should ensure that the amended definition is applied when considering who is eligible for Emergency FMLA.
- The Act also clarifies that an employer shall not be required to pay “more than $511 per day and $5,110 in the aggregate for each employee,” when the employee is taking leave for the following reason (the numbers correspond to those outlined in the FFCRA):
- The employee is subject to a Federal, State, or local quarantine or isolation order related to COVID–19;
- The employee has been advised by a health care provider to self-quarantine due to concerns related to COVID–19; or,
- The employee is experiencing symptoms of COVID–19 and seeking a medical diagnosis. (Section 3602.)
- The Act further clarifies that “[a]n employer shall not be required to pay more than $200 per day and $10,000 in the aggregate for each employee” for paid leave, which was not specifically made clear in the FFCRA, for employees taking leave for the following reasons:
- The employee is caring for an individual subject to an order described in (1) or self-quarantine as described in (2) above;
- The employee is caring for a child whose school or place of care is closed (or child care provider is unavailable) for reasons related to COVID-19; or
- The employee is experiencing any other substantially-similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretaries of Labor and Treasury. (Section 3601.)
Unemployment Insurance Support
The Act not only provides additional funds for unemployment insurance (“UI”) benefits through the Department of Labor (“DOL”) but provides states, like Wisconsin, with the opportunity to secure additional supplement benefits. It appears that the federal government is covering 100% of the costs of the expanded UI benefits, and covering the additional administrative expenses that will be incurred to provide these benefits; however, while it does not appear these amounts will have to be repaid to the federal government in a manner similar to prior DOL loans taken in 2008 and 2009, it is not entirely clear.
Support for Non-Traditional Workers
The Act provides the following support to states and waives other DOL requirements:
- The Act provides additional UI benefits, if caused by COVID-19, to those who are:
- Seeking part-time employment;
- Do not have sufficient work history, or otherwise would not qualify for regular unemployment or extended benefits under State or Federal law or pandemic emergency unemployment compensation.
The inclusion of these non-traditional groups is a reflection of the need to allow UI support to a broader category of workers to whom traditional UI is not usually available, such as independent contractors. Specifically exempted from this section, however, are those who have the ability to telework with pay or who are receiving paid sick leave or other paid leave benefits. (Sec. 2101).
In addition to providing independent contractors the ability to apply for Small Business Administration (“SBA”) loan (see below), independent contractors (“ICs”) may able be entitled to obtain UI benefits through the provision above. Business should communicate with their ICs to let them know these avenues of additional relief may be available. However, consideration should be given to the impact of an IC filing for UI on a business’s reserve account compared to an IC seeking to access relief through an SBA loan. The former action portrays an IC akin to an employee, while the latter action stresses the independent nature of the IC’s business and the risk associated with that business. Whether a UI filing by an IC will come back to haunt a business sometime down the road is anyone’s guess.
Waiver of Waiting Period
While DOL typically requires a waiting period before UI benefits start, the federal waiting period has been waived and DOL has offered to pay for the one-week waiting period; however, two clarifications are necessary. First, Wisconsin must opt into this benefits by entering into an agreement with DOL to provide for full DOL funding for the first week of UI benefits. The Unemployment Insurance Division is indicating that they are awaiting further word from DOL on this issue.
Second, if Wisconsin does opt in, which remains to be seen, Wisconsin’s waiting period is statutory in nature instead of a regulatory requirement which could be waived by the Governor. See Wis. Stats. §§ 108.02(26m), 108.04(3). These provisions must be amended by the Legislature and enacted by the Governor. Assembly Bill 1034, relating to the suspension of the waiting period for collection of unemployment insurance benefits, has been introduced in the Assembly and referred to the Rules Committee. Accordingly, the one-week waiting period is still in place pending further action in the Assembly.
Additional UI Supplemental Funding
States can also, upon agreement with DOL, receive additional federal funding through the Pandemic Unemployment Assistance (PUA), for a period of their choosing to end no later than December 31, 2020, to provide UI benefits, where permissible under state law in a supplemented amount. This supplemented amount includes the amount permitted by state law plus “an additional amount of $600.” (Section 2104.) Wisconsin must also opt into or agree to receive this DOL funding.
Other sections of the Act provide a business tax credit based on a percentage of wages paid to be taken as a tax credit, for businesses closed due to COVID-19 if the business sustains a specifically outlined loss in gross receipts provided the business achieves the same or similar gross revenue from the calendar quarter in the prior year. (Section 2301.)
Delay of Employer Payroll Taxes
Additional provisions delay the obligation to pay employer payroll taxes. (Section 2302.) The Act postpones the due date for depositing employer payroll taxes and 50% of self-employment taxes related to Social Security and attributable to wages paid during 2020. Any deferred tax payments would then be due in two installments, the first at the end of this year on December 31, 2021 and the second half due a year after on December 31, 2022.
Employee Retention Credit
The Act provides eligible employers, including 501(c)(3) entity non-profits, with a refundable credit against payroll tax (Social Security) liability equal to 50% of the first $10,000 in wages per employee (including value of health plan benefits). To be eligible, the business must have carried on a trade or business during 2020 and satisfy one of two tests. First, the business must have operations fully or partially suspended due to orders from a governmental entity limiting commerce, travel, or group meetings. Second, alternatively, the business must experience a year-over-year (comparing calendar quarters) reduction in gross receipts of at least 50% – until gross receipts exceed 80% year-over-year.
For employers with more than 100 full-time employees, only employees who are currently not providing services for the employer due to COVID-19 causes are eligible for the credit. The employee retention credit is effective for wages paid after March 12, 2020, and before January 1, 2021.
SBA Paycheck Protection Program
The $349 billion SBA lending program will help keep small businesses operating, to keep their workers employed and to encourage rehiring of employees that have been furloughed or laid off. Eligible businesses include certain business concerns, nonprofit organizations, veterans’ organizations, or certain Tribal business concerns with fewer than 500 employees, hospitality businesses with fewer than 500 employees at each location, sole-proprietors, independent contractors, and self-employed individuals. (Section 1102(2)). The maximum amount of any such loan is calculated using a formula based upon number of employees and other factors, not to exceed $10,000,000.
For an eligible self-employed individual, independent contractor, or sole proprietorship seeking a covered loan, these entities must submit such documentation as is necessary to establish eligibility, including payroll tax filings reported to the Internal Revenue Service, Forms 1099–MISC, and income and expenses from the sole proprietorship.
These businesses may be eligible for forgiveness of indebtedness on a covered loan in an amount equal to the sum of the costs incurred and payments made during the time of the loan including payroll costs, any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation and any covered utility payment. When forgiven, the amount of the loan is paid by the federal government to the lender.
Of particular note for businesses is that these loans may be forgiven for an amount equal to the amount spent on payroll (capped at $100,000 in wages), rent, mortgage interest, and utilities for eight weeks beginning on the origination date of the loan. However, forgiveness will be reduced in proportion to any reduction in employees and to a reduction in employees’ pay of greater than 25 percent.
The SBA will issue implementing regulations within 15 days of the Act’s enactment. Regulations are likely on either Saturday, April 11, 2020, or the next business day, Monday, April 13, 2020. The provisions are retroactive to February 15, 2020, and cover loans from that date to June 30, 2020.
Additional Business Loans to Distressed Industries
The Act creates a new Business Loan Program category (Program) for a period from February 15, 2020 to June 30, 2020 and allows the SBA to provide 100% federally-backed loans up to a maximum amount to eligible businesses to help pay operational costs like payroll, rent, health benefits, insurance premiums, utilities, etc. to certain recipients subject to certain conditions. The Program provides financing for banks to loan money to business with between 500 and 10,000 employees; specifically, $25 billion is allocated for passenger airlines; $4 billion for cargo airlines; $17 billion for businesses critical to “maintaining national security;” and $454 billion for loans, loan guarantees, and investments in businesses and municipalities.
Notably, the $454 billion Program provides assistance to businesses that otherwise do not receive relief under the Act and, in this regard, this program should be considered a business’s option of last resort. While there are numerous conditions upon a loan under the program, among those that are troubling from a labor and employment perspective are the following conditions, which the business must certify that:
- The funds the business receives will be used to retain at least 90 percent of the business’s workforce, at full compensation and benefits, until September 30, 2020;
- The business intends to restore not less than 90 percent of the business’s workforce that existed as of February 1, 2020, and to restore all compensation and benefits to the workers no later than 4 months after the termination date of the public health emergency declared by the Secretary of Health and Human Services on January 31, 2020;
- The business will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment of the loan;
- The business will not abrogate existing collective bargaining agreements for the term of the loan and 2 years after completing repayment of the loan; and,
- The business will remain neutral in any union organizing effort for the term of the loan.
(Section 4003(c)(3)(D)). Because of the uncharted territory that both union and non-union businesses are traveling, in which the economic future may not be predictable, it may be understandably difficulty to certify these conditions and/or comply with them in the long-run. In addition to the difficulty of this certification, this Program does not provide loan forgiveness and requires a business that is not publicly traded provide the government with a warrant, equity interest or senior debt instrument in the business. As a result, to the extent support is available through other SBA programs, businesses should turn to those options first.
The Act permits single-employer pension plan businesses to delay the due date for any contribution otherwise due during 2020 until January 1, 2021. As such, a business’s contribution typically due on July 1, 2020 may be delayed until January 1, 2021, which will free up financial resources that can be used to assist in pandemic response and/or ramp up when the economy comes back on line.
If you have questions or concerns, please contact your Lindner & Marsack attorney.
This Legal Alert provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact situation.