CARES ACT – A LIQUIDITY LIFELINE (With Tough Choices For Franchising)

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Let’s face it—COVID-19 has decimated the franchise industry, along with the rest of the economy. The food service, hospitality, travel and the service sectors had very tough decisions to make almost instantly, with very little guidance. Questions persist: Can or should franchise businesses continue to operate? How can workers be protected? How can business be supported and bills paid? How long will it last, and how quickly can the industry get back on its feet?

We still don’t know the answer to the last two questions. But the Coronavirus Aid, Relief and Economic Security (CARES) Act, signed on March 27, 2020 should help staunch the financial bleeding. CARES offers franchise businesses a liquidity lifeline in the form of loans (which can become grants), deferred payments, and tax relief. CARES is targeted to small businesses (fewer than 500 employees) but in a coup for franchising, franchises, specifically “any organization operating as a franchise that is assigned a franchise identifier code by the SBA,” are exempted from the size eligibility requirements. This is especially significant for multi-unit franchisees, whose multiple locations when combined would have exceeded the 500 employee limit. In an earlier parallel move, Congress enacted the Families First Coronavirus Response Act (FFRCA) to protect liquidity for individuals and families. The overarching intent of these massive spending bills, unprecedented in our nation’s history, is to help businesses and individuals weather the challenge of COVID-19. Neither law is intended to be a stimulus.

CARES poses tough choices to businesses that are already in shock, the result of an abrupt closure or dramatic sudden catastrophic decline in income. Should employees be laid off or retained? Is it better to off-load employee expense, normally a business’ greatest expense, or keep them employed and bear the potential burden of the increased sick pay and family medical leave payments mandated by FFRCA? If a business opts to maintain employees, will it be able to survive financially? If employees are laid off, how quickly will they return to the workplace in light of the greatly expanded and very generous unemployment benefits mandated by CARES? When the virus struck, the workforce was fully employed; there was no excess of workers. Thus, workers who are financially dissuaded from returning to work when the virus emergency ends may dampen or delay the economic recovery that is the goal of CARES.

In summary terms, FFRCA bolsters individual liquidity for retained employees, in the form of expanded family medical leave and sick pay. The FFRCA’s expanded family medical leave and sick pay obligations are mandatory for employers with fewer than 500 employees (full or part time and including join employees), as determined under federal law. This provision emphasizes the importance of the recent rulings by the Department of Labor and the National Labor Relations Board, narrowing the definition of employment and joint employment. (See our prior blogs) An employer is liable under the FFCRA for payments to employees, whether temporary, full time or part time, but not to independent contractors or workers who are not their employees. These mandated payments are in addition to, and not a substitute for, the employee’s preexisting leave entitlements. With certain exceptions, an employee who elects expanded sick leave or family medical leave must be rehired at the end of the leave, subject to the employer’s layoffs or furlough actions. A small business, defined as one with 50 or fewer employees, may apply for an exemption from these payment obligations – the exemption is not automatic, but depends on the potential financial impact of payment on the business. The CARES Act then added very generous unemployment payments for those whose jobs disappear in the crisis – raising unemployment weekly benefits by $600 and extending the duration of payments. For low paid workers, these payments may be sufficient to replace a worker’s entire paycheck, for a longer period of time.

The CARES liquidity lifeline for businesses, including franchise businesses, is more complicated and intersects with the individual and family relief afforded by FFRCA. The expanded family medical relief and sick pay that the Act grants to employees must be paid by the employer. At first blush, then, the FFRCA imposes an additional burden on employers just when they are least likely to have access to cash. That’s where the CARES Act steps in with a liquidity lifeline that implicitly recognizes employers’ obligations to employees.  CARES offers a variety of liquidity tools to businesses primarily in the form of loans (that may become grants) and tax relief.

The SBA is a frequent lender to franchised businesses, but applicants have frequently criticized its procedural requirements that result in a very long process, restrictive loan limits, excessive red tape, and collateral or personal guaranty requirements. CARES cuts many of the most problematic of these burdens; Congress has armed the SBA to move quickly. As examples, lender and borrower fees are waived, collateral and personal guaranty requirements are waived, prepayment fees are not charged, interest rates are capped at 4 percent, the maximum loan amount is increases, and loan payments can be deferred for up to one year.

The Paycheck Protection Program (PPP) established by the CARES Act provides SBA loans for businesses to support employee salaries, paid sick or medical leave obligations (an FFCRA intersection), and mortgage, rent and utility payments. The PPP’s goal of providing businesses, including franchises, a liquidity lifeline to continue in business, keep its workers on the payroll and position them to recover with rapidity are obvious. But, to underscore that intent, CARES provides that PPP loans will be forgiven, in full or in part, if during the employer maintains its workforce throughout the crisis. Employers who laid off workers prior to enactment of the Act can re-hire workers without penalty having a reduced penalty at the beginning of the period (February 15, 2020).

In addition to PPP loans, tax relief in CARES operates to decrease and/or delay payments. It includes:

*          Payroll tax credit for 50% of wages paid by employers during the crisis;

*          Delayed payment of employer payroll taxes, allowing payment of the employer’s share to be paid over two years;

*          More generous net operating loss (NOL) limitation, carry over and carry back rules, which are also extended to non-corporate business entities;

*          Increased limit on allowable interest expense that can be deducted;

*          Accelerated write-off for qualified property improvements (particularly important in the hospitality industry)

In addition to these highlighted provisions, the “Economic Stabilization and Assistance to Severely Distressed Sectors of the United States Economy” part of CARES offers extensive support to impacted businesses, specifically including the airlines, but extending to other businesses not subject to otherwise adequate relief. This includes provisions that were termed “Mnuchin’s slush fund” during the legislative process, and the fund is a large one — $500 Billion to Treasury’s Exchange Stabilization Fund. The money can be used for short term direct loans to affected businesses, contingent among other things on a business’ retention of workers during the crisis. Reflecting legislative memories of financial institutions that used the government’s financial support in the 2008 crisis to buy back stock and/or dramatically increase CEO pay, those uses are forbidden for these loans.

This is but a “trailer” for the entire, roughly 900 page legislation, and detailed official commentary is expected soon (perhaps by April 3rd). Details and technicalities abound, and of course the usefulness of the CARES and FFRCA liquidity lifelines will vary. We thus need to add that this is not legal advice. Like Siskel and Ebert, this is just a review. I give the CARES/FFCRA legislation: Two thumbs up for intent; two thumbs up for speed; an exclamation point of surprise at the bilateral action of Congress; and a cautious thumb-and-a-half for substance. But I reserve the right to re-evaluate as the implementation moves forward, and, most importantly, whether at the end of this crisis recovery is rapid or delayed.

This is not the end of the story, by any means.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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