The Coronavirus Aid, Relief, and Economic Security (CARES) Act is a roughly $2 trillion bill intended to provide emergency assistance and healthcare response for individuals, families, and businesses affected by the COVID-19 pandemic. The Senate passed the CARES Act on March 25, 2020, and the House of Representatives passed and President Trump signed it on March 27, 2020. The CARES Act will supplement, and in some cases amend, the Families First Coronavirus Response Act that takes effect April 1, 2020.
The CARES Act includes significant measures for individuals, employers, and businesses to handle and overcome the COVID-19 pandemic. In addition to a multitude of tax benefits for businesses of all sizes, it includes various elements to help keep people healthy, supported, and engaged in the economy, such as direct cash for families, extra unemployment benefits, tax-free student loan repayment benefits, temporary student loan relief, insurance coverage for COVID-19 testing and treatment, emergency funds for small businesses, forgivable loans for small businesses, and public health funding. For employers, these important topics include:
- Unemployment Compensation Benefits Issues
- Leave Issues
- Impacts on Potential Union Organizing Attempts and Existing Collective Bargaining Agreements
- Paycheck Protection Program Issues.
The set of FAQs below is intended to answer in brief some questions employers may have regarding the CARES Act. These FAQs and this page will be updated as necessary.
Unemployment Compensation Benefits Issues
Q: What types of unemployment benefits are available under the CARES Act for employees who are terminated or furloughed?
A: There are three types of unemployment benefits detailed in the Act in Sections 2102, 2104, and 2107: (1) Federal Pandemic Unemployment Compensation; (2) Pandemic Emergency Unemployment Compensation; and (3) Pandemic Unemployment Compensation. Each has different eligibility requirements.
Federal Pandemic Unemployment Compensation (“FPUC”)
Under Section 2104, assuming that their state has “opted in” to participate in the program, individuals eligible for and receiving state unemployment benefits will get an additional $600 under the CARES Act. The $600 provided for under this section expires on July 31, 2020.
Pandemic Unemployment Compensation (“PUC”)
To be eligible for PUC under Section 2102, the employee will need to meet certain eligibility requirements - i.e., be ineligible for regular compensation or extended benefits under state or federal law or PEUA, and be unable to work due to COVID-19 for certain delineated reasons. They also cannot receive any type of paid leave or be able to telework. If they do not get state unemployment benefits, or their state unemployment benefits have run out, and they meet these eligibility requirements, then they will also get $600 on top of whatever PUC benefits they get. Employees are entitled to a total of 39 weeks of benefits through December 31, 2020. Importantly, however, any weeks during which the employee received other unemployment benefits (including state, FPUC, and PEUC benefits) are counted toward this 39-week limit.
Pandemic Emergency Unemployment Compensation (“PEUC”)
To be eligible for PEUC under Section 2107, employees need to have exhausted all rights to regular unemployment compensation under state law and be able to work, available to work, and actively seeking work (although many states are starting to waive this requirement). They must also be “totally unemployed,” which is not a requirement for PUC or FPUC. This means that employees who are working reduced hours will not qualify for PEUC benefits. If eligible for PEUC, employees would get the amount of benefits they were entitled to under state law, plus $600. Employees are entitled to 13 weeks of PEUC benefits through December 31, 2020.
Q: How does the $600 FPUC payment under Section 2104 work if the individual is eligible for state unemployment due to a reduction in hours, as opposed to a complete loss of work? Is there a proration of the $600 or does it not apply?
A: While the individual’s state benefits might be less than someone with a complete loss of work, the $600 for FPUC is not pro-rated or reduced; the individual is entitled to it in full so long as they are eligible for state benefits. This can result in a “windfall” under certain circumstances where the individual “earns” more unemployed than when he or she is fully employed.
To avoid this, employers may want to communicate to employees that they have available work, and that if they do not report to work, then they will be considered to have resigned. Resignation disqualifies the employee from unemployment compensation in most states, so they would lose the state benefits, and likely the federal benefit. This approach ignores any entitlement to be off work under the FFCRA and the FMLA and may help keep some employees reporting to work.
Q: Will the unemployment insurance provisions of the Act cover 100% of employee wages?
A: Not for all employees, but it will for most employees. The two unemployment insurance sums combined (the normal one from the state and the $600 from the Act) will not necessarily cover 100% of all recipients’ wages, but when considering what the average recipient’s normal wages are, the two sums together will usually cover 100% of wages for the average employee (in other words, employees who are paid above average will not have 100% of their wages covered). This is why politicians are touting this new law as covering 100% of employee wages—but that assertion is not technically accurate.
Q: Will employees who are on 50% furlough still have access to unemployment insurance benefits under the Act?
A: Generally, yes, though the specific answer to this question will require a state-by-state analysis. The Act states that if employees are eligible for unemployment insurance benefits under state law, they will be entitled to supplemental unemployment insurance benefits (the extra $600 a week) under the Act. Many states provide unemployment benefits when employees are reduced to part time instead of being let go completely. It is not entirely clear from the provisions of the Bill what will happen to employees in states that do not provide for unemployment insurance benefits to employees who are reduced to part-time work, but the Bill also provides funding for states to enact short-term compensation programs, which provide pro-rated benefits for employees whose hours have been reduced in lieu of a layoff.
Further, the 13 weeks of additional unemployment benefits (the “Pandemic Emergency Unemployment Compensation”) seem to be limited to only employees who are “totally unemployed,” although that is also not entirely clear from the plain terms of the Bill. Importantly, it seems that states have to “opt in” to participate in the federal Stimulus unemployment insurance programs.
Q. Will a “covered individual” be eligible for Pandemic Emergency Unemployment Assistance if the employer is providing a $100 per week benefit while the employee is on furlough?
A: A “covered individual” is someone who is unemployed, partially unemployed, or unable/unavailable to work because of COVID-19. A “covered individual,” however, does not include someone who has the ability to telework with pay or is receiving paid sick leave or other paid leave benefits. Although the CARES Act does not define “other paid leave benefits,” it is possible that the receipt of $100 per week while furloughed may constitute “other paid leave benefits,” such that it would disqualify the employee from receiving Pandemic Unemployment Assistance under the CARES Act.
Q: Does the CARES Act change the amount of paid sick leave provided under the Families First Coronavirus Response Act?
A: Yes and no. The CARES Act does not change the duration of paid sick leave provided under the Families First Coronavirus Response Act, but it does add maximum dollar amounts that an employer will be required to pay employees for paid sick leave. Specifically, when the employee is taking leave because 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 healthcare 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, employers are not required to (but may) pay more than $511 per day and $5,110 in the aggregate. Alternatively, when the employee is taking leave because the employee is caring for someone subject to a Federal, State, or local quarantine or isolation order related to COVID-19, the employee is caring for someone who has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19, the employee is caring for his/her child if the child’s school or place of care has been closed or the child’s care provider is unavailable due to COVID-19 precautions, or the employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services, employers are not required to (but may) pay more than $200 per day and $2,000 in the aggregate. See CARES Act § 3602; Families First Coronavirus Response Act § 5102.
Impacts on Potential Union Organizing Attempts and Existing Collective Bargaining Agreements
Q: From a labor relations perspective, what do employers need to be careful of in seeking relief under the CARES Act?
A: While the CARES Act provides economic stimulus and payroll tax relief to employers, the Act presents concerns for companies that seek to remain union-free. Indeed, loans under this discretionary program would have stringent restrictions affecting labor relations. Notably, Section 4003 of the Act provides that in order for businesses with between 500 and 10,000 employees to take a loan under the program, they will need to “remain neutral in any union organizing effort for the term of the loan.” While the language is unclear on exactly what “remain neutral” means, some common and problematic provisions of neutrality agreements are “gag” rules prohibiting businesses from making any statements to employees about the risks associated with collective bargaining. This means that employees will only hear one side of the unionization debate: the union’s. This, in turn, will limit workers’ ability to make informed decisions about who should represent them in the workplace and make it more likely that they will favor union representation.
Another common, pro-union aspect of neutrality agreements is card check provisions that tilt the election process very much in the union’s favor. Current law provides for a formal secret ballot election, supervised by the National Labor Relations Board (NLRB), even if a majority of workers have signed union authorization cards. The “remain neutral” provision of the CARES Act would likely take away an employee’s right to a secret ballot unionization election and allow unions to organize via a petition process where if a majority of employees sign cards, the union is automatically recognized and represents the employees.
In light of the pro-union provisions of the CARES Act, businesses should evaluate the relative costs and benefits of receiving assistance before entering into mid-sized business loans under the program. They also might consider, if a loan is necessary, making it for a short term, or providing in the loan document that the term can be shortened by prepayment.
Q: Does the CARES Act impact any existing union agreements or create any restrictions for employers?
A: A mid-sized business seeking assistance under the CARES Act must certify that it will not abrogate existing collective bargaining agreements with unions or “outsource or offshore jobs” during the length of the loan and two years after the loan is repaid. These restrictions would affect a business’s ability to subcontract work and would limit rights that are currently available to other companies with organized workplaces. They also could interfere with employees’ ability to decertify a union as their representative.
In addition, mid-sized business must certify that funds from the loan will be used to retain at least 90% of its workforce at full compensation until September 30, 2020. Eligible businesses must also restore its workforce to not less than 90% of the workforce that existed on February 1, 2020, and restore all compensation and benefits to the workers no later than four months after the Secretary of Health and Human Services terminates the ongoing public health emergency.
Paycheck Protection Program Issues
Q: The CARES Act excludes payroll costs for employee salary or wages in excess of $100,000. Does this exclusion apply to all payroll expenses incurred with respect to any such employee?
A: No. An employee’s salary or wages up to $100,000 may be taken into account to compute the maximum loan amount and the potential forgiveness amount under the CARES Act. The exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to noncash benefits. Thus, noncash benefits such as the following can be added to the payroll cost for the employee even if the total exceeds $100,000 as a result:
- Employer contributions to defined-benefit or defined-contribution retirement plans.
- Payment for the provision of employee benefits consisting of group healthcare coverage, including insurance premiums.
- Payment of state and local taxes assessed on compensation of employees.
Q: Is sick leave included in total payroll costs?
A: Yes and no. PPP loans can be used to cover payroll costs, including costs for employee vacation, parental, family, medical and sick leave. However, qualified paid sick and family leave wages for which a tax credit is allowed under sections 7001 and 7003 of the Families First Coronavirus Response Act (FFCRA) may not be included in payroll costs. This means that if you take the tax credit under the FFCRA, you cannot include the amounts paid for the qualified leave in your forgiveness calculation under the PPP loan.
Q: What time period should businesses use to determine their number of employees and payroll costs in order to calculate the maximum loan they can obtain?
A: Guidance issued by the SBA provides that a borrower may use either the payroll costs incurred during calendar year 2019 or aggregate payroll costs from the most recent 12-month period completed prior to the application for the loan.
Q: Are payments made to independent contractors treated as payroll costs?
A: No. SBA guidance provides that independent contractors and sole proprietors are eligible to obtain loans pursuant to the PPP program, and thus payments made to independent contractors and sole proprietors should not be used by other borrowers to compute payroll costs.
Q: Whose responsibility is it, the borrower’s or the lender’s, to calculate payroll costs?
A: It is the borrower’s responsibility, and the borrower must attest to the accuracy of the calculations in the application. Lenders are expected to perform a good-faith review of the borrower’s calculation to ensure accuracy. If errors are found, the lender is to work with the borrower to remedy the issue.
Q: Does the payroll calculation include payroll through a third-party payer such as a payroll provider or a Professional Employer Organization (“PEO”)?
A: Yes. The borrower, however, must provide documentation obtained from the third-party payroll service or PEO to support the payroll figures. If tax returns are not available, the borrower must provide a statement from the payroll provider documenting the amount of wages and payroll taxes paid on the borrower’s behalf.
Q: Can I apply for more than one PPP loan?
A: No. Borrowers are limited to one PPP loan. This means that if borrowers apply for a PPP loan, they should consider applying for the maximum amount.
Q: What is the interest rate, and can I defer making payments?
A: The interest rate will be 100 basis points, or 1 percent. Borrowers will not have to make any payments for six months following the date of disbursement of the loan. However, interest will continue to accrue on PPP loans during this six-month deferment.
Q: When can we apply for a loan under the Paycheck Protection Program? And how do we apply?
A: Small businesses (businesses with 500 or fewer employees or businesses that have fewer employees than the Small Business Administration’s small business size standards for the particular industry) and sole proprietorships can apply beginning April 3, 2020. Independent contractors and self-employed individuals can apply beginning April 10, 2020. It is important that you apply as soon as possible because there is a funding cap. You can apply through any existing Small Business Administration 7(a) lender or any participating federally insured depository institution, federally insured credit union, or Farm Credit institution. Participating lenders can be found at www.sba.gov. All loans will have the same terms regardless of the lender. The loan application can be found here.
Q: How can we find out if our business, which has more than 500 employees, falls into an industry that the Small Business Administration (“SBA”) characterizes as a small business?
A: The SBA’s website regarding size standards can be found here. The table of size standards can be found here.
Q: How does forgiveness of a PPP loan work?
A: There has been no guidance on the specifics of loan forgiveness under the PPP. But based on what we understand at this time, the amount of loan forgiveness can be up to the full principal amount of the loan plus any accrued interest. If a borrower wants the loan forgiven, the borrower must spend the loan proceeds during the 8-week period following the origination of the loan on forgivable purposes, such as payroll costs, interest on a mortgage obligation (which includes real and personal property), rent, and utilities. After the 8-week period expires, borrowers may seek forgiveness through their lenders based on documentation that shows that the loan proceeds were used for forgivable purposes.
Q: Does it matter how much of the PPP loan proceeds are spent on any particular forgivable purpose?
A: Yes. The SBA has made clear that at least 75% of the loan proceeds must be used for payroll costs.
Q: What are “payroll costs” under the PPP for forgiveness purposes?
A: Payroll costs consist of all compensation to the employee. These costs include salary, wages, commissions, tips, vacation, pay for leave, allowance for separation or dismissal, payments made by the employer for provision of employee health and retirement benefits, and payment of state and local taxes assessed on compensation of the employees. The employer’s share of FICA taxes are not an allowable payroll cost for this purpose.
Q: How can my forgiveness amount be reduced?
A. Money spent on non-forgivable purposes, and money spent after the 8-week period, will not be forgiven. Though unclear, SBA has indicated that if less than 75% of the loan proceeds are spent on payroll costs, the amount of forgiveness will be reduced dollar for dollar by the amount below 75%. In addition, if the employer reduces the number of full-time equivalent employees during the 8-week period, or if it significantly reduces the compensation to its employees during that same period, the loan amount will also be reduced.
Q: Under what circumstances will my loan be reduced if my company reduces headcount?
A: The PPP will reduce the forgivable amount based on a reduction in the amount of full-time equivalent employees using a formula. An employer must multiply the maximum amount that may be forgiven (the amount of qualified costs and payments made in the 8-week period) by the following fraction:
The average number of FTEs per month during the 8-week period after loan origination; divided by either:
(a) the average FTEs per month between February 15, 2019 and June 30, 2019; or
(b) the average number of FTEs per month between January 1, 2020 and February 29, 2020.
An employer may choose the denominator that will maximize the forgiveness amount. The product is the amount of the loan that may be forgiven (subject to further reduction based on reduction in salary or wages mentioned below).
Q: Under what circumstances will my loan be reduced if my company reduces an employee’s pay?
A: We expect there to be guidance issued in the future. Preliminarily, we believe the employer must reduce the forgivable amount to account for a reduction in the amount of salary or wages paid to an employee in the 8-week period following the origination of the loan. The amount of the reduction will be determined by comparing the amount of salary or wages paid to each employee during the 8-week covered period with the amount he/she was paid during the most recently completed calendar quarter ending prior to the origination date for the loan. If a particular employee has a reduction in total salary or wages paid in the 8-week period following the origination of the loan that is in excess of 25% of the total amount of salary/wages he/she earned in the most recent full quarter before the origination of the loan, the amount of loan forgiven will be reduced dollar for dollar in that amount.
An example is helpful: If the employee is paid $60,000 per year or $5,000 per month the total salary paid to the employee during the relevant quarter would be $15,000; and the allowable reduction would be equal to $3,750 (75% of $15,000). Based upon the employee regular rate of pay, the employee would normally be paid $9,232during the 8-week period ($1,154 per week time 8). Apparently, the employer may reduce the employee’s salary during the 8-week covered period to $6,924 (75% of $9,232) without causing a reduction in the forgiveness amount
Q: Is there any way to reduce the amount of money not subject to loan forgiveness based on the reduced headcount?
A: In order to limit the impact on the forgiveness amount based on reductions in the number of FTEs, an employee that was terminated before April 26, 2020 may be rehired before June 30, 2020. Accordingly, these rehires will help a borrower increase the numerator fraction to equal the borrower’s chosen denominator. It is not clear whether the specific employees terminated or furloughed must be the same individuals who are hired. However, if an employer wants to take advantage of this process, the total amount of the loan spent on payroll must still be 75% of the loan proceeds. Reaching 75% will be difficult if significant numbers of employees are terminated before April 26, 2020 and then not rehired until June 30, 2020.
In addition, the salary reduction limitation on forgiveness apparently must be applied to any employee(s) who were rehired in order to increase the numerator used to compute the head count reduction test. As a result, if any individual is rehired the amount of loan forgiveness will be reduced in the amount that the rehired employee’s pay during the 8-week covered period is less than 75% of the amount he/she was paid in the last full quarter before the loan origination.
Though decidedly unclear, there appears to be a de facto obligation to give some amount of backpay to the rehired employee that is attributable to the covered period, so as to have the total compensation for the employee equates to a minimum of 75% of that quarterly amount if the desire is to maximize the amount forgiven. We expect guidance to be issued on this subject.
Q: Is there any way to reduce the impact on the amount to be forgiven from my PPP loan due to reductions in salary of employees?
A: In order avoid a reduction in the amount of forgiveness due to any reductions in salary and wages, the salary and wage reductions must have occurred before April 26, 2020, and the amount reduced must be paid back to the employee by June 30, 2020. There is an open issue with the amount that must be paid back to avoid the reduction in the amount to be forgiven. The statute can be read such that in order to take credit for the curing of the reduction in salary/wages, the entire amount of the reduction that occurred before April 26 must be paid back to the employee. There is also a reading that the amount to be paid back is the amount to get the total salary and wages to be over 75% of the wages for the last calendar quarter before the loan originates. We will have to wait to see if there is any guidance issued in this regard.