Summary of Employment-Related Provisions of the Coronavirus Aid Relief and Economic Security (CARES) Act
On March 27, 2020, President Trump signed the Coronavirus Aid Relief and Economic Security (CARES) Act, which includes several provisions intended to help employers and employees through the economic downturn caused by the COVID-19 virus. For employers, these provisions include loans, a payroll tax credit, and a delay in the payment of the employer portion of 2020 payroll taxes. The CARES Act also includes aid to employees in the form of enhanced unemployment benefits and a one-time, direct payment to individuals.
I. Aid for Employers
A. Small Businesses Emergency Loans -Paycheck Protection Program
The CARES Act will assist small businesses in retaining their employees through the Paycheck Protection Program (PPP). This program will provide federally-guaranteed loans administered through lending institutions approved to participate under the Small Business Administration’s (SBA) existing 7(a) loan program. These loans may be partially or wholly forgiven if employers meet certain requirements and maintain payroll. These loans will be made through private banks and other lenders, not directly through the SBA.
Under this program, loans will be available for companies (including nonprofit organizations) with 500 employees or fewer, as well as for companies with more than 500 employees that meet the SBA’s definition of a small business under the North American Industrial Classification System (NAICS), which varies by industry. Companies can look up their Industry Code on the SBA website, www.sba.gov/size-standards, to see if they qualify as a small business. For example, certain chain businesses that have more than 500 employees who are divided up across several locations could still be eligible for loans under the PPP.
The amount of the available loans is calculated in different ways depending upon the particular circumstance of each company, up to a maximum of $10 million. For businesses that were in existence between February 15, 2019, and June 30, 2019, the maximum loan is equal to 250 percent of the company’s average monthly payroll costs during the one-year period before the date the loan is made. If the business employs seasonal workers, it can choose the average payroll between February 15 or March 1, 2019, as the start date, through June 30, 2019. If the business was not in existence between February 15, 2019, and June 30, 2019, the maximum loan available is 250 percent of the company’s average monthly payroll costs between January 1, 2020, and February 29, 2020.
The loans may be used to cover payroll (but only for salaries up to $100,000), employee health benefits, and other eligible fixed expenses, including rent, utilities, mortgage interest, and interest on other debt obligations incurred from February 15, 2020, to June 30, 2020.
Repayment of these loans will be deferred for at least 6 months and loans will be forgiven as long as the business uses the money to cover payroll and the other eligible expenses. The amount of the loan that is forgiven is calculated as the sum of payroll costs (excluding compensation over $100,000) and other eligible fixed expenses (e.g., rent, utilities, interest on interest on mortgage, etc.) during the eight-week period after the loan is made. According to the SBA, at least 75% of the loan amount must be used for payroll costs in order to be forgiven.
The purpose of the PPP is to keep employees employed at their current rate of pay. Therefore, the loan forgiveness amount will be reduced proportionally if a company reduces its wage and salary levels by more than 25 percent (compared to the most recent full quarter prior to loan origination). Similarly, if an employer reduces its workforce during the covered period of February 15, 2020, and June 30, 2020, in comparison to the preceding period of February 15, 2019, through June 30, 2019, the amount of loan forgiven would be reduced by an amount corresponding to the reduction in the workforce. This loan forgiveness reduction provision is retroactive to February 15, 2020, which means that temporary workforce and wage reductions that companies already made beginning February 15, 2020, will not reduce the amount of loan forgiveness as long as such workforce and wage and salary reductions are eliminated by June 30, 2020.
For any portion of the loan that is not forgiven, loan repayments will be deferred for at least six (6) months starting on the date of the loan’s origination. The SBA has indicated that the non-forgiven portion of the loan will have an interest rate of .5% (the maximum interest rate is capped at 4% under the CARES Act) and a maturity of two (2) years. Forgiven debt would not be treated as income for tax purposes.
Companies interested in loans available under the SBA’s Payroll Protection Program should contact their existing bank or the SBA’s Small Business Development Centers which assist employers in identifying participating lenders, available here.
We will provide further guidance on the Payroll Protection Program as it becomes available.
B. Emergency Economic Injury Disaster Loans for Small Business
Companies can immediately apply for Emergency Economic Injury Disaster Loans (EIDL) through the SBA.
Businesses and nonprofit organizations with fewer than 500 employees which were in operation as of January 31, 2020, may apply for loans of up to $2 million which may be used to pay fixed debts, payroll, accounts payable and other bills the company is unable to pay as a result of COVID-19.
Unlike loans under the PPP, loans under the EIDL program are not forgivable, but the SBA offers long-term repayments based upon each borrower’s ability to repay, up to a maximum of 30 years, and the interest rate is 3.75% for small businesses and 2.75% for nonprofit organizations. The SBA will not require collateral for loans of less than $25,000.
Eligible small businesses may also apply for a grant of up to $10,000 which will not have to be repaid.
A business that has obtained an EIDL between February 15, 2020, and June 30, 2020, may apply to refinance that loan into a loan under the Paycheck Protection Program.
C. Loans for Larger Employers
The CARES Act includes funding to establish Federal Reserve programs that support lending to eligible large businesses, including loans, loan guarantees, and other investments. Some of these programs will be industry-specific, such as those for airlines and those involved in national security.
Businesses that receive loans through these Federal Reserve programs cannot pay dividends or repurchase any outstanding equity interests while the loan or loan guarantee is outstanding, or for 12 months thereafter unless the business receives a waiver from the Secretary of the Treasury.
The CARES Act also provides funding for the Treasury Department and the Federal Reserve to create a program to provide low-interest loans for eligible businesses (including nonprofit organizations) with between 500 and 10,000 employees that will not require repayment for at least six months. In order to be eligible for these loans, companies must provide a good-faith certification that the company:
- intends to maintain at least 90 percent of its workforce as of February 1, 2020;
- will not pay dividends or repurchase equity security;
- will not outsource or offshore jobs during the loan or two years after;
- will not abrogate existing collective bargaining agreements; and
- will stay neutral regarding union organizing activity.
Loan forgiveness is not available for these loans.
D. Payroll Taxes
Companies will be provided with a 50% refundable payroll tax credit to encourage the retention of employees. This means that eligible employers will receive a credit against applicable employment taxes for each calendar quarter in an amount equal to 50% of the qualified wages with respect to each employee.
The amount of qualified wages taken into account for each eligible employee, however, will not exceed $10,000 per calendar quarter and the credit will not exceed the applicable employment taxes owed for such calendar quarter.
An eligible employer is defined as any employer: (i) that was carrying on a trade or business during calendar year 2020, and (ii) with respect to any calendar quarter, where operation of their trade or business was fully or partially suspended due to governmental order as a result of COVID-19.
Notably, this credit is not applicable if the employer is also taking advantage of the SBA loans, to avoid double-dipping.
The Act also provides for a delay in payment of the employer portion of 2020 payroll taxes until 2021 and 2022. Half of this deferred amount would be due on December 31, 2021, and the other half by December 31, 2022.
II. Economic Aid for Employees
As employers contemplate the effect that furloughs, layoffs, and reductions in compensation will have on their workforce, businesses should also take into account the economic aid the CARES Act makes available to employees in the form of direct payments and enhanced unemployment insurance benefits.
A. Direct Payments to Individuals
The CARES Act provides for $1,200 ($2,400 for joint filers) in direct payments to taxpayers with incomes up to $75,000 per year ($150,000 for joint filers, $112,500 for heads of household). The payment amount is reduced by $5 for each $100 above the $75,000/$150,000 thresholds. Families would receive an additional $500 per child.
Payments for individuals will phase out and end altogether for those earning more than $99,000. Married couples with incomes of $198,000 a year and above will not be eligible for any payments. For people filing as the head of household, the income cap is $146,500 a year.
B. Unemployment Benefits
The CARES Act provides funding for states to extend both the length of time employees can collect unemployment insurance (“UI”) benefits and the amount employees can collect, as well as extending UI benefits to individuals who previously have not been eligible for such benefits, such as independent contractors and part-time employees.
The CARES Act extends the time employees may collect UI benefits by an additional 13 weeks beyond the benefits provided by each state. Therefore, participants in states like New York, who are ordinarily eligible for up to 26 weeks of UI benefits, would be eligible for a total of 39 weeks. The total amount cannot exceed 39 weeks, but it may be shorter in certain states.
The CARES Act also increases the amount of UI benefits by an extra $600 per week through July 2020, regardless of the amount of the regular UI benefit for which the individual qualifies. In New York, the maximum amount of UI benefits an individual may receive is $504 per week. Under the CARES Act, individuals will also receive the additional $600 per week, for a total maximum of $1,104 in UI benefits per week.
Employees whose hours have been reduced will also be eligible for UI benefits if they are working fewer than four days a week and earn $504 per week or less. These individuals will also be eligible for the additional $600 per week.
Individuals who have already exhausted their UI benefits can reapply and receive an additional 13 weeks of UI benefits, which would include the extra $600 per week payment.
The expanded UI coverage of 13 additional weeks will also be available to workers who were newly eligible for unemployment benefits for weeks starting January 27, 2020, through December 31, 2020. The additional $600 per week is available only until July 2020.
The CARES Act also establishes Pandemic Unemployment Assistance (PUA) under which states can enter into an agreement with the federal government to provide benefits to individuals who are not traditionally eligible for UI benefits under state laws, such as independent contractors, freelancers, part-time employees, individuals whose employment has been affected by COVID-19 and individuals who do not have a long enough work history to qualify for state UI benefits.
The New York State Department of Labor (NYSDOL) has published Frequently Asked Questions, available here, that illustrate the scenarios under which PUA will provide benefits to individuals who do not qualify for regular UI benefits. The NY DOL advises that the guidance regarding who is eligible is “subject to change.” Individuals are not eligible for PUA if they can telework or are receiving paid sick leave or other paid leave benefits.
The minimum amount of PUA benefits is calculated by the U.S. Department of Labor on a quarterly basis as 50% of the average weekly benefit amount in each state. For January 1, 2020 – March 31, 2020, the minimum PUA benefit rate in New York is $172. For April 1, 2020 – June 30, 2020, the minimum benefit rate in New York is $182. The maximum benefit rate is $504, the same as the maximum benefit rate for regular unemployment insurance benefits. PUA benefits will also include the additional $600 per week provided by the CARES Act up to July 31, 2020. PUA benefits can be paid retroactively for periods of unemployment, beginning on or after January 27, 2020.
The NY DOL has published a flow chart illustrating what individuals should do to obtain UI benefits, available here. Individuals who have already applied for UI benefits do not need to take further action at this time. Individuals cannot apply for PUA until they have been determined to be ineligible for regular UI benefits, so those individuals must first apply for UI before applying for PUA.
We will be updating information regarding the assistance available under the CARES Act as it becomes available. Please reach out to any of our attorneys if you have any questions.