On March 27, 2020, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act also known as the CARES Act. The CARES Act includes a number of important programs intended to provide relief to eligible employers and employees across different sectors, including the hospitality and foodservice industries. However, employers should also be aware of the potential consequences of participating in one or more of these programs.
The CARES Act substantially increases the unemployment assistance available to laid-off or reduced hours employees. Not only does the CARES Act extend benefits for all eligible workers through December 31, 2020, but it also allows workers to collect unemployment benefits who would not traditionally be eligible (for example, self-employed workers and independent contractors). In addition, until July 31, 2020, the federal government will pay “eligible recipients” an additional $600 per week in excess of amounts otherwise paid under state programs. Finally, through December of 2020, the CARES Act provides 50 percent of the cost of any state “short-time compensation” programs, which are programs designed to allow employers to reduce their workforce without laying workers off. Under such programs, employees who have had their hours reduced as a result of COVID-19 receive pro-rated unemployment benefits.
Paycheck Protection Program
One of the programs under the CARES Act that has generated the most interest is the Paycheck Protection Program, sometimes called the PPP. Under the PPP, small businesses that certify that the uncertainty of current economic conditions necessitates the loan are eligible for PPP Loans, which are guaranteed by the Small Business Administration. The definition of what constitutes a “small business” varies from industry to industry, but most often it means a business with fewer than 500 employees. For accommodation businesses and foodservice businesses, however, a small business (with regard to eligibility for the PPP) is one with fewer than 500 employees per location.
The maximum loan amount of each PPP Loan is capped at the lesser of $10 million or 250 percent of the total average monthly payroll in the one-year period before the loan was made (capping compensation for any individual employee at $100,000 when determining payroll cost). Payroll costs have very specific definitions in the PPP, which should be reviewed carefully. Items such as commissions, tips, vacation pay, severance, group benefits, retirement benefits, and many other costs beyond simple wages and salaries are included for the purposes of calculating payroll costs under the program.
PPP Loan proceeds can be used for such payroll costs (which, here again, is broadly defined), as well as rent payments, utilities, and payments on debt, provided that each lease, utility service, and debt instrument was in effect on, or prior to, February 15, 2020. PPP Loan proceeds cannot be used for employee compensation above $100,000 per year (prorated for the covered period); certain federal taxes; compensation to employees residing outside of the U.S.; and sick leave or family leave wages for which credit is allowed under the Families First Act.
The SBA will not require business owners to personally guarantee PPP Loans and will waive credit requirements and origination fees. We expect most small business owners to seek debt forgiveness, as described below. However, any debt that is not forgiven will be non-recourse and will have a term of up to 10 years, with an interest rate capped at 4 percent, with no prepayment penalty. Debt service payments under a PPP Loan may be deferred for at least 6 months and up to one year upon request by the borrower.
The Treasury and the SBA have 15 days from the date on which the CARES Act was enacted (March 27, 2020) to provide rules to allow businesses to access funds. Additionally, Secretary Mnuchin said on March 29, 2020 that he expects the rules to be available by April 3, 2020. The PPP program expires on June 30, 2020. The necessary application forms for the PPP have not yet been released by the SBA, but we suggest that potential applicants gather necessary documents for the application (expected to include payroll information and possibly organizational documents) as soon as possible.
PPP Loan Forgiveness Program
PPP Loan borrowers will be able to apply for loan forgiveness in the amount of any payments made in the first eight weeks following the disbursement of the PPP Loan for the following expenses: (a) payroll; (b) rent payments; (c) interest on mortgages (but not principal); and (d) utilities, provided that each lease, debt instrument, and utility service was in effect on or prior to February 15, 2020.
However, the above-described loan forgiveness comes with “strings attached.” Loan forgiveness will be reduced proportionally by comparing the number of full-time equivalent employees (FTEs) employed during the eight-week period following the disbursement of the PPP Loan against either (a) the average number of FTEs employed by the borrower between February 15, 2019, and June 30, 2019, or (b) the average number of FTEs employed by the borrower between January 1, 2020, and February 29, 2020. The borrower will get to choose which period to use for such comparison.
If, during the eight week period following the disbursement of the PPP Loan, the salary or wages of any employee who earned under $100,000 in 2019 falls by more than 25 percent of that employee’s salary or wages in the preceding full quarter in which that employee was employed, the loan forgiveness will also be reduced by the amount of the wage drop in excess of 25 percent.
Borrowers subject to the above forgiveness reductions may mitigate their reduction (i.e., have more of the loan forgiven) by eliminating, prior to June 30, 2020, any losses of headcount or salary and wage cuts that occurred between February 15, 2020 and April 27, 2020.
Borrowers must apply for the loan forgiveness—it is not automatic to all PPP Loan borrowers. Any amount forgiven under the loan forgiveness program will not be taxed as income.
Any PPP Loan amounts not forgiven will remain subject to the basic terms outlined above.
Emergency Economic Injury Disaster Loans (EIDLs), Grants
The SBA had previously instituted an EIDL program in response to COVID-19, and the CARES Act expands the program, which is already subject to a cap of $2 million per loan and fixed interest rates of 3.75 percent for small businesses and 2.75 percent for non-profits.
The expanded EIDL program now covers businesses, cooperatives or employee stock owned companies of fewer than 500 employees, individuals operating as sole proprietorships (with or without employees) or independent contractors, and tribal businesses. Under the CARES Act, the SBA also waives personal guarantees on loans and advances under $200,000, and several other requirements, such as that the borrower has been in business for a year, and the “credit elsewhere” test (i.e., that borrowers are unable to obtain credit elsewhere). Creditworthiness can be determined by a borrower’s credit score or by “alternative appropriate methods.” EIDL loans are available until December 31, 2020.
The Emergency EIDL Grants also fund loan advances of up to $10,000, which any applicant may request and, as long as the applicant is an eligible borrower, is to be disbursed within three days. Even if the applicant is subsequently turned down for an EIDL loan, this advance does not need to be repaid, but may be factored into loan forgiveness, or subsequent refinancing into a PPP Loan.
Employee Retention Tax Credit
The CARES Act provides an Employee Retention Tax Credit to employers who fully or partially suspended their operations during any calendar quarter due to governmental restrictions on commerce, travel, or group meetings due to COVID-19 and for whom gross receipts in Q1 2020 are at least 50 percent less than Q1 2019. These employers remain eligible for the tax credit until their gross receipts in any subsequent quarter are at least 80 percent of the same, one year prior.
The Employee Retention Tax Credit is a refundable payroll tax credit for 50 percent of qualified wages paid to certain employees, not exceeding $10,000 per employee. Qualified wages are those paid between March 12, 2020, and December 31, 2021. For employers with fewer than 100 full-time employees, qualified wages include the wages of all employees, regardless of whether an employee is furloughed. If an employer has more than 100 employees, then qualified wages include only wages paid for periods of time when the employee was paid but not providing services. Note, however, that any employer receiving the PPP Loan is not eligible for this tax credit.
Delay of Payment of Employer Payroll Taxes
Most employers will have the option to defer payment of the 6.2 percent payroll tax payable from March 27, 2020, through December 31, 2020. Half of the deferred amounts will be due on December 31, 2021; the remainder will be due on December 31, 2022. Note, however, that any employer who received any PPP Loan Forgiveness is not eligible for this deferral.
Coronavirus Economic Stabilization – Emergency Loans
The CARES Act earmarks approximately $454 billion for loan and loan guarantees to eligible businesses. These loans will, “to the extent practicable,” be at market rates reflecting pre-COVID-19 conditions (except as discussed below). Borrowers must be U.S. companies having significant operations in, and a majority of employees based in, the United States and reasonably unable to obtain credit elsewhere, and the debt must be “prudently incurred” and “sufficiently secured.” Borrowers of these emergency loans are, however, barred from stock buybacks for the term of the loan plus one year and issuing dividends or capital distributions for the term of the loan plus one year. Borrowers must also maintain through September 30, 2020, employment levels of at least 90 percent of the number of employees as of March 24, 2020.
The emergency loan program puts additional limitations on the compensation of borrowers’ officers or employees. For the term of the loan plus one year, officers or employees whose total compensation (i.e., salary, bonus, stock awards, or other financial benefits) was higher than $425,000 in 2019 will have their total compensation capped at the 2019 level and any severance is capped at 200 percent of that 2019 compensation level. For the term of the loan plus one year, officers or employees whose total compensation was higher than $3 million may be compensated at an amount of $3 million, plus 50 percent of any excess over $3 million.
Emergency Loans to Midsize Businesses
As part of the Economic Stabilization emergency loans detailed above, the Treasury will endeavor to establish a subset of the emergency loan program for midsize businesses (between 500 and 10,000 employees). These loans to midsize businesses will be at interest rates capped at 2 percent, with a deferral of all principal and interest payments for six months. In addition to the restrictions applicable to all emergency loans outlined above, midsize borrowers must also make a good-faith certification that: (a) the uncertainty of economic conditions makes the loan necessary; (b) the loan will be used to retain at least 90 percent of employees at full compensation and benefits through September 30, 2020; (c) the borrower intends to restore, within four months after the termination of the official public health emergency declared by the Secretary of Health and Human Services on January 31, 2020, its employment levels to at least 90 percent of the number of employees it had on February 1, 2020; (d) the borrower is an entity domiciled in the U.S. with significant operations and employees in the U.S.; (e) the borrower is not a debtor in a bankruptcy proceeding; (f) he borrower is a U.S. company having significant operations in, and a majority of employees based in, the U.S.; (g) the borrower will not buy back stock during the term of the loan; (h) the borrower will not outsource or offshore jobs during the term of the loan plus 2 years; (i) the borrower will not abrogate an existing collective bargaining agreement during the term of the loan plus two years; and (j) the borrower will remain neutral in any union organizing effort during the term of the loan.
The CARES Act provides several avenues for relief to struggling small and medium-sized business owners, but it is important to fully understand the consequences of participating in one or more of the above programs. Additional regulatory guidance will likely be forthcoming from the agencies tasked with administering these programs, and such regulations will add even more complexity to the set of programs created under the CARES Act. Employers should consult an attorney and/or tax professional before electing or foregoing any particular program established by the CARES Act.