What Employers Need to Know About the CARES Act

By Frank L. Day

            The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) is a $2 trillion economic bailout that generally provides financial benefits to businesses and individuals affected by the novel coronavirus (COVID-19) pandemic. The CARES Act is 880 pages in length and the third major piece of legislation enacted by Congress since the President declared a national emergency on March 13, 2020. This article will summarize some of the key provisions relevant to employers, including the Paycheck Protection Program (PPP) and Expanded Unemployment Benefits.

1.         The Paycheck Protection Program.

The PPP is included in Section 7(a) of the Small Business Act (15 U.S.C. §636(a)(36)). In addition to the purposes for which small businesses have historically been able to obtain loans under the Small Business Act, the law authorizes loans to cover specified operating expenses, including payroll costs. “Payroll costs” are defined broadly in the PPP and include salary, wages, commissions, tips, paid vacation and other leave, severance payments, payments related to provision of health or retirement benefits, and payment of state or local taxes assessed on employee compensation. Nonetheless, the covered “costs” do not include compensation for an individual employee in excess of $100,000 per year (prorated for the covered period), federal taxes assessed on employee compensation during the covered period, compensation of employees whose principal residence is outside of the U.S., and sick leave or family leave wages under the Families First Coronavirus Response Act.

The PPP also authorizes qualifying businesses to use loan funds for continuation of healthcare benefits, interest on mortgage obligations, rent, utilities, and interest on other debt obligations that were incurred before the covered period. Hence, employers are allowed to use the funds for many purposes beyond paying their employees.

The PPP also expands which organizations are eligible for 7(a) loans beyond those that had historically met the definition of a “small business concern” under 15 USC § 632. The expanded eligibility now also includes:

• Any business, non-profit organization, veterans’ organization, or Tribal business that employs fewer than 500 employees (or, as applicable, the threshold number of employees for their industry as established by the Small Business Administration);
• Sole proprietors, self-employed individuals, and independent contractors, provided they are able to submit certain documentation required under the PPP;
• Restaurants and other businesses assigned a North American Industry Classification System (NAICS) code beginning with 72 (“Accommodation and Food Services”) with more than one location if they have no more than 500 employees per physical location, notwithstanding that they may have more than 500 employees in total.

Additionally, the Small Business Administration’s affiliation rules are waived for: (a) businesses with a sector 72 designation and no more than 500 employees; (b) any business operated as a franchise and assigned an NAICS franchise code; and (c) any business that receives financial assistance from a company licensed under section 301 of the Small Business Investment Act.

            The PPP also contains other eligibility requirements. To be eligible to receive a loan as described in the PPP, the borrower must make a good faith certification that: the loan is necessary because of the economic conditions caused by the pandemic; the funds will be used to retain workers and maintain payroll, or make mortgage, lease, or utility payments; and the borrower has not received or applied for a duplicative loan under the program. No collateral or personal guarantees are required however, and there is no need for a borrower to demonstrate any actual economic harm. The “credit elsewhere” requirement—pursuant to which a borrower must show that it is unable to obtain credit elsewhere before obtaining an SBA loan—is also waived during the covered period.

The maximum loan amount for any borrower that is in business during the PPP’s covered period is the lesser of (a) $10 million or (b) the sum of two-and-one-half times the average monthly payroll costs for the borrower during the one-year period before the date on which the loan is made, plus certain other amounts. Different calculations apply for seasonal employers, and for organizations that were not in business between February 15, 2019 and June 30, 2019, but that are otherwise eligible.

One of the key provisions of the CARES Act is that PPP loans are forgivable under certain circumstances. While funds received as a PPP loan may technically be used for any purpose outlined in Section 636(a) of the Small Business Act, in order to have the loan forgiven, the funds must be used for one of the purposes contemplated in the borrower’s good-faith certification—namely, payroll costs, payment of interest on mortgages, or payment of rent and/or utilities.

The recipient of a PPP loan who otherwise meets the requirements for loan forgiveness is eligible to have its indebtedness reduced in an amount equal to payroll costs, interest on covered mortgage obligations, rent payments, and utility payments that were made or incurred during the covered period. Note, however, that the “covered period” under the forgiveness provisions of the CARES Act is defined as the 8-week period beginning on the date of the origination of PPP loan—a significant difference from the definition of the “covered period” of the PPP itself, which spans the four and a half month period from February 15, 2020 to June 30, 2020.

The PPP also reduces the amount to be forgiven based on (1) reductions in the number of employees or (2) reductions in salaries or wages. The CARES Act provides specific methods for calculating those reductions. The reductions may be avoided, however, if the employer eliminates the reduction in employee numbers or eliminates the salary and wage reductions by June 30, 2020. An employer seeking to have all or a portion of a loan under the PPP forgiven must apply to the lender and submit certain documentation showing how the loan money was spent. Thus, employers seeking a loan under the PPP should make certain that they observe the program’s record-keeping requirements.

2.         Expanded Unemployment Benefits

The CARES Act temporarily enhances and expands unemployment insurance (UI) benefits through three key programs. To participate in the programs, each state must enter into an agreement with the federal government. The basics of each program are as follows:

Pandemic Unemployment Compensation (PUC) (Section 2104 of the CARES Act)

• Individuals who are entitled to unemployment benefits as determined by the state unemployment agency are eligible.  
• Each individual who qualifies for unemployment is entitled to receive an additional payment of $600 per week on top of the amount the employee is otherwise entitled to under state law. This increase applies to weeks of unemployment beginning after the state agrees to participate in the program through July 31, 2020 (approximately four months).

Pandemic Unemployment Assistance (PUA) (Section 2102 of the CARES Act)

• This program expands the scope of who can qualify for unemployment benefits to cover individuals who would typically not qualify under the laws of some states. The individuals generally covered by the program include those who are furloughed or out of work as a direct result of COVID-19, self-employed and independent contractors, and those who have exhausted existing state and federal unemployment benefit provisions.
• Individuals qualifying exclusively under this program will receive a benefit equal to the minimum weekly benefit amount described in the Stafford Act Disaster Unemployment Assistance (DUA) program, which is the model for the PUA program (CFR 625.6 of Title 20), plus the $600 per week federally funded supplement (similar to that provided to UI recipients under the PUC).
• Applicants for PUA must provide self-certification that they are (1) partially or fully unemployed or (2) unable and unavailable to work because of one of the following circumstances:
  • the individual has been diagnosed with COVID–19 or is experiencing symptoms of COVID–19 and seeking a medical diagnosis;
  • a member of the individual’s household has been diagnosed with COVID–19;
  • the individual is providing care for a family member or a member of the individual’s household who has been diagnosed with COVID–19;
  • a child or other person in the household for which the individual has primary caregiving responsibility is unable to attend school or another facility that is closed as a direct result of the COVID–19 public health emergency and such school or facility care is required for the individual to work;
  • the individual is unable to reach the place of employment because of a quarantine imposed as a direct result of the COVID–19 public health emergency;
  • the individual is unable to reach the place of employment because the individual has been advised by a health care provider to self-quarantine due to concerns related to COVID–19;
  • the individual was scheduled to commence employment and does not have a job or is unable to reach the job as a direct result of the COVID–19 public health emergency;
  • the individual has become the breadwinner or major support for a household because the head of the household has died as a direct result of COVID–19;
  • the individual has to quit his or her job as a direct result of COVID–19;
  • the individual’s place of employment is closed as a direct result of the COVID–19 public health emergency; or
  • the individual meets other criteria established by the Secretary of Labor.
• The time period for expanded compensation is January 27, 2020 through December 31, 2020.