The Coronavirus Aid, Relief, and Economic Security (CARES) Act, which was passed by the Senate on March 25, then passed by the House of Representatives and signed by President Trump on March 27, includes several requirements for employers seeking to take advantage of the Act’s financial assistance provisions. Although the legislation will provide financial opportunity for businesses seeking to stay afloat in these challenging times, it also provides obstacles and pitfalls that businesses should weigh before seeking such assistance. The new law includes The Coronavirus Economic Stabilization Act of 2020, which provides loans to all eligible businesses and the Keeping American Workers Paid and Employed Act, which provides loan assistance to small employers for paycheck protection.
Of particular significance in this legislation, is that mid-sized and large employers must remain neutral during any future union organizing activity, during the term of the loan, if they take advantage of the financial assistance provisions.
Coronavirus Economic Stabilization Act of 2020
The CARES Act provides $454 billion for loans, loan guarantees and investments from the Federal Reserve’s lending programs to eligible businesses, states and municipalities $25 billion for passenger air carriers and related companies, $4 billion for cargo air carriers, and $17 billion for businesses important to maintaining national security.
Generally speaking, the $454 billion is available to all United States businesses created or organized under the laws of the United States that have significant operations in and a majority of their employees based in the United States. Generally, the interest rates for a loan will be determined by the Secretary of Treasury “based on the risk and the current average yield on outstanding marketable obligations of the United States of comparable maturity.”
For any eligible business to obtain a Treasury loan, eligible businesses must agree:
- To not engage in any stock repurchase of its company’s stock within one year after the loan is repaid;
- To not pay any dividends within one year after the loan is repaid;
- To comply with highly compensated employee caps; and
- To any applicable requirements under Section 13(3) of the Federal Reserve Act, 12 U.S.C. 343(3).
Subpart (c) means that companies may not increase the compensation of an officer or employee whose compensation exceeds $425,000 until one year after the loan is no longer outstanding. Additionally, companies may not offer severance pay or other benefits upon termination that exceeds twice the amount of maximum compensation received by such employee for that same time period. No officer or employee whose compensation exceeded $3 million may be compensated at a rate higher than that plus 50% of excess over $3 million received in calendar year 2019.
There is some ambiguity in the law as to whether this restriction on compensation will apply to industries other than the airline industry and industries important to national security, but until regulations resolve this issue, we believe that employers taking advantage of the provisions of the Act should follow these restrictions.
Mid-Sized and Large Employers
The CARES Act states that the Federal Reserve will create a special program for businesses and nonprofit organizations that have between 500 and 10,000 employees. In order to qualify for a loan under this program such employers must make a good faith certification that:
- The loan is necessary to support ongoing operations;
- It will use the funds to retain at least 90% of the workforce, with full compensation and benefits, through September 30, 2020;
- It intends to restore not less than 90% of the workforce that existed as of February 1, 2020, no later than four months after the termination of the public health emergency declared by the Secretary of Health and Human Services;
- It is a U.S.-domiciled business with significant operations in the U.S.;
- It is not a debtor in a bankruptcy proceeding;
- It is created or organized under the laws of the U.S., has significant operations in and a majority of its employees based in the U.S.;
- It will not pay dividends or engage in stock buybacks during the life of the loan, unless pursuant to a prior contractual obligation; and
- It will not outsource or offshore jobs for the life of the loan and two years after repayment.
Loans for mid-sized and large employers under the Act will be at an interest rate not to exceed 2%. Additionally, no interest or principal will be required to be paid in the first six months.
Obviously, the requirement that an employer maintain the overwhelming majority of its workforce or at least be in a position to restore 90% of it no later than four months after the termination of the emergency is challenging. Therefore, employers contemplating financial assistance should analyze these requirements closely before pursuing a loan under this program.
The CARES Act also creates special employment-related obligations for businesses with 500 to 10,000 employees. First, borrowers are prohibited from abrogating existing collective bargaining agreements with unions during the life of the loan and for two years thereafter.
Second, and more importantly, borrowers “must remain neutral in any union organizing effort for the term of the loan.” The Act does not elaborate on this requirement or define what neutrality means. However, it is believed this provision would prohibit employers from engaging in an otherwise legally permissible election campaign in opposition to organizing efforts under the National Labor Relations Act, such as making statements against unionization or statements encouraging employees to vote against unionization. Presumably, supervisors would not be able to make comments to employees about elections other than to state when they will occur and where the polling places will be.
We believe, however, that employers in this category do not have to agree to all of these onerous requirements in order to get a loan under CARES, and could proceed through the general path, obtaining a loan at a “rate determined by the Secretary,” which, however, almost certainly will not be as attractive as the 2%/no-payment for six months formula.
Airline Industry and National Security Employers
The CARES Act provides similar requirements for passenger air carriers, and related businesses, cargo air carriers, and businesses important to national security:
- Credit must not be reasonably available at the time of the loan;
- The intended obligation is prudently incurred;
- The loan will be at “a rate determined by the Secretary based on the risk and the current average yield on outstanding marketable obligations” and the loan cannot exceed five years;
- A borrowing business cannot purchase any of its stock or that of any related company or pay dividends until the loan is paid off or one year after the date of the loan or the loan is paid off, unless there is a prior contractual obligation;
- Borrowers must maintain their employment levels as of March 24, 2020, until September 30, 2020, “to the extent practicable,” and shall not reduce employment levels by more than 10% before such date;
- Borrowers must be U.S.-domiciled businesses with significant operations in the U.S. and a majority of whose employees are predominantly based in the U.S.;
- The loan cannot be forgiven; and
- Eligible business must have incurred losses such that the continued operations of the business is jeopardized.
It should be noted that the provisions relating to neutrality with respect to union organizing and revocation of collective bargaining agreements discussed above, do not apply to this category of employers.
Furthermore, borrowing companies in these industries may not increase the compensation of an officer or employee whose compensation exceeds $425,000 until one year after the loan is no longer outstanding. Additionally, companies may not offer severance pay or other benefits upon termination that exceeds twice the amount of maximum compensation received by such employee for that same time period. No officer or employee whose compensation exceeded $3 million may be compensated at a rate higher than that plus 50% of excess over $3 million received in calendar year 2019.
Paycheck Protection Program
Under the Keeping American Workers Paid and Employed Act, Congress has allocated $349 billion in loans to small employers for the Paycheck Protection Program(PPP). This generally applies to employers with less than 500 employees. Small businesses are eligible for loans to cover payroll(except for employee/owners’ compensation in excess of $100,000), commissions and tips, mortgage interest payments, rent and utility payments, employer-provided benefits, insurance premiums, state and local taxes, and interest on other debt obligations incurred before February 15, 2020.
The deadline to apply for a PPP loan is June 30, 2020. Notably, CARES waives the “credit elsewhere” requirement , collateral and personal guarantee requirements, as well as borrower and lender fees. The legislation provides that the federal government will guarantee loans through the Small Business Administration (SBA) at 100% through December 31, 2020. After that point, the guarantee will be reduced to 75% for loans exceeding $150,000, and 85% for loans equal to or less than $150,000.
Loans may be forgiven for payroll costs, rent, interest paid on mortgages, and utility payments for eight weeks. The amount of loans under PPP is the average monthly payroll costs in 2019 multiplied by 2.5 or $10 million dollars, whichever is less. Therefore, if a small employer’s average monthly payroll cost for 2019 was $400,000, it would be entitled to a loan of $1,000,000.
Forgiveness of these loans will be reduced if the employer reduces its workforce in the eight-week forgiveness period compared to the number of full-time employees it had from February 15, 2019 to June 15, 2019 or the average number of full-time employees it had from January 1, 2020 to February 29, 2020. Additionally, loan forgiveness will be reduced if an employer implemented a reduction in salary or wage in excess of 25% compared to wages on or before February 15, 2020. If, however, an employer terminates employees or reduces wages by 25% between February 15, 2020 and April 26,2020, it can still obtain loan forgiveness if it rehires all employees and reinstates wages by June 30, 2020. Obviously, these provisions create an incentive for employers to retain their employees during this crisis, or at least to rehire them as soon as possible.
Since legal developments pertaining to COVID-19 are constantly evolving, we recommend that our clients call the Kullman Firm attorney(s) with whom they work for the most current guidance on these matters.