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13 May 2020
With rapid developments in local, state and federal guidance and law, the appropriate approach for each employer in relation to COVID-19 will vary depending on the nature of their work, the industries served and their location and size, among other considerations. This article outlines what employers need to know about furlough and the financial help that is available for employers.(1)
If an employer temporarily shut downs its business because of a local or state stay home order, and they temporarily furlough employees with no work as a result, will their employees be eligible for benefits under the FFCRA?
The question is whether the employee would be able to work or telework 'but for' being required to comply with a quarantine or isolation order.
If the only reason that the employee is not working is due to the stay home order, but if it were lifted the employee would be able to return to work immediately, then the US Department of Labour (DOL) has advised that the Families First Coronavirus Response Act (FFCRA) does apply and such employees are entitled to take their two weeks' paid sick time for being subject to a government quarantine or isolation order.
However, if the employee would be unable to work even if the quarantine order were lifted – for example, if the company has also experienced a downturn in business or there is a lack of work for the employee – they are not entitled to take FFCRA paid leave during the shutdown. The DOL's regulations provide that if an employer closes its worksite or furloughs its employees due to a downturn in business or lack of work, employees are ineligible to receive paid sick leave or expanded family and medical leave while the worksite is closed. In these circumstances, employees may be eligible for unemployment insurance (UI) benefits regardless of whether their employer closes the worksite pursuant to a federal, state or local order or because of lack of business. Employers should direct their employees to the relevant state workforce agencies or state UI offices for information about their UI eligibility.
In the latter scenario, the DOL has also noted that if an employer reopens and its employees go back to work, they would then be eligible for paid sick leave or expanded family and medical leave.
Can employers that are struggling implement salary reductions for exempt employees to adjust for this downturn?
Yes, employers generally may prospectively reduce salaries for at-will exempt employees during a business or economic slowdown, so long as the reduction is done for bona fide long-term business reasons and not done on a day-to-day or week-to-week basis (short-term changes may jeopardise the exempt status of the employee). For employees who are under contract, employers must review the terms of the agreement before modifying an employee's compensation or other employment terms.
Many state and federal exemptions require employers to compensate employees on a salary basis and require such employees to earn at least a threshold minimum salary. The threshold may vary depending on the state of employment. Employers should be cognisant of these requirements if they are considering reducing exempt employee salaries to ensure that otherwise-exempt employees remain exempt and continue to meet the minimum salary threshold applicable.
Any reduction in employee pay should be implemented in a non-discriminatory, even-handed way. Any substantial reduction in an employee's compensation may be interpreted as constructive termination if the employee resigns as a result; therefore, employers should understand that such terminations may be interpreted as an involuntary employer-initiated termination for employment law purposes.
Which businesses are eligible for financial assistance under the CARES Act?
The Coronavirus Aid, Relief and Economic Stimulus (CARES) Act earmarked $2 trillion in stimulus funding to help businesses and their employees cope with the economic impact of the COVID-19 outbreak. The CARES Act is intended to inject liquidity back into the financial system, facilitate economic recovery and incentivise employers to maintain and restore their workforces.
The CARES Act empowers the US Department of the Treasury to set up a $454 billion loan programme for 'mid-sized businesses', defined as businesses employing between 500 and 10,000 individuals as defined in the act. Among other requirements, the applicant must certify that the loan is necessary for its continued operations given current economic uncertainties and that it is not a debtor in a bankruptcy proceeding.
The CARES Act also created the Paycheck Protection Programme to provide up to $349 billion in forgivable loans to 'small businesses' with 500 or fewer employees as defined in the act. All applicants must certify, among other things, that the loan is necessary due to current economic conditions and that the funds will be used for only certain specified and authorised payroll costs and operational expenses. As of 16 April 2020, the Paycheck Protection Programme had exhausted its initial funding, although negotiations are underway to provide additional funding.
How much assistance will a business receive, and what employment-related conditions are attached to loans?
To date there is no cap on the amount of financing available under the Mid-Size Loan Programme, and interest rates cannot exceed 2%. However, these loans come with several conditions requiring serious consideration, including the following:
The Mid-Size Loan Programme also requires businesses to remain neutral in any union organising efforts for the term of the loan and to continue existing collective bargaining agreements for the term of the loan and until two years following repayment.
Small businesses applying for a loan under the Paycheck Protection Programme are allowed only one loan of no more than the lesser of 2.5 times their average monthly payroll or $10 million (however, it does not include compensation above $100,000). The Small Business Administration has set a two-year maturity date and a 1% interest rate for all loans under the programme, and the funds must be used for payroll costs, including employee benefits, as well as mortgage interest payments, rent and utility costs. However, Small Business Administration guidance has indicated that non-payroll costs will be allowed to account for only up to 25% of the forgivable amount, indicating that the majority of these loans should be used for payroll and employee benefit costs. In addition, the loan is reduced proportionally by any reduction of employees or wages unless such employees or wages are restored at the beginning period of the programme.
What does the CARES Act do to expand unemployment benefits for workers?
The CARES Act contains several important UI expansions, including:
Businesses should be aware that many factors, including differences in individual state unemployment programmes, may affect an employee's access to UI benefits.
For companies that are considering doing a 'partial furlough' (where employee hours will be reduced somewhat but they will continue to perform some work), will their employees who are now being reduced to part-time be eligible to receive partial UI benefits?
It depends. Many companies are considering reduction in hours and/or compensation for employees with the hope that employees can receive some partial UI benefit through the state. Such companies should understand that a reduction in hours or compensation will not always result in partial UI eligibility. Ultimately, whether a worker will be entitled to receive partial UI benefits depends on the state's definition of 'partial unemployment' and whether the worker qualifies under that definition.
Each state differs on this point, but generally speaking the partial unemployment eligibility qualification test tends to look at whether an employee is working less than full-time and earning less than the weekly benefit amount that they would receive on state UI had they been completely furloughed. To determine what the employee's weekly benefit amount would be, each state has its own formula that typically takes a fraction of the employee's historical compensation over several quarters and is subject to a state-specific minimum and maximum.
If an employee is eligible for partial unemployment benefits in any amount, they will also be entitled to receive the full Federal Pandemic Unemployment Compensation (FPUC) $600 supplemental UI benefit (available through July 2020).
Companies should consult with counsel for assistance with understanding their state's rules and eligibility requirements for partial unemployment.
Which employees will be entitled to the $600 per week extra benefit under the CARES Act? Will it be pro-rated or reduced depending on their compensation or if they are performing part-time work?
The $600 per week FPUC is an 'on/off' switch. There is no pro-ration or adjustment of the $600 weekly benefit available through the end of July 2020. If someone is unemployed or 'partially unemployed' (as defined by state law) and receiving even $1 of state UI benefits, that person will also receive the full $600 per week of FPUC benefit during the period it is available.
Employees must be eligible and receiving at least some state UI benefit to be eligible to receive the $600 FPUC benefit.
Will employees make more on unemployment than if they were working? If so, what is an employee's motivation to return to work?
Yes, in some cases, given the flat $600 per week FPUC benefit under the CARES Act, some workers (particularly lower-paid workers) may be able to receive 100% or more than 100% of their lost wages in UI through July 2020. Some have criticised the CARES benefit for this reason, fearing that it will encourage workers to go on UI rather than work. That said, quitting without good cause to obtain these benefits under the state's UI programme or the CARES Act:
Thus, only a worker who is able to work, available to work and actively seeking work (unless unable to do so due to COVID-19) may be eligible for any UI or CARES UI benefits.
In practice, this will mean that workers must be laid off or furloughed by their employer or forced to quit due to COVID-19 reasons in order to continue receiving UI benefits. Once the business reopens and the worker is offered reinstatement, in most cases this will also cut off UI eligibility, unless the worker continues to need to stay out of work due to one of the CARES Act Pandemic Unemployment Assistance (PUA) COVID-19 reasons.
When are the CARES Act UI expansions effective?
As of 28 March 2020, all states have signed up to implement the CARES Act UI expansions. Each state will now update their systems to reflect these expansions. The timing of this will be state-specific depending on how quickly the state can act to update their system, and in some cases certain expansions (eg, the FPUC $600 per week expansion) may be implemented first, with other expansions (eg, the PUA expansion to permit UI benefits for COVID-19 reasons) being implemented later due to the complexity of such updates. Certain states such as California and New York have already updated their systems to administer the FPUC $600 expansion.
While it may take the states a few more weeks to update their systems, all CARES expansions will be retroactive to a point. States must provide retroactive payments to individuals eligible for FPUC ($600 per week) for the weeks that they would have been entitled. In addition, workers who would have been eligible for UI under the PUA (COVID-19 reasons) will also be entitled to retroactive benefits back to 2 February 2020. Each state will develop procedures to permit workers to receive such benefits, which may include a requirement to apply or reapply to the extent that the worker has not yet been in the UI system.
What does the CARES Act permit businesses to do with respect to tax deferral?
Section 2302 of the CARES Act grants significant latitude to delay paying the employer portion of Social Security taxes (6.2% tax paid on wages up to the 2020 annual limit of $137,700). Employers may defer payments of those payroll taxes for 2020 over the following two years, with half of the amount required to be paid by 31 December 2021 and the other half by 31 December 2022. However, businesses that receive loan forgiveness under the CARES Act (available under Sections 1106 or 1109) will be ineligible for these deferred tax payments.
Does the CARES Act provide employers with an employee retention tax credit?
Section 2301 of the CARES Act offers an employee retention tax credit. This is a 50% tax credit for wages paid:
These credits apply to qualified wages paid after 12 March 2020 until the end of 2020. Qualified wages include the eligible employer's qualified health plan expenses that are properly allocable to the wages. The credit is subject to a $10,000 cap per employee for all calendar quarters (ie, a total of $5,000 credit per employee).
The availability of these credits turns on the number of employees:
For purposes of this tax credit, the number of employees is determined by looking to an employer's average number of full-time employees during 2019.
The credit is allowed against the employer portion of social security taxes under Section 3111(a) of the Internal Revenue Code, subject to certain exceptions. Employers cannot take advantage of this tax credit for the paid leave wage payments taken into consideration for the tax credit under Sections 7001 and 7003 of the FFCRA. Moreover, employers that receive loans (not loan forgiveness) under the CARES Act (as added under Section 1102) are ineligible for employee retention tax credits.
For further information on this topic please contact Michelle Strowhiro or Carole Spink at McDermott Will & Emery by telephone (+1 312 372 2000) or email (firstname.lastname@example.org or email@example.com). The McDermott Will & Emery website can be accessed at www.mwe.com.
(1) For further information please see here.
Lindsay Ditlow, partner, assisted in the preparation of this article.
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