In the third and final of a series, our employment and benefits teams take an in depth look at the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act” or the “Act”) affecting employment, compensation, payroll taxes and paid leave. For a description of changes affecting health and welfare plans, see here, and for a description of changes affecting retirement plans, see here.

Employment and Compensation Requirements Tied to Emergency Aid

Types of Emergency Aid

Title IV of the CARES Act includes up to $500 billion in emergency aid that can be provided to distressed companies in the form of government loans, loan guaranties, and other investments. This emergency aid is discussed in Mayer Brown’s Legal Update on Section 4003 of the CARES Act – Liquidity for Eligible Businesses, States and Municipalities, dated March 31, 2020, but in brief summary it consists of several programs, including the following:

  • Aid to Airlines, Cargo Air Carriers and Critical Businesses
    Of the $500 billion in aid authorized by the CARES Act, $46 billion of such aid is marked for direct assistance to (i) air carriers and industry-related businesses (such as repair and ticket agents); (ii) cargo air carriers; and (iii) business critical to national security.
  • Loans, Loan Guarantees, and Other Investments Through Programs Established by the Federal Reserve
    The remainder of the $500 billion plus any of the $46 billion not used to provide relief to airlines, cargo air carriers, and critical businesses is to be made available to provide loans and loan guarantees to, and other investments in, programs or facilities established by the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) that support lending to other eligible businesses (“Other Eligible Businesses”).
  • Assistance for Mid-Sized Businesses
    As a subset of the loans, loan guarantees, and other investments to be made available through programs and facilities maintained by the Federal Reserve and described above, Title IV of the CARES Act directs the Treasury Department to develop programs or facilities that will provide financing to banks and other lenders to make direct loans to eligible businesses, including nonprofits, with between 500 and 10,000 employees (a “Mid-Sized Business”). Loans made to eligible Mid-Sized Businesses will have interest rates not exceeding 2% and no principal or interest will be due for the first six months of the loan or longer if the Treasury Department extends the repayment holiday.
  • Main Street Lending Program and Government Participants
    The CARES Act also authorizes the Federal Reserve System to develop a Main Street Lending Program to support lending to small and mid-sized businesses on such terms and conditions as the Federal Reserve Board may set consistent with section 13(3) of the Federal Reserve Act. The CARES Act also directs the Treasury to implement a program or facility that provides liquidity to the financial system supporting lending to state and municipal governments.

Program Requirements

In order to be eligible to apply for and receive emergency aid provided through the programs described above, employers must meet certain requirements, including the following:

US Companies

In general, and subject to some variation depending on whether the business is a Mid-Sized Business, in order to receive aid under these programs, an eligible business must be a US company, have significant operations in the US, and have a majority of its employees based in the US. An “eligible business” is defined in Section 4002 of the CARES Act as (i) an air carrier or (ii) a United States business that has not otherwise received adequate economic relief in the form of loans or loan guarantees provided under the CARES Act. The CARES Act does not define the term “business” and further does not state whether companies must satisfy the criteria for emergency aid on an entity by entity basis or on a controlled group basis. Nevertheless, the fact that the CARES Act refers to the “parent” and “affiliates” of an eligible business suggests that the criteria are applied on a standalone entity, rather than controlled group, basis.

Prohibition on Stock Buybacks, Dividends and Capital Distributions

The eligible business must agree to not (i) conduct any stock buybacks, (ii) pay dividends, or (iii) make capital distributions, until twelve (12) months after the loan is repaid. (In the case of an entity that receives financing as a Mid-Sized Business, it appears that the prohibition may not continue to apply for the 12 month period after the loan is repaid. See discussion below in the Unanswered Questions Section.)

Requirement to Maintain Employment Levels for Companies Seeking Direct Government Assistance

In addition to the above requirements, an eligible business must agree to the following restrictions with regard to its employee workforce:

  • In the case of airlines and related eligible businesses, cargo air carriers, and businesses critical to national security that intend to receive aid, the eligible business must agree to maintain its current employment level through September 30, 2020, to the extent practicable and, in any event, to not reduce its employment level by more than 10% of its employment level as of March 24, 2020.
  • In order to apply for a loan, a Mid-Sized Business must certify that the funds received will be used to retain at least 90% of its workforce at full compensation and benefits until September 30, 2020. It must also agree to restore its workforce to certain levels after the threat of coronavirus ends and to not outsource jobs or send jobs offshore for two (2) years after the loan is repaid.
  • Except for airlines and related eligible businesses, cargo air carriers, businesses critical to national security, and Mid-Sized Businesses, the CARES Act does not appear to include an express requirement that other eligible businesses maintain a specified level of employment. However, the Treasury’s broad authority to establish the terms and conditions on which loans, loan guarantees and other investments may be made may allow it to require an eligible business to maintain employment levels as a condition of receiving aid.

Note: Title I of the CARES Act contains provisions for loans to certain eligible businesses with up to 500 employees, but the loans do not appear to require the same restrictions regarding employment levels described above, or compensation and benefits described below.

Compensation Restrictions for Companies Seeking Direct Government Assistance

With the possible exception of Mid-Sized Businesses, which do not appear to be subject to such restrictions (see discussion below in the Unanswered Questions Section), an eligible business that receives direct government aid pursuant to Title IV of the CARES Act must agree to restrict compensation paid to certain highly compensated employees and executives during the period beginning on the date the agreement is executed through the date that is one (1) year after the loan or loan guarantee is no longer outstanding (the “Restricted Period”) as follows:

  • Employees or officers who received more than $425,000 in total compensation in calendar year 2019 cannot receive total compensation in any period of twelve (12) consecutive months during the Restricted Period that exceeds the total compensation amount that was received during calendar year 2019. Such employees also cannot receive severance pay during the Restricted Period that is more than twice the compensation received during calendar year 2019.
  • Employees or officers who received more than $3,000,000 in total compensation in calendar year 2019 cannot receive total compensation in any period of twelve (12) consecutive months during the Restricted Period that exceeds the sum of: (i) $3,000,000 and (ii) fifty percent of the excess over $3,000,000 that was received during calendar year 2019. For example, if an employee received $8,000,000 during 2019, such officer’s compensation would be limited to $5,500,000 ($3,000,000 + (50% of $5,000,000)) during any period of twelve (12) consecutive months during the Restricted Period.
  • For purposes of these restrictions, the definition of total compensation includes salary, bonuses, awards of stock, and other financial benefits provided to such employees by the eligible business.

Unanswered Questions

Lack of Guidance on Timing and Value of Compensation “Received” and application to partnerships

The CARES Act does not provide sufficient guidance on how compensation amounts are to be valued and when amounts are considered received for purposes of applying the compensation restrictions described above. Simply using the compensation that is required to be included in income for federal tax purposes during a certain period does not seem like a practical approach, as many elements of compensation are not included in income until years after the year in which the decision to grant or award or pay such compensation is made. Consider the following examples of open questions on this point:

  • In applying these rules, would the “base salary” amount include only the amount paid during the applicable period or would the amount include any value that was deferred pursuant to a qualified or nonqualified deferred compensation plan?
  • For annual bonuses, does the amount included relate to the year that the bonus is actually paid to the employee or the year in which the bonus is earned and accrued for accounting purposes?
  • For equity awards, does the amount relate to the year that such award is settled and an amount is included for federal tax purposes or does the amount included relate to the year in which such award is granted with the amount equal to the fair value for accounting purposes (or the years over which such award is expensed for accounting purposes)?

In addition, the guidance does not provide detail on how the compensation limitations listed above would apply to partners in a partnership who are not treated as employees for federal tax purposes. Guidance on these questions will be needed for most employers to be able to apply the rules.

Treatment of Mid-Sized Businesses

Certain restrictions contained in the Act apply to loans and loan guarantees to, and other investments in, all “Other Eligible Businesses,” which would appear to include lending to a Mid-Sized Business; these conditions include the requirement that the borrower not make dividend distributions or engage in buybacks until 12 months after the loan is repaid and that the borrower adhere to the compensation restrictions described above. The special lending program established by the CARES Act for Mid-Sized Businesses, however, contains a set of separately stated requirements that include a prohibition on dividends and stock buybacks that apply only for the period of the loan and that, significantly, do not include the compensation restrictions described above. Further guidance is needed on the reconciliation of these requirements as they apply to Mid-Sized Businesses.

Employer Considerations Related to Acceptance of Emergency Aid

  • Consider shareholder-relations response and related communications to an agreement to not (i) conduct any stock buybacks, (ii) pay dividends, or (iii) make capital distributions, until twelve (12) months after the loan is repaid.
  • Determine whether maintaining employment and compensation levels is economically possible, even with the assistance of the loan or loan forgiveness. Determine whether any compensation restrictions would require an amendment to any agreement with any executive or employee and whether such amendment would require consent.
  • Consider communication of compensation restrictions to the affected employees and strategy for any retention concerns that may arise in connection with the limitations.

Payroll Tax Credits and Deferral

Employee Retention Credit

The CARES Act includes a refundable “employee retention credit” for employers whose business was fully or partially suspended as a result of COVID-19, or who have a significant decline in gross receipts, to encourage continued payment of employee wages and continued coverage under employer sponsored health plans. The refundable credit generally equals 50% of each employee’s “qualified wages” paid on or after March 13, 2020 through December 31, 2020. As discussed below, whether wages constitute “qualified wages” is determined on a quarterly basis; the maximum amount of qualified wages taken into account for any employee for all quarters in 2020 is $10,000; as a result, the maximum credit per employee is $5,000. The employee retention credit can be applied to the first $10,000 of “qualified wages”—that is, it need not be spread over the entire period.

The employee retention credit is a credit against applicable employer payroll taxes and is limited to the employer’s employment taxes, reduced by certain other credits; to the extent that the amount of the qualified wages exceeds the amount of payroll taxes for any quarter, such excess amount is treated as an overpayment and is refunded to the employer. Several provisions prevent duplication, including that an employer will not get a credit for an employee for which it is already getting a work opportunity tax credit. In addition, wages taken into account for the employee retention credit won’t be considered for purposes of the paid family medical leave credit under Section 45S of the Internal Revenue Code of 1986, as amended (the “Code”).

Eligible Employers

An eligible employer is an employer carrying on a trade or business during 2020 that meets one of the following criteria with respect to a calendar quarter:

  • The employer’s trade or business is fully or partially suspended during such quarter due to government orders limiting commerce, travel, or group meetings due to COVID-19.
  • The quarter falls in the “significant decline period.” The significant decline period is the period beginning with the first quarter beginning after 2019 in which the employer’s gross receipts during the quarter are less than 50% of those for the same calendar quarter in the prior year, and ending with the first quarter following the first quarter in which the employer’s gross receipts are greater than 80% of its gross receipts for the same calendar quarter in the prior year.

Tax-exempt organizations also qualify. The federal government, state governments and any political subdivisions (e.g., local and city governments), and their related agencies and instrumentalities are not eligible employers. In addition, employers receiving small business loans under Section 1102 of the CARES Act are not eligible employers for this purpose. An employer may opt out of receiving the credit, using procedures to be developed by the Treasury Secretary.

Qualified Wages

The definition of “qualified wages” depends on the size of the employer, determined on a controlled group basis, and in each case, is limited to $10,000 per employee for all calendar quarters. For employers that had 100 or fewer full-time employees in 2019, “qualified wages” includes all wages and compensation paid by the eligible employer during the applicable period (i.e. a period during which business is suspended as a result of a government order due to COVID-19 or a calendar quarter that meets the reduction in gross receipts test). For organizations that had more than 100 full-time employees in 2019, “qualified wages” include only wages and compensation paid to employees who are not providing services due to the reasons making the employer eligible for this credit (i.e., either as a result of a suspension of business pursuant to a governmental order due to COVID-19 or a reduction in gross receipts), which wages may not exceed typical wages for the 30 days immediately preceding such period. The Affordable Care Act definition of “full-time employee” (generally, an employee employed, on average, for at least 30 hours of service per week, or 130 hours of service per month) applies..

In each case, “qualified wages” includes not only wages (as defined in Section 3121(a) of the Code) and compensation (as defined in Section 3231(e) of the Code), but also all amounts paid by the employer for the employee’s group health plan coverage, provided those amounts are excluded from income under Section 106(a) of the Code. Guidance will be provided on how to allocate health plan expenses. Initially, allocating health plan expenses pro rata among employees and pro rata on the basis of coverage dates will be treated as reasonable. The inclusion of this expense in the definition of qualified wages seems intended to incentivize employers to permit employees to remain in any employer sponsored health plan.

Unanswered Questions 

Employer Definition and Controlled Group Application

As noted above, the rules for employee retention credits must be applied on a controlled group basis, using 50% as the standard for ownership for the controlled group analysis rather than the 80% standard that is often used for controlled groups of corporations or trades or businesses. However, several other sections of the CARES Act are not clear as to whether they will be applied on a controlled group basis. For example, it is possible that a small joint venture of two larger groups of corporations will be permitted to take a loan pursuant to Section 1102 of the CARES Act as a small employer (although such section also includes an analysis of affiliates for determining eligibility as a small business). However, if such a joint venture was eligible and took such a small business loan but would be considered part of the controlled group for purposes of this payroll tax credit section, the larger group of corporations would need to consider whether the loan taken by the joint venture would cause them to not be eligible for this credit.

Although the CARES Act provides that the controlled group standard applies to the whole of Section 2301 for the payroll tax credit, the provisions defining an eligible employer by reference to a suspension of operations appear to be specific to a trade or business, while the alternative criteria (a decline in gross receipts) is more ambiguous as to whether it is measured on a controlled group or trade or business basis. Application of the decline in gross receipts standard on a controlled group basis could create difficulty for employers with multiple lines of businesses—under this approach, unless the gross receipts are reduced on an entire controlled group basis by more than 50%, the employer would be ineligible based on the “gross receipts” standard. However, the employer could still be eligible if such employer has fully or partially shut down one or more operations that constitute a trade or business and any of the shutdowns are as a result of a government order rather than just a decline in gross receipts.

Finally, for large employers or controlled groups of corporations doing business in several cities and states, the analysis of the application of this credit will likely depend on an analysis of governmental orders in all of those cities and states. While the content and the specific language of each of these orders is beyond the scope of this client alert, Mayer Brown is frequently updating guidance for employers on the language and the content of such orders here.

Payroll Tax Deferral

Employers and self-employed individuals are generally responsible for paying federal payroll taxes—for employers, a 6.2% employer share (often referred to as FICA or, for railroad employers, the RRTA) and for self-employed individuals, 12.4% covering both the employer and employee share (often referred to as SECA). The CARES Act permits employers and self-employed individuals to defer paying the employer share of federal payroll taxes covering the period from March 27, 2020 through December 31, 2020 (which, as noted above, is the 6.2% employer share for employers and is half of the 12.4% otherwise due for self-employed individuals, or 6.2%). Half of the deferred payment must be remitted by December 31, 2021, and the remainder must be remitted by December 31, 2022. The payroll tax deferral does not apply to the employer share of Medicare taxes.

This payroll tax deferral provision seems intended to broadly help all employers save cash for the remainder of 2020 to use for other critical purposes. Generally, all employers are eligible to defer payroll taxes, except for those employers receiving loan forgiveness under the CARES Act. Therefore, an employer should carefully consider which benefit will be more advantageous— loan forgiveness, or the ability to defer payroll taxes. Those otherwise responsible for remitting the payroll taxes under applicable law (including individuals and professional employer organizations) will not be held liable for payment of any delayed payroll taxes—only the employer will be responsible for payment.

Employer Considerations Related to Payroll Tax Credits and Deferral

  • Consider whether the benefit of the employee retention credits provided under the CARES Act would be duplicated (or negated) by any previously-existing tax credit, such as a work opportunity tax credit.
  • Determine whether deferral of payroll taxes or the receipt of a small business loan or loan forgiveness of such small business loan under the CARES Act would be more economically beneficial to the employer.

Clarifications to the Families First Coronavirus Relief Act (FFCRA)

As discussed in more detail in Mayer Brown’s March 19, 2020 Legal Update—US Employers Should Pay Close Attention to New Legislation Requiring Paid Leave Related to the COVID-19 Pandemic, the Families First Coronavirus Relief Act (“FFCRA”) was enacted on March 18, 2020. The FFCRA, which took effect on April 1, 2020, requires employers with 500 or fewer employees to provide two new paid leave programs for employees who must miss work as a result of specified COVID-19 related reasons: (1) up to two weeks of emergency paid sick leave, and (2) up to 12 weeks of expanded family and medical leave under the Family and Medical Leave Act (“eFMLA”) (the first two (2) weeks of which are unpaid, but as a practical matter, are likely to be compensated by way of emergency paid sick leave). Under the FFCRA, employers are entitled to receive a dollar-for-dollar refund or credit from the government for the qualified wages paid to employees when providing sick leave pursuant to the FFCRA, in addition to the cost of qualified health plan expenses paid by the employer and the employers’ share of Medicare tax imposed on those wages.

The CARES Act amended and clarified certain aspects of the FFCRA, as detailed below:

  • Tax-Credit Advances for Paid Sick and eFMLA Leave
    When it was initially passed, the FFCRA provided that employers would pay the costs of paid sick leave and eFMLA up front, and thereafter receive full reimbursement of the amounts paid for leave first through a payroll tax credit, and if the credit did not suffice, through a refund payment. To address cash-flow concerns raised by small businesses, the CARES Act permits employers to request an advance from the government of the anticipated tax credits and refunds pursuant to instructions provided by the Department of Treasury. The CARES Act further provides that an employer will not be penalized for failing to deposit employer-side payroll taxes if such failure was in anticipation of receiving a tax-credit for paid sick and eFMLA leave.
  • Employers May Choose to Pay Employees More Than the FFCRA Requires for Paid Leave
    As originally drafted, paid sick and eFMLA leave could not exceed certain specified monetary limits. The CARES Act amended the FFCRA so that it now states that employers “shall not be required” to pay employees more than the monetary limits in the FFCRA. In doing so, the amendment permits employers to provide their employees with compensation above the monetary limits set forth in the FFCRA if they wish to do so—which additional compensation will not be refundable via a tax credit/refund.
  • Rehired Employees are Eligible for eFMLA Without Prior Waiting Period
    The CARES Act clarifies that an employee who is laid off on or after March 1, 2020, and subsequently rehired by the same employer, is eligible for paid leave under the eFMLA, so long as the employee was employed by the employer for at least 30 of the last 60 calendar days prior to layoff. As a result, rehired employees will be immediately eligible for eFMLA, without having to satisfy any 30-day of employment waiting period during the post-rehire period.
  • Reimbursements for Federal Contractors
    The CARES Act gives federal agencies, through September 30, 2020, the ability to reimburse federal contractors for paid leave (up to an average of 40 hours per week and subject to other limitations) provided that the contractor keeps employees or subcontractors “in a ready state” to the extent the contractor’s employees or subcontractors cannot perform work at their duty station or telework because their job duties cannot be performed remotely during the COVID-19 public health emergency.

Notably, employers that receive payroll credits pursuant to the FFCRA may also receive benefits under the Paycheck Protection Program and the Retention Credit (assuming the other meet the applicable requirements), provided that the wages for which the employer received tax credits under FFCRA are not included in the wages for which the retention credit is provided or the PPP loan is calculated.

Small Business Administration (SBA) “Paycheck Protection Program” Loans

The CARES Act created the Paycheck Protection Program (PPP) authorizing eligible employers to apply for loans up to $10 million to cover up to eight (8) weeks of payroll costs (including employee wages, commissions and benefits) and most rent, mortgage interest and utility costs. An eligible employer may receive a loan equal to up to 2.5 times the employer’s payroll costs, capped at $100,000 per employee.

The loan is forgivable, provided the employer: (a) continues employing the employees whose wages it includes in determining the PPP loan amount through June 30, 2020; (b) does not reduce such employees’ salaries by more than 25 percent; and (c) uses the loan proceeds for eligible expenses. In the event the employer uses the loan to pay non-payroll expenses, no more than 25 percent of the loan will be forgiven.

All business with 500 or fewer employees, including nonprofits, sole proprietorships, self-employed individuals and independent contractors, may apply for an SBA loan, as long as they qualify as a “small” business under the SBA’s industry-specific thresholds. These rules differ for certain types of employers. For instance, a hospitality or food services employer may qualify for a loan if it employs fewer than 500 workers per physical location.

Importantly, the test for determining whether an employer meets the 500 or fewer employee threshold under the PPP is different for most employers from the test utilized under the FFCRA. Specifically, eligibility under the PPP is governed by the SBA’s broad “affiliation standards,” pursuant to which business concerns and other entities or individuals are deemed to be affiliates of each other if (1) one business controls or has the power to control another (irrespective of whether the power is exercised), or (2) a third party (or parties) controls or has the power to control both businesses. Control may exist through ownership, management, or other relationships or interactions between the parties.

Mayer Brown attorneys provide highlights of the PPP here, and they answer some frequently-asked questions on the PPP here.


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