Legal Alert

CARES Act Loans Come with Labor and Employment Strings Attached

by the Labor and Employment Group
March 27, 2020

This morning, the House of Representative passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and President Trump is expected to sign the bill immediately. The CARES Act provides emergency assistance and health care support for individuals, families, and businesses affected by COVID-19. Its two loan programs—one for small businesses and one for larger businesses—are targeted to help businesses currently struggling because of COVID-19. But, as employers consider whether to apply for loans or loan guarantees under the CARES Act, they should be aware of certain labor and employment “strings” attached to that assistance.

First, the Keeping American Workers Paid and Employed Act (Title I), allows the Small Business Administration (SBA) to provide smaller businesses with loans under the “Paycheck Protection Program.” The loans under this program are available to any company with no more than 500 employees and to larger companies in certain industries, as approved by the SBA.

Second, the Coronavirus Economic Stabilization Act of 2020 (Title IV), provides $500 billion to the Secretary of Treasury for loans, loan guarantees, and investments to eligible businesses. Those businesses include air carriers, and any other domestic businesses that have not otherwise received adequate economic relief through the CARES Act. Title IV also makes a loan facility available to nonprofit organizations and mid-size businesses with between 500 and 10,000 employees. The loan facility will offer loans with annual interest rates no higher than 2 percent and no payments due within the first six months.

Title I: Keeping American Workers Paid and Employed Act

Loans made under Title I to small businesses may be used to cover both wages owed to employees and payments owed to independent contractors. Funds under this program can also be used to cover payment for group health benefits, including insurance premiums and the cost of continuing group health coverage during periods of qualifying paid sick, medical, or family leave under the Families First Coronavirus Response Act (FFCRA), and payment for any retirement benefits or applicable state and local wage taxes. These loans waive interest for the first six months, and are eligible for forgiveness of amounts used for payroll, mortgage/rent payments and utility payments after one year if the business was in operation on February 15, 2020. Both the loans and the forgiveness program come with labor and employment conditions:

Restrictions on Highly Compensated Employees. No employee being paid with funds received through the Paycheck Protection Program may receive compensation of more than $100,000 annually. In addition, employees who earn wages or salaries that exceed $100,000 may have their salaries reduced without the amount of their employer’s loan forgiveness being reduced.

Current Employment Levels and Salaries Must Be Maintained. The amount of loan forgiveness, which can be up to 100%, is reduced by a proportional amount when the employer: (1) terminates the employment of employees; and/or (2) decreases employee salaries during the “covered period,” which lasts from February 15, 2020 through December 31, 2020.

Title IV: Coronavirus Economic Stabilization Act of 2020

The requirements for Title IV loans are different depending on whether the loans are provided under the section addressing airlines and other eligible businesses, or the section applicable to nonprofits and mid-size businesses.

For Title IV funding, an airline or other eligible business that seeks a loan must agree to maintain current employment levels as of March 24, 2020, to the extent practicable, and, in any event, not reduce staffing by more than 10 percent before September 30, 2020.

Nonprofit organizations and mid-size businesses that seek loans from the Loan Facility under Title IV are subject to much broader conditions:

Funds Must Be Used Primarily for Employees. At least 90 percent of the funds must be paid to the employer’s workforce, at full compensation and benefits, until September 30, 2020.

Current Employment Levels Must Be Maintained. The employer must retain at least 90 percent of its employees as of the time the loan is received at full pay through September 30, 2020. The employer also must sign a good faith certification that, no later than four months after the Federal public health emergency declaration ends, it will restore to full compensation and benefits not less than 90 percent of its employees whose employment was terminated or whose compensation was reduced between February 1, 2020 and the time of the loan.

No Outsourcing and No Abrogation of CBAs. The employer must not outsource or offshore any jobs or abrogate any existing collective bargaining for the term of the loan, as well as for two years after completion of repaying the loan.

Employer Must Remain Neutral. The employer must agree to remain neutral in any union organizing effort throughout the term of the loan.

Restrictions on Highly Compensated Employees. Employers may not increase salaries for officers and employees whose compensation exceeded $425,000 in 2019, or offer those employees severance pay or other benefits upon termination of more than twice their maximum total compensation for the year. These restrictions apply during the course of the loan and for one year thereafter. However, these restrictions do not apply to employees whose compensation is determined through an existing collective bargaining agreement that was entered into prior to March 1, 2020.

There are additional restrictions for officers and employees whose compensation exceeded $3,000,000 in 2019. Those employees and officers are prohibited from earning more than $3,000,000 plus 50 percent of any amount of their compensation that exceeded $3 million in 2019.

1. Note that the date from which employment levels must be maintained for Title I loans is February 15, 2020, whereas for Title IV loans they are measured from March 24, 2020 for airlines and eligible businesses, or from February 1, 2020 for mid-size businesses or non-profit organizations that have received loans through the Loan Facility.

Copyright © 2020 by Ballard Spahr LLP.
(No claim to original U.S. government material.)

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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.

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