Benefits Guidance in the Time of COVID-19: Employer Payroll Tax Relief in the Families First Coronavirus Response Act

The Families First Coronavirus Response Act (the “Act”), which we detailed in a previous Advisory, requires private employers with fewer than 500 employees (“covered employers”) to provide paid sick leave (“Emergency Paid Sick Leave”) and family leave (“Public Health Emergency Leave”) for certain COVID-19 related absences and includes a tax credit for employers for the cost of the paid leave.

As covered employers prepare to meet these requirements, questions have arisen related to the payroll tax relief associated with these payments.  This update addresses some of these questions based on the guidance available at this moment.

1. When are tax credits available to eligible employers?

Eligible employers will be able to claim payroll tax credits based on qualified leave taken by their employees between April 1, 2020, the effective date of the Act, and December 31, 2020.  These employers qualify for dollar-for-dollar reimbursement through tax credits for all qualifying wages paid under the Act.  Qualifying wages are those paid to an employee who takes leave under the Act for a qualifying reason, up to the appropriate per diem and aggregate payment caps.  Applicable tax credits also extend to amounts paid or incurred to maintain health insurance coverage.

Note also that under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) passed by the U.S. Senate on March 26, 2020, employers will most likely be able to postpone payment of the employer payroll taxes they do owe for 2020.  Unless modified before enactment, the CARES Act would permit 50 percent of employer payroll taxes for 2020 to be payable on December 21, 2021, with the other 50 percent to be payable on December 31, 2022.

2. How will the payroll tax credits under the Act work?

While the Act as passed provided for a tax credit on Emergency Paid Sick Leave against the employer’s portion of Social Security taxes, a joint statement issued on March 20, 2020 by the Department of Treasury,  Internal Revenue Service (IRS), and the Department of Labor (IR-2020-57) (the “Joint Statement on the Act”) clarified that the employer tax credit under the Act includes employee income tax withholding, and both the employee and employer portion of Social Security and Medicare taxes.  Emergency Paid Sick Leave provided under the Act is credited against these payroll taxes, and any excess is refundable on an expedited basis.

The Joint Statement on the Act elaborates on how the Act caps the tax credit available to eligible employers to equal the amount of Emergency Paid Sick Leave and Public Health Emergency Leave taken by eligible employees.  The Act allows each eligible employer to retain total payroll taxes up to the amount of the credit, rather than having to deposit those amounts quarterly to the IRS.  If the total Emergency Paid Sick Leave taken exceeds the employer’s payroll tax liability for a quarter, an eligible employer can request an expedited cash refund using a streamlined form that the IRS will release this week.

3. How will the mechanics of the credit work?

 For example, if an employer pays $100,000 in paid sick leave under the Act, and the employer’s total payroll tax liability for the quarter is $150,000, the employer would only need to make a quarterly payroll tax deposit of $50,000.  If the employer pays $100,000 in Emergency Paid Sick Leave under the Act, and the employer’s total payroll tax liability for the quarter is $50,000, the employer would make no payroll tax deposits to the IRS for that quarter, and could request an expedited credit refund of $50,000, based on procedures soon to be announced.

4. Is there any other administrative guidance at this time?

The Joint Statement on the Act previewed the formal administrative guidance that will be forthcoming.  Formal guidance may set forth additional requirements or distinctions regarding the application of employer tax credits with respect to qualified leave under the Act.  The CARES Act also appears to provide that employers can seek advance refunds of the payroll tax credit for Emergency Paid Sick Leave and Public Health Emergency Leave refunds using forms and instructions to be provided by the IRS, and further instructs the IRS to waive any penalties payable by employers for failure to deposit payroll taxes, if the failure were due to an anticipated payroll tax credit for Emergency Paid Sick Leave and Public Health Emergency Leave.

5. Are private employers that are part of a larger group of related companies eligible for payroll tax credits provided by the Act, if their combined employee totals equal or exceed 500 employees? 

According to guidance published by the Department of Labor (the “DOL Q&As”) if two or more entities are part of an integrated employer under the Family Medical Leave Act  (“FMLA”), which the Act amends, then employees of all entities making up the integrated employer count.  The DOL Q&As state that the relevant count is whether, at the time the employee is to take leave, the employer has, in total, fewer than 500:

1. full-time and part-time employees within the United States (including any State, the District of Columbia, or any Territory or possession of the United States);

2. employees on leave;

3. jointly employed temporary employees; and

4. day laborers supplied by a temporary agency.

The Act does not regard workers who are independent contractors under the Fair Labor Standards Act (the “FLSA”), rather than employees, as employees for purposes of the 500-employee threshold.

Unlike the Public Health Emergence Leave provisions of this Act, the Emergency Paid Sick Leave provisions do not specifically amend, or become part of, an existing substantive law like the FMLA or the FLSA.  However, companies subject to the FMLA already must provide unpaid sick leave (whereas state law has governed general paid sick leave requirements).

Neither the Act nor the DOL Q&As specify that the integrated employer concept applies for purposes of counting employees under the Emergency Paid Sick Leave provision.  Thus, it is unclear whether there is an intended distinction under the Act as to whether an employer who may equal or exceed 500 employees under an FMLA integrated employer analysis would still be eligible to claim payroll tax credits for paid sick leave so long as it is not a joint employer surpassing the employee thresholds.

6. How should an employer proceed if unclear whether they are part of an integrated employer?

It seems reasonable to argue that an employer who is an integrated employer under an FMLA analysis, who would have been subject to unpaid sick leave obligations prior to the passage of the Act, should apply the same analysis to determine whether it is eligible for the credits associated with providing paid sick time under this Act.  However, DOL may elect to clarify this issue in forthcoming regulations or other guidance materials.

For the time being, employers with fewer than 500 employees but that are part of a potential integrated employer with 500 or more employees face a choice: (1) provide paid sick leave and risk taking the tax credit erroneously, or (2) do not provide the paid sick leave under the terms of this Act (unless other State requirements apply) and risk a deemed violation of the FLSA.  For employers presented with this dilemma, a practical approach may well be to provide the paid sick leave under the terms of this Act and take the tax credit.

As set forth in the Internal Revenue Service’s IR-2020-57, DOL issued guidance in Field Assistance Bulletin 2020-1 (March 24, 2020) (the “FAB”) providing a temporary 30-day non-enforcement policy of violations of the Act (from March 18 through April 17, 2020) for employers that acted reasonably and in good faith as defined therein.  Thus, employers will need to monitor guidance and determine in the coming weeks whether they need to take any corrective actions.  For purposes of this non-enforcement policy, it is worth noting that footnote 3 of the FAB also provides that employers who are eligible for tax credits but that have insufficient cash flow should make payment of sick leave or family leave wages as soon as possible, but not later than seven calendar days after the employer has withdrawn an amount equal to the required paid sick leave and expanded family and medical leave wages from the employer’s federal payroll tax deposits or, to the extent such deposits are not sufficient, has received a refund of the credit amount from the IRS to cover the required wages.

7. How does the FMLA identify an integrated employer?  

The FMLA regulations provide that whether separate entities are an integrated employer depends on the entire relationship in its totality, not one single criterion.  Factors considered in determining whether two or more entities are an integrated employer include:

1. common management;

2. interrelation between operations;

3. centralized control of labor relations; and

4. degree of common ownership/financial control.

Employers must consider these integrated employer issues before using the payroll tax credit procedures because there is no guarantee that the payroll tax credits will be available if integration with one or more other entities takes the employee count to 500 or more.  Of course, Congress may still enact additional laws requiring all employers to provide the paid leave and sick time regardless of payroll tax credits.  Employers should closely monitor any further statutory and regulatory developments.