Labor and Employment Issues in the CARES Act
On March 27, 2020 the House passed the Coronavirus Aid, Relief and Economic Security Act (CARES Act) – the largest stimulus package in U.S. history – in response to the economic crisis caused by the coronavirus pandemic. The stimulus package, immediately signed into law by President Trump, contains a variety of provisions related to employment, including offering employers access to loans, loan guarantees, tax credits and delays, unemployment insurance, and other relief to help them navigate the ongoing crisis. Despite the welcomed financial assistance, employers need to be aware of potential consequences that result from taking advantage of the opportunities offered by the stimulus package.
Loans and Loan Guarantees
The CARES Act allocates $500 billion for loans, loan guarantees and other investments by the federal government. Of that, $454 billion is set aside for general relief to businesses. Congress reserved the remaining $46 billion for passenger air carriers, cargo air carriers and businesses critical to national security. The Secretary of the Treasury (the Secretary) is to determine all interest rates and conditions on the loans, which will not be issued for terms of more than five years. On or before April 6, 2020, the Secretary will publish procedural information regarding applications and minimum requirements for the available loans. Companies seeking loans must agree to maintain current levels of employment until September 30, 2020, to the extent practicable and must agree not to reduce employment levels by more than 10 percent from the levels on that date. While the CARES Act does not explicitly dictate all conditions that will be imposed upon borrowers, there will likely be employment ramifications, including guidelines on executive compensation and union organizing.
The CARES Act imposes additional restrictions on borrowers following the loan repayments. For twelve months following the repayment of the loan, a borrowing company cannot:
Repurchase its own publicly-traded stock.
Pay dividends on its common stock.
Increase the compensation or enhance the current severance packages of certain highly-compensated employees.
The first restriction dictates that neither borrowing companies nor their affiliates may repurchase their own equity securities that are listed on a national exchange unless that the borrowing company is contractually obligated to do so. The third restriction prohibits increases in compensation and payments of severance more than twice the value of total compensation for 2019 for employees whose total compensation exceeded $425,000 in 2019. There are additional restrictions for officers and employees whose total compensation in 2019 exceeded $3 million.
Loans to Mid-Sized Businesses
The CARES Act also authorizes the Secretary, in his discretion, to create a lending program to benefit mid-sized businesses with between 500 and 10,000 employees. With a two percent annual interest rate cap and a six-month grace period before any payments are due, these mid-sized business loans appear very attractive, but there are some strings attached. Like the general loans, mid-sized business must agree to not repurchase publicly-traded equity securities or pay dividends on outstanding common stock. These prohibitions last for the duration of the loan. The most pertinent conditions imposed on employers in these stimulus package loans involve the workforce, compensation and labor relations.
Any funds received as part of a mid-sized business stimulus package loan must be used to retain at least 90 percent of the business’ workforce – at full compensation and benefits – until September 30, 2020. The borrower must also agree to restore the workforce, and all compensation and benefits, to at least 90 percent of the level that existed at February 1, 2020 within four months of the end of the public health emergency. In addition, the borrower must agree to not outsource or create offshore jobs for two years following the repayment of the loan. Finally, there are two provisions dealing with the borrower’s union relations.
The CARES Act requires that “the recipient will not abrogate existing collective bargaining agreements for the term of the loan and two years after completing the repayment of the loan.” This prohibition on abrogating existing collective bargaining agreements is drafted broadly. Although the CARES Act does not explicitly define “abrogate,” this prohibition may affect any concession bargaining in which unionized businesses plan to engage prior to the expiration of any current collective bargaining agreements. This provision remains in the effect for the term of the loan plus two years after completing repayment of the loan – up to seven years in total.
The second union relations provision requires all mid-sized businesses that apply for these loans to “make a good-faith certification that the recipient will remain neutral in any union organizing effort for the term of the loan.” The CARES Act provides no further guidance as to the exact meaning of “remain neutral,” so the effects could be substantial. Typical neutrality agreements cover anything from an agreement not to campaign against unionization to an agreement to recognize the union without an election if the union presented the employer with a majority of signed union authorization cards. While it is still too early to forecast precisely what neutrality requirements will be imposed, at a minimum, employers will be restricted to some degree in efforts to avoid labor organization. The provision remains in effect for the term of the loan.
Other significant CARES Act conditions on loans to mid-sized business include executive compensation, severance and dividend restrictions. On executive compensation, during the life of the loan and for one year after it is paid off:
If compensation exceeded $425,000, total compensation is capped at the amount received in calendar year 2019.
If compensation exceeded $3 million, total compensation is capped at $3 million plus 50 percent of the excess over $3 million of compensation received in calendar year 2019.
In addition, the loan recipient must not pay dividends with respect to the common stock of eligible business, or repurchase an equity security that is publicly listed, except to the extent required under a contractual obligation.
Paycheck Protection Program
In addition to general loans and mid-sized business loans, the CARES Act also authorizes loans for small businesses to cover payroll costs for the next several months. The CARES Act broadly defines “payroll costs” to include salary, wages and commission; tips; vacation, parental, family, medical or sick leave pay; severance allowances; health care benefits, including insurance premiums; retirement benefits; and all state and local taxes assessed on employee compensation. Eligible businesses may apply for these loans to fully cover payroll costs from February 15, 2020, to June 30, 2020. Loans from the Paycheck Protection Program may also be used for mortgage obligations, rent, utilities and interest on any other previously-incurred debt obligations. Any company that receives a loan through the Paycheck Protection Program can seek forgiveness of that loan by meeting specified criteria including refraining from laying off employees. The amount of loan forgiveness will be reduced if the company ultimately lays off employees.
Typically, a business must have fewer than 500 employers to be eligible taking into account Small Business Administration rules that can aggregate affiliated companies for counting purposes. There are some exceptions. Businesses in the accommodation and food services industry that employ 500 or fewer employees in a single location are eligible. Also, any small business operating as a franchise that is assigned a certain identifier by the Small Business Administration and any small business that already received certain assistance under the Small Business Investment Act is eligible. Individuals who operate as sole proprietorships or as independent contractors are also eligible to apply for these loans, with applications considered on a case-by-case basis upon review by the Administrator or the Secretary of the Treasury of applicant’s payroll tax filings, Form 1099s, and income and expenses.
In addition to the protections for employers, the CARES Act substantially expands the amount and duration of unemployment benefits. In some situations, employees could actually receive more money through unemployment benefits than they would have received in compensation had they been working. Unemployed individuals are deemed eligible for unemployment benefits under applicable state requirement, including any modified eligibility requirements issued in response to the coronavirus outbreak. Should individual states choose to enter into agreements with the federal government under this section of the CARES Act, eligible individuals will receive weekly payments equal to the amount determined under state law plus an additional $600. Eligibility is not based solely on closures attributed to the coronavirus outbreak, but individuals who are able to work remotely with pay or individuals receiving paid sick leave or other paid leave benefits are not eligible.
Unemployment benefits will be available for eligible individuals for 39 weeks. That 39 weeks includes any weeks for which the eligible individual “received regular compensation or extended benefits under any Federal or State law.” The CARES Act explicitly leaves open the possibility of extending the 39-week limitation. Unemployment assistance authorized under the CARES Act is retroactively available to January 27, 2020. The CARES Act also eliminates all waiting periods previously required before an eligible individual could receive unemployment benefits. Individuals who have exhausted all rights to regular state, federal and Canadian unemployment benefits may still be eligible for benefits under the CARES Act.
In a time of uncertainty and economic crisis, the need for financial stability is substantial. It is crucial that employers are aware of how government-issued assistance will affect business operations in the long run. If you have any questions about the labor and employment provisions included in the CARES Act stimulus package, or if you have any other labor and employment issues, please contact any attorney in Faegre Drinker’s Labor and Employment practice group.