On March 27, 2020, President Trump signed the “Coronavirus Aid, Relief, and Economic Security Act.” The CARES Act makes significant changes to the unemployment compensation structure for all employers, including governmental entities and non-profit organizations. The CARES Act also implements a Paycheck Protection Program, which is designed to provide a direct incentive for small businesses to keep their workers on payroll by providing businesses with less than 500 employees with a loan up to $10 million for payroll and certain other expenses. In addition, the CARES Act provides employers with payroll tax relief. These changes and programs are summarized as follows.
Unemployment Benefits and Programs
Expansion of who may receive benefits: The CARES Act (Section 2102) authorizes payment of unemployment compensation benefits for individuals who were not previously eligible under federal or state law (such as self-employed individuals or employees with insufficient work histories). Individuals who can telework or who are receiving other paid leave (such as EFMLA leave under the FFCRA) are not eligible for such benefits. An individual will qualify for such benefits, however, if they are unemployed or underemployed for 1 of 11 COVID-related reasons, including:
- They have been diagnosed with COVID-19, or they are experiencing symptoms of COVID-19 and are seeking a medical diagnosis;
- A member of their household has been diagnosed with COVID-19, they are caring for a family member with COVID-19, or their child’s school or daycare is closed because of COVID-19; and
- “the individual has to quit his or her job as a direct result of COVID-19,” which potentially could be read as covering things such as an individual quitting his or her job due to a fear of contracting COVID-19.
Employees will get the weekly benefit rate in the state where they are employed (subject to certain minimum levels of payment), plus the $600 extra Federal Pandemic Unemployment Compensation payment discussed below. Such benefits are available for the period between January 27, 2020 and December 31, 2020, and may be awarded retroactively. An employee’s total receipt of benefits under this section shall not exceed 39 weeks, which includes any weeks in which the employee received benefits under another state or federal law.
Additional benefits for individuals who exhaust their unemployment: The CARES Act (section 2107) provides individuals who exhaust their unemployment compensation benefits with a 13-week extension of benefits, which will be fully reimbursed by the federal government. Employees will get the weekly benefit rate in the state where they are employed (subject to certain minimum levels of payment), plus the $600 extra Federal Pandemic Unemployment Compensation payment discussed below.
Supplemental pandemic payment: The CARES Act (section 2013) provides any individual receiving unemployment compensation benefits with an additional $600 Federal Pandemic Unemployment Compensation payment per week. This $600 payment is available to public and private sector employees and it is not dependent on the amount of benefits received. Thus, if someone is receiving any level of benefits, they will get the $600 supplemental payment. These supplemental payments extend through July 31, 2020, and will be fully reimbursed by the federal government.
Faster claim acceptance: The CARES Act (section 2105) also requires that each state agree to pay unemployment compensation benefits without any waiting period.
Relief for nonprofit and government employers: Nonprofit organizations and governmental entities normally reimburse state governments for 100% of their unemployment claims rather than paying unemployment taxes on an ongoing, prospective basis. In a situation like this, where there are mass layoffs, such a situation can cause such entities and organizations to incur significant bills from the state. The CARES Act (section 2104) provides relief to such entities and organizations in two ways:
- First, the CARES Act provides that the federal government will provide states with money to reimburse governmental entities and nonprofit organizations for 50% of their unemployment claims. This money will be for all unemployment claims for the period March 13, 2020 through December 31, 2020, without regard to the reason for the unemployment claim.
- At this time, the Connecticut Department of Labor has not determined whether the State will only bill such entities and organizations for half of the money paid out for their former/furloughed employees, and then keep the federal reimbursement money, or (2) whether the State will bill such entities and nonprofits the full cost of their employees’ claims and then reimburse the entities and nonprofits 50% of their costs after the State receives the federal money.
- Second, the CARES Act authorizes the Secretary of Labor to issue guidance for states to interpret their unemployment laws in a manner that would provide “maximum” flexibility for reimbursing employers as it relates to timely payments and assessment of penalties and interest. The Connecticut Department of Labor has not issued any such guidance yet, so it remains unclear what additional relief may be provided under this provision of the CARES Act.
- Employees from governmental agencies and non-profit organizations are eligible for the supplemental $600 per week payment through July 31, 2020. Because such payments will be fully reimbursed by the federal government, at this time the cost of those weekly payments is not expected to be passed on to such entities or organizations. Instead, we expect the State to make those payments and then keep the reimbursement it receives from the federal government. The Connecticut Department of Labor is expected to clarify this issue soon.
Payments for reductions in hours: Employees whose hours or pay have been reduced may be eligible for unemployment benefits depending on the rules in each state. Connecticut, for example, considers such matters on a case-by-case basis. The CT Department of Labor also maintains the Shared Work Program, which offers an alternative to layoffs by allowing employers to temporarily reduce an employee’s hours between 10 and 60%, and supplement lost wages with the help of partial unemployment benefits. With such a program already in place, the CARES Act provides that Connecticut can be reimbursed for 100% of the short-time compensation paid under the Shared Work Program. This provision should cover Shared Work benefits paid to employees for private sector employers, as well as reimbursing employers such as governmental entities and nonprofit organizations.
The Paycheck Protection Program
Under the CARES Act, employers with 500 or fewer employees (with certain exceptions) can benefit from the $349 billion Paycheck Protection Program, which is designed to keep businesses operational during this COVID emergency. There are several key aspects of this loan program, which are summarized as follows:
- Who can receive them: Loans are available of up to $10 million per business through qualified SBA lenders, banks, and other financial institutions for employers with up to 500 employees. The amount a company can borrow is based on its average monthly payroll for 2.5 months, and some additional considerations.
- What they can be used for: These loans can be used for expenses in the 10-week period following the loan such as payroll costs, mortgage payments, rent and utility payments, insurance premium payments, and certain other existing debt obligations. There are certain limits on what payroll expenses can be covered by the loan, such as compensation amounts over $100,000 per employee.
- How can businesses qualify: In order to receive a loan, a business must certify that it will be used for one of the previously-stated reasons, that it is needed due to the COVID-19 emergency, that the employer has not had other applications pending, and has not already received funds under the program.
- How can the loans be forgiven: The debt will be forgiven if used in the 8-week period following the loan for purposes such as payroll, rent, mortgage interest, or utility payments. However, any forgiveness will be reduced in proportion to any reduction in the number of employees as compared to the prior year, and any reductions in employee compensation greater than 25%. Such reductions can be offset by an employer rehiring employees or adjusting wages by June 30, 2020.
Payroll Tax Relief
In this client alert, our tax colleagues have summarized two areas of the CARES Act that provide payroll tax relief to employer, as well as the many other significant tax changes made in the Act. Their summaries of the two payroll tax changes are the following:
Deferral of Employer Portion of Social Security Tax: Section 2302 of the CARES Act allows employers to defer payments of the 6.2% employer portion of the Social Security tax due from the date of enactment through the end of 2020. Employers choosing to defer the payment are required to repay the deferred amount in two equal payments, one of which is due by December 31, 2021, and the second of which is due by December 31, 2022. Individuals paying self-employment tax are provided with equivalent relief.
Employee Retention Credit for Employers Subject to Closure Due to COVID-19: For businesses that are fully or partially suspended due to a government order limiting commerce, travel, or group meetings due to COVID-19, or that saw a 50% reduction in gross receipts for the first quarter beginning in calendar 2020 compared to the same quarter in the prior year, Section 2301 of the CARES Act creates a 50% credit for paying up to $10,000 in wages. Wages paid before the end of 2020 are potentially eligible for the credit, but are not available for any wages paid due to the new requirement for paid leave and sick pay. The credit is allowed against payroll taxes. The period for which wages are eligible for the credit ends when the business is no longer suspended or gross receipts for a quarter reach 80% of the prior year. Tax-exempt organizations may claim the credit based on a “full or partial suspension” of a trade or business.
For employers with more than 100 full-time equivalent employees, only wages paid when the employee was not providing services are eligible for the credit. Employers with 100 or fewer full-time equivalent employees are eligible to take the credit on any wages during the eligible period described above.