The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”): Understanding How its Paycheck Protection Program Incentivizes Employers to Retain or Rehire Employees

30 March 2020 Labor & Employment Law Perspectives Blog
Authors: Anne B. Sekel

As Foley’s multidisciplinary and multijurisdictional Coronavirus Task Force reported on March 27, the newly minted CARES Act creates a $349 billion loan program—referred to as the Paycheck Protection Program (Title I, Section 1102)—for small businesses, including 501(c)(3) nonprofits and physician practices.  (With some specific exceptions set forth in the act, small businesses are those that employ fewer than 500 employees.)  Pursuant to the program, small businesses can apply for loans through a network of Small Business Association-approved private lenders, not from the federal government itself. 

The program employs many different and varied methods to encourage employers to retain their workforce, maintain their employees’ wages and rehire already laid-off workers.  Summarized below are the primary means by which the act incentivizes employers:  

First, the program requires every loan applicant to certify, among other things, that the loan funds provided to it pursuant to the program will be used to retain workers, maintain the borrower’s payroll or make mortgage, lease or utility payments.  Thus, while a borrower may use the loan proceeds for operational expenses other than payroll, by requiring a certification that the loan will be used for one of two purposes—one of which is payroll—the act increases the likelihood that the program will benefit businesses aiming specifically to protect and maintain their workforce. 

Second, the maximum loan amounts under the program—up to a maximum loan of $10 million—are calculated based on the loan recipient’s average monthly “payroll cost” (as that term is defined in the act to, among other things, include employee compensation for those making less than $100,000) for the one-year period prior to the date on which the loan is made.  (For certain seasonal businesses, the borrower may instead choose to calculate its maximum loan amount using the average total payroll cost for the 12-week period commencing on February 15, 2019, and the period from March 1, 2019, through June 30, 2019.)  Specifically, loan amounts are calculated by multiplying the loan recipient’s average monthly payroll cost by 2.5.  Accordingly, loans made under the program provide funds to allow a business to meet its pre-crisis level payroll for 2 1/2 months after the loan is made.  A borrower is thereby highly incentivized to retain its current workforce during that period.  Or, if a loan recipient already has furloughed employees, it may decide to rehire them to boost its average monthly payroll cost going forward and, consequently, increase its maximum loan eligibility.     

Third, the act provides for program loan forgiveness in an amount that is keyed, in part, to the borrower’s post-loan payroll costs.  In particular, among other expenses to be factored in when calculating the amount of potential loan forgiveness, the program considers the amount spent by the loan recipient on payroll during the eight-week period after the origination date of the loan.  By tying the amount of loan forgiveness to the level at which a borrower maintains its workforce for a two-month period after the loan is made, a loan recipient is given a powerful motivation to keep and even to increase its work force.  The more spent on payroll costs during the two-month period after a loan is made pursuant to the program, the higher the rate of loan forgiveness.  

Finally, the loan amount eligible for forgiveness pursuant to the act is proportionally reduced if the employer does not maintain its pre-pandemic level of full-time equivalent employees for the two-month period after the loan originates.  Similarly, if the borrower decreases an employee’s wages by more than 25% during the same period, the amount of the loan forgiveness is proportionally decreased.  If, however, by June 30, 2020, the loan recipient essentially reverses any layoffs or salary reductions that it made during the period from February 15, 2020, through April 26, 2020, (i.e., 30 days from the date of the act’s enactment), such reductions in force or wage decreases will not count against the loan amount eligible for forgiveness.  As such, the act creates yet another incentive for an employer to keep its workforce and payroll as close to the status quo prior to the crisis as possible. 

While the incentives provided by the CARES Act for maintaining a consistent workforce are clear, navigating the Paycheck Protection Program and the loan forgiveness set forth in the act to ensure that an employer is maximizing its (and, therefore, its employees’) advantages under the act may be complicated and require legal counsel.  For example, an employer facing an imminent reduction in force must determine whether such a reduction still makes sense in light of the protections and benefits of the act.  In the same vein, a business that has terminated workers or reduced their salaries must conduct an analysis of the relevant legal and business considerations to determine when it may be possible and most effective to rehire employees or raise their wages. 

Foley has created a specialized Paycheck Protection Program team to address questions, issues and concerns regarding the program, including the following team members: Kenny Broodo, Jessica Mason and Don Schroeder.

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