Last Updated: April 7, 2020
The United States government, the State of New York and the City of New York has adopted legislation intended to provide economic relief to businesses and individuals impacted by the COVID-19 emergency. The following is a review of various loans, loan forgiveness provisions, and other benefits created by these recent acts.*
U.S. Federal Laws
On March 27, 2020, an approximately $2 trillion coronavirus response bill, the Coronavirus Aid Relief, and Economic Security (“CARES”) Act (H.R. 748), was signed into law.
The CARES Act:
- Provides Forgivable Loans to Small Businesses
Under the CARES Act’s Paycheck Protection Program, the Small Business Administration (the “SBA”) will back loans of up to $10 million from banks to businesses with not more than 500 employees for those businesses to pay employee salaries, paid sick or medical leave, health insurance premiums, and basic immediate operating expenses like mortgage, rent, and utility payments (“Covered Expenses”).
There are very few borrower requirements to obtain a loan under the CARES Act. Those requirements include a good-faith certification that the borrower (a) needs the loan to continue operations during the COVID-19 pandemic, (b) will use the funds to retain workers and maintain payroll, or pay the other immediate operating costs, (c) does not have any other pending application under this program for the same purpose, and (d) has not received duplicative amounts under this program from February 15, 2020 until December 31, 2020.
Eligible businesses include private and public non-profits, sole proprietorships, independent contractors, individuals who are self-employed, and businesses with not more than 500 employees (including full-time and part-time employees). For businesses in the hospitality and dining industries, there is a special eligibility rule: if the business has more than one physical location, it employs not more than 500 employees per physical location, and it is assigned to the “Accommodation and Food services” sector (Sector 72) of the North American Industry Classification System, that business is eligible for a loan.
Notably, the CARES Act includes a “Sense of the Senate” that the SBA should issue guidance to lenders to ensure that the processing and disbursements of loans prioritizes small businesses in underserved and rural markets, small businesses owned by individuals who are socially or economically disadvantaged, women owned businesses, and businesses that have been in operation for less than two years.
The Loan Amount
The maximum loan amount (the “Loan Amount”) is the lesser of (a) 2.5 multiplied by the average total monthly payroll costs (with salaries capped at $100,000 on an annualized basis for each employee) incurred from the previous one-year period (plus the outstanding amount of any loan that the business received under the SBA’s Disaster Loan Program between January 31, 2020 and the date on which that loan may have been refinanced as part of the Paycheck Protection Program (“Prior SBA Loan Amount”)), or (b) for businesses that were not in existence from February 15, 2019 to June 30, 2019, 2.5 multiplied by the average total monthly payroll costs (with salaries capped at $100,000 on an annualized basis for each employee) incurred from January 1, 2020 to February 29, 2020 (plus any Prior SBA Loan Amount), or (c) $10 million. When calculating the average total monthly payroll costs, borrowers should subtract any salary paid to an employee in excess of an annual salary of $100,000. Additionally, contrary to the statute, the SBA’s Interim Final Rule issued on April 2, 2020 (the “SBA’s IFR”) removed payments to independent contractors from its definition of payroll costs.
A borrower is entitled to loan forgiveness in an amount equal to Covered Expenses paid during the 8-week period following loan origination (the “Loan Forgiveness Covered Period”). Forgiveness is subject to reduction based on a reduction of the business’s employees, and wages and salaries as explained below (the “Forgiveness Amount”). Additionally, not more than 25% of the Forgiveness Amount may be attributable to non-payroll costs.
To calculate the Forgiveness Amount, the Act instructs to multiply the total of the Covered Expenses incurred during the Loan Forgiveness Covered Period by the result of dividing the average number of full-time equivalent employees (“FTEEs”) that the business employed per month during the 8-week Loan Forgiveness Covered Period, by (at the election of the borrower) either (a) the average number of FTEEs that the business employed per month from February 15, 2019 to June 30, 2019, or (b) the average number of FTEEs that the businesses employed per month from January 1, 2020 to February 29, 2020. The Act also provides that employees whom the business laid off between February 15, 2020 and April 26, 2020, but rehired by June 30, 2020 will, in effect, be treated as employed individuals during the 8-week Loan Forgiveness Covered Period so as not to reduce the Forgiveness Amount.
The Forgiveness Amount will be reduced by the amount of employee salary reduction in excess of 25% of that employee’s total salary during the most recent full quarter during which the employee was employed before the Loan Forgiveness Covered Period. For this calculation, the only reductions in an employee’s salary that reduce the Forgiveness Amount are reductions to an employee’s salary who did not receive, during any single pay period during 2019, wages or salary of more than $100,000 annually. Thus, if the business did not reduce such employees’ salary or wages during the Loan Forgiveness Covered Period by more than 25%, the Forgiveness Amount will not be reduced in this manner.
It is important for businesses to document the use of its funds received under the program pursuant to the documentation provisions in the CARES Act because businesses that to do not properly document their use may be ineligible for loan forgiveness.
Businesses can apply for the loans through private sector lenders authorized by the SBA who can use their own paperwork to process the loans. It is estimated that it will take about two weeks for the SBA to approve each loan, and to guarantee it against default. Lenders will not distribute the loan money to businesses until the SBA has assured it that each loan is fully backed, so it may take at least two weeks from applying for the loan for businesses to start receiving the loan money.
Business owners are not required to provide personal guarantees or use their assets as collateral for the loan. There are no fees associated with obtaining the loan, and the SBA’s IFR states that the interest rate will be 1%.
- Provides Emergency EIDL Grants
The CARES Act provides, in certain circumstances, emergency Economic Injury Disaster Loan (EIDL) grants of up to $10,000 from the SBA to small businesses for those businesses to use the funds for, among other things, providing paid sick leave for employees, maintaining payroll, meeting increased costs due to an interrupted supply chain, and making rent or mortgage payments. It is currently uncertain as to what impact, if any, obtaining an emergency grant under this provision may have on applications made under the Paycheck Protection Program.
- Expands Unemployment Benefits
Under the CARES Act’s temporary Pandemic Unemployment Assistance Program, workers not usually eligible for state and federal unemployment benefits—such as independent contractors, and people who are self-employed or who have a limited work history—may receive unemployment benefits if they are unable to work because of the COVID-19 pandemic. Anyone who self-certifies that they are able and available to work but is unemployed or partially unemployed because of the COVID-19 pandemic is considered a “covered individual.” If workers have the ability to work remotely with pay, they are not eligible for these benefits.
Under the CARES Act, unemployment benefits are available for the weeks of unemployment, partial unemployment, or inability to work caused by COVID-19 beginning on or after January 27, 2020 (the date on which the Secretary of Health declared COVID-19 a public health emergency) and ending on or before December 31, 2020, and shall continue to be available as long as the individual’s unemployment, partial unemployment, or inability to work continues, for up to 39 weeks. Individuals will receive the amount that would be calculated under state law plus $600 each week for up to four months, as opposed to the usual three months. Additionally, the standard one-week waiting period is waived, so laid off employees immediately qualify for benefits.
- Provides Refundable Payroll Tax Credit to Employers
For businesses whose operations were fully or partially suspended by a government entity due to the COVID-19 pandemic or had a decrease in gross receipts of 50% or more compared to the same quarter last year, the CARES Act provides for a refundable payroll tax credit equal to 50% of the first $10,000 in wages per employee. This payroll tax credit can be claimed for employees who are retained but who do not work during the COVID-19 pandemic. Businesses with 100 or fewer full-time employees can claim the payroll tax credit for all employees’ wages—whether the employer is open for business or has been ordered to close. Businesses with more than 100 full-time employees can claim the credit for employees who are retained but who do not work due to the COVID-19 pandemic.
New York City and New York State Laws
Employers that employ at least two employees in New York State seeking to avoid layoffs should also know about the Shared Work Program, which provides partial unemployment benefits to employees who are working reduced hours. To participate, employers must design a “Shared Work Plan” and apply to participate here at least one week before the proposed effective date. After an employer’s plan is approved, participating employees must file unemployment insurance Shared Work claims. Eligible employees include those who qualify to receive unemployment insurance benefits in New York state and who normally work no more than 40 hours per week. Covered employees may receive up to 26 weeks of regular Shared Work benefits in one year. Currently, it is unclear how employers would take advantage of the New York State Shared Work Program and the Federal Paycheck Protection Program simultaneously. One potential scenario is that the reduction in salary and wages under the Shared Work Program may reduce the amount of the loan forgiveness under the Paycheck Protection Program.
Under New York City’s Employee Retention Grant Program, small business in New York City (including nonprofits) that have been in operation for at least six months, with one to four employees that can demonstrate at least a 25% decrease in revenue as a result of the COVID-19 pandemic may be eligible to receive a grant covering up to 40% of their payroll for two months, for a maximum of up to $27,000. This program was implemented to help New York City businesses retain employees. More information can be found here.
Under New York City’s Small Business Continuity Loan Program, businesses in New York City with fewer than 100 employees that can demonstrate at least a 25% decrease in revenue as a result of the COVID-19 pandemic, and that it has the ability to repay the loan, may be eligible for an interest-free loan up of up to $75,000 to help retain employees and continue business operations. More information can be found here.
*Evolving Regulation and Implementation Procedures
The foregoing is intended as a summary of the various measures enacted within the past few days. The legislation examined above was understandably passed under exigent circumstances. Most, if not all, of the above will be subject to rule-making and interpretation. Therefore, implementation structures, procedures and subsequent regulations may vary from the analysis presented above.
For questions about the foregoing and further developments, please contact us. We also have assembled resources and alerts for COVID-19-related legal issues and considerations on our website under “News – COVID-19 Guidance.” Please check there for useful information and updates as events evolve.
*Required Disclaimer: This alert is provided for informational purposes and does not constitute, and should not be considered legal advice. Specific facts and circumstances will differ. Neither the transmission nor the receipt of this information shall create an attorney-client relationship between the transmitter and the recipient. You should not take, or refrain from taking, any action based upon information contained in this alert without consulting legal counsel of your own choosing. Under applicable professional rules of conduct, this informational publication may be considered attorney advertising.