Material Corporate Provisions of the CARES Act
In response to the recent outbreak of a novel coronavirus, COVID-19, President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) into law on Friday, March 27, 2020. The CARES Act provides (I) unemployment assistance, (II) limits on paid leave requirements that were established in the Families First Coronavirus Response Act (the “First Response Act,” a client alert summarizing the provisions of the First Response Act can be found here), (III) tax relief for businesses, (IV) economic relief for businesses in industries that are most affected by the COVID-19 pandemic, and (V) expanded Small Business Administration (“SBA”) loan access for small businesses.
This alert focuses on those corporate components of the CARES Act that Kleinberg Kaplan believes will be most relevant and useful to our clients.
I. Unemployment Assistance
The CARES Act contains several unemployment insurance provisions intended to provide expanded unemployment compensation for individuals who have been terminated during the COVID-19 pandemic.
- The pool of individuals who are eligible to apply for unemployment insurance has been temporarily broadened to include self-employed individuals and other individuals who are traditionally not eligible for unemployment benefits.
- In addition to unemployment compensation determined under the laws of each participating state, eligible individuals will receive an additional $600 of compensation, regardless of such individual’s previous compensation.
- Participating states are mandated to remove the one-week waiting period between the date of an individual’s unemployment claim and the commencement of unemployment benefits.
- Individuals in participating states who have had their hours reduced during the COVID-19 pandemic may have their reduced salary compensation partially subsidized by their state government.
II. Limitation of Paid Leave Requirements
The CARES Act provides some key clarifications regarding the paid sick leave requirements that were passed in the First Response Act.
- Under the Family and Medical Leave Act, the limitation on the amount of paid leave that an employer must pay shall be $200 per day and $10,000 total per employee.
- Certain ambiguities regarding the paid leave benefits that employers are obligated to provide their employees under Division E of the First Response Act have been clarified. Depending on the underlying reason for leave, employers will be required to provide a minimum of either: (a) $511 per day and $5,110 total per employee, or (b) $200 per day and $2,000 total per employee.
- The number of employees who qualify for the above paid leave benefits has been temporarily expanded to include rehired employees who were terminated on or after March 1, 2020, and had worked at least thirty (30) of the previous sixty (60) days prior to such termination.
III. Tax Relief for Businesses
- For an in-depth summary of the tax provisions of the CARES Act, please see our client alert here.
IV. Economic Relief for the Industries Most Affected by the Coronavirus Pandemic
In order to restore liquidity to certain industries that have been deeply affected by the COVID-19 pandemic, the CARES Act provides up to $500 billion in loans, loan guarantees and other investments for a term of up to five (5) years to various eligible businesses.
- Specific industry allocations include: (a) $25 billion to passenger air carriers; (b) $4 billion to cargo air carriers, (c) $17 billion to businesses critical to maintaining national security, and (d) $454 billion to other eligible businesses.
- In addition to air carriers, the definition of eligible businesses include U.S. businesses that have not otherwise received adequate economic relief in the form of loans or loan guarantees provided elsewhere under the CARES Act. This gives the Treasury Department broad discretion in deciding procedures and other minimum requirements for the allocation of the final $454 billion, which procedures and requirements the Secretary of the Treasury is tasked with providing by April 6, 2020.
- As a condition to accepting a loan, loan guarantee or similar investment, businesses must agree to forego equity buy-backs, dividends or other common equity distributions until twelve (12) months after such loan, guarantee or similar investment is no longer outstanding. However, the Secretary of the Treasury has authority to waive these requirements if he deems it in the best interest of the federal government.
- Until twelve (12) months after the loan, guarantee or similar investment is no longer outstanding, no officer or employee of a borrower that received more than $425,000 in total compensation in 2019: (a) may receive compensation in excess of their total 2019 compensation for any 12-month period, or (b) may receive severance in excess of twice their total 2019 compensation.
- Until twelve (12) months after the loan, guarantee or similar investment is no longer outstanding, no officer or employee of a borrower that received total compensation of more than $3 million in 2019 may receive compensation of more than: (a) $3 million, plus (b) fifty percent (50%) of total 2019 compensation in excess of $3 million, for any 12-month period.
V. SBA Loans under the CARES Act
The CARES Act expands the SBA 7(a) loan program in response to the COVID-19 pandemic, including by expanding eligibility criteria, setting favorable terms, streamlining the application and approval processes and providing for substantial loan forgiveness under certain circumstances.
- The list of businesses that are eligible for SBA 7(a) loans has been temporarily expanded to include most businesses with 500 or fewer employees, sole proprietorships and independent contractors. The loosening of criteria includes special provisions for businesses operating in the accommodation and food services industry, franchises and businesses with more than one physical location.
- The terms of the SBA 7(a) loans have been made materially more favorable under the CARES Act by (a) allowing borrowers to receive a maximum loan of up to $10 million based on a formula that uses monthly payroll as the primary metric, (b) capping interest rates at four percent (4%), (c) capping the maximum term at ten (10) years, (d) waiving the requirement that the loans be collateralized by assets of the business, (e) waiving the requirement that each business owner holding a twenty percent (20%) or greater stake in the business provide a personal guarantee of the loan, (f) mandating that the SBA fully guarantee the loan rather than guaranteeing only a percentage of the loan, and (g) removing all repayment penalties for the life of the loan.
- Under the CARES Act, SBA 7(a) loan approval authority has been delegated by the SBA to approved financial institutions. Under this system, eligible businesses will apply directly to financial institutions, and the financial institutions will make an approval or denial based on criteria set by the SBA and the CARES Act, which decision is binding upon the SBA. This is intended to reduce the administrative burden on the SBA and shift that burden to a number of financial institutions that are better equipped to deal with the volume of applications that are expected to be submitted.
- Under the terms of the CARES Act, the SBA 7(a) loans are forgivable, up to the full amount of the loan, based on a formula that incorporates typical monthly business expenses, such as payroll mortgage/rent and utilities. However, in an effort to incentivize employers to retain workers and maintain salaries, the amount of forgiveness is reduced in the event that workers are terminated or individual employee salaries are reduced by more than twenty-five percent (25%).
- For an in-depth summary of the SBA 7(a) loan provisions under the CARES Act, please see our prior client alert here.
We understand that these are challenging times for our clients and friends. Kleinberg Kaplan has been diligently monitoring the updates and developments pertaining to COVID-19 and the potential impact for our clients. We will continue to provide updates as the situation develops.
Our attorneys are available to discuss with you these provisions, as well as other COVID-19 legislation, regulations and executive orders. You can find other helpful COVID-19 related materials here, at our COVID-19 resource page.