Category: Employment Law Tracker

American Rescue Plan Act – COBRA subsidy

March 12th, 2021 — 10:18pm

by Joseph P. Kelly

Yesterday, Joe Biden signed the American Rescue Plan Act of 2021 which includes a 100% COBRA premium subsidy that will require immediate employer action.

The COBRA subsidy–which applies to all group health plans, except for flexible spending account coverage–will be available to all individuals enrolled or that will enroll in COBRA on or after April 1, 2021 and until September 30, 2021 when the subsidy ends.

What employers need to know:

Eligible individuals will receive the subsidy directly from the employer; the employer will be required pay the COBRA premiums and then will receive a payroll tax credit to recoup the subsidy cost.

Employers are required to either update their current COBRA notices or provide a separate notice describing the premium subsidy. The Department of Labor is required under the new law to provide model notices within 30 days. But affected employers shouldn’t wait for the model notices; instead they should work with their COBRA administrators to see if there are any individuals eligible for the subsidy–including former employees that may or may not have elected COBRA coverage. Failure to provide the required notice may result in a tax penalty.

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IL Senate Bill 1480 expected to become law; new law would further limit employer’s ability to consider criminal history in employment decisions

February 22nd, 2021 — 10:36pm

by Joseph P. Kelly

Since 2015, Illinois employers have been prohibited from asking a prospective employee about their criminal background in applications or before granting an interview or making a job offer.

Earlier this month, the Illinois legislature passed Senate Bill 1480 which would amend the Illinois Human Rights Act to require Illinois employers—before refusing to hire a job applicant based on criminal history—to determine that (1) there’s a substantial relationship between an applicant’s criminal history and the position sought; or (2) hiring the applicant would lead to an unreasonable risk to property or the safety or welfare of specific individuals or the general public. The law doesn’t define “unreasonable risk.”

Senate Bill 1480 lists six factors for determining whether there’s a substantial relationship between an applicant’s criminal history and the position sought—namely, (1) the length of time since the conviction, (2) the number of convictions in the applicant’s criminal history, (3) the nature and severity of the conviction and its relationship to the safety and security of others, (4) the facts or circumstances the conviction, (5) the age of the applicant at the time of the conviction, and (6) evidence of rehabilitation efforts.

After evaluating those six factors, if an Illinois employer decides that it won’t hire the applicant, the bill requires the employer (1) notify the applicant in writing of its preliminary decision and the basis for same, (2) provide a copy of the criminal history report, if any, and (3) inform the applicant that they have the right to respond to the notice of preliminary decision within five business days before the decision becomes final. Specifically, the employer needs to tell the applicant that their response may include (but isn’t limited to) evidence challenging the criminal history report’s accuracy or evidence of mitigation—e.g. rehabilitation.

If after all of that, the employer still doesn’t want to hire the applicant, it must provide the applicant with a final notice identifying the conviction, explaining the basis of the decision, advising of existing internal procedures for requesting reconsideration, and advising the application of the right file a change of discrimination with the Illinois Department of Human Rights.

Illinois employers are required under the bill to conduct the same analysis and go through the same process when terminating an employee based on criminal history.

While the bill is not law yet, stay tuned—Governor Pritzker is expected to sign the bill into law in the near future. Bottom line–Illinois employers need to be very careful is an applicant or employee’s criminal history factors into an employment decision.

If you have any questions on any of the above, we’re here to help.

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Illinois Tier 3 Mitigation effective November 20, 2020

November 19th, 2020 — 10:03pm

by Joseph P. Kelly

As you are undoubtedly aware by now, Governor Pritzker has initiated “Tier 3 Resurgence Mitigation” restrictions effective November 20, 2020 to help combat the Covid-19 crisis.

Many businesses with remote capabilities have opted to have their employees working from home since the beginning of the pandemic. Per the new restrictions, working remotely is mandated if possible. Specifically, the new restrictions provide hat “All employees who can work remotely should work remotely.”

Gatherings of 10 or more people are now barred in “Tier 3” with limited exceptions.

The new restrictions address specific industries as well such as retail, personal care services, and bars and restaurants. For more information, the full text of the new restrictions can be found here.

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DOL issues new regulations regarding paid leave under FFCRA

September 18th, 2020 — 8:06pm

By Joseph P. Kelly

It’s back to school time … or at least kind of. Many schools are operating remotely. Some schools, like those here in Geneva, are operating on a “hybrid” schedule. That means that many students from Kindergarten to High School are learning from home at least some of the time. To say that these new school arrangements have made it tough for working parents is an understatement!

You may recall that way back in the Spring–in part to alleviate pressure on working parents–passed the Families First Coronavirus Relief Act (FFCRA). We wrote about the FFCRA in prior alerts here, here, and here.

The FFCRA mandates that employers provide paid sick leave or expanded family and medical leave for specified reasons related to COVID-19. One of the specified reasons for such leave is to care for a child whose school is closed due to COVID-19.

The Department of Labor recently issued revised regulations interpreting the FFCRA in response to a court decision in New York. The revised regulations which took effect on September 16 are here.

Here are some key takeaways:

  • Employers can’t require an employee submit documentation supporting their need for FFCRA leave before leave can be taken; an employee need only provide supporting documentation “as soon as practicable.”
  • An employee is only entitled to FFCRA is an employer has work available. If there’s no work–whether because of a furlough, closure of a business location, or otherwise–then an employer isn’t required to give paid leave.
  • Employees may take intermittent use of FFCRA leave upon employer approval. But the DOL clarified that the “employer-approval condition would not apply to employees who take FFCRA leave in full-day increments to care for their children whose schools are operating on an alternate day (or other hybrid-attendance) basis.” Per DOL, “[f]or the purposes of the FFCRA, each day of school closure constitutes a separate reason for FFCRA leave that ends when the school opens the next day.”

We all hope that there’s no longer a need for the FFCRA when it expires on December 31, 2020 but that seems unlikely. Perhaps it will be renewed at that point. Stay tuned!

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New FMLA forms issued by DOL

July 20th, 2020 — 8:22pm

by Joseph P. Kelly

On July 16, 2020, the U.S. Department of Labor (“DOL”) issued new FMLA forms regarding leave under the Family Medical Leave Act (“FMLA”), which can be found here. The reason for the new forms–according to DOL–is to make it easier for employees and health care providers to understand the forms and complete the requisite paperwork. The new forms aren’t drastically different than FMLA forms previously issued by DOL. But it does appear that the new forms should be easier for employees and health care providers to complete.

Employers are not required to use DOL’s new forms for FMLA leave requests; employers may use forms previously issued by DOL or even an employer’s own forms. But, if an employer is unsure at all about what information it is obligated to provide upon a leave request under FMLA or what information it is permitted to ask for, it’s a good idea to use the new DOL forms.

There’s a distinct possibility that the new DOL forms will be revised at some point in the near future as DOL is requesting public comment on the new forms. If there are any changes, we’ll be sure to blog about them.

While there are new forms, there’s no new poster regarding FMLA for employers to post in the workplace. The old poster is still sufficient.

Lastly, it’s important to note though that the new forms don’t address paid sick leave or expanded FMLA leave under the Family First Coronavirus Response Act (“FFCRA”)(which we blogged about here and here). DOL hasn’t issued forms for FFCRA-related forms of leave.

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Guidelines and toolkits for “Phase 3” employers

May 28th, 2020 — 6:50pm

By Joseph P. Kelly

As you undoubtedly know by know, Governor Pritzker is expected to move Illinois into “Phase 3” of the Restore Illinois plan tomorrow, May 29.

We previously posted here about OSHA guidelines for “essential businesses.”

With more businesses opening up in “Phase 3”, the Illinois Department of Commerce issued guidelines and toolkits for those businesses (link here).

Safety is paramount in this pandemic and best pratices dictate that Illinois employers do all that they can to focus on the health and safety of their workers, customers, and all other visitors.

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SBA paycheck protection and economic injury disaster loans: new developments

May 21st, 2020 — 1:40pm

By Christopher J. Graham and Joseph P. Kelly

There have been more developments regarding SBA paycheck protection loans and economic injury disaster loans that may be of interest:

SBA paycheck protection loans:

  • New SBA regulations and guidance:

The SBA is updating its regulations and guidance, with the most recent FAQs coming on May 13. There are now 9 Interim Final Rules and 47 FAQs, which continue to be updated. You can find them in the program rules section of this link.

  • IRS notice re tax deductibility of PPP-loan funded payroll and other costs:

The IRS also issued a notice regarding the deductibility of expenses funded with PPP loan proceeds, at least to the extent of loan forgiveness. For example, if a taxpayer funds payroll costs with PPP loan proceeds and the loan is forgiven as a result, the IRS would disallow ordinarily permitted tax deductions for those costs. The rationale is that the taxpayer really isn’t paying those costs; the government is via the SBA loan “grant.” The IRS position has been controversial. And on May 6, a bipartisan senate group proposed legislation (S.3612) to “clarify” that those types of costs would remain tax deductible, notwithstanding loan forgiveness; so maybe borrowers will be able to have their cake and eat it too?

  • Some of the most recent SBA FAQs address:

Reduced loan forgiveness resulting from reductions in employees; employees refusing to be rehired:

As explained in a prior blog post, if you reduce your monthly average number of full-time equivalent employees during the 8-week period beginning from the initial loan disbursement—when compared to that monthly average for your base period, loan forgiveness is reduced proportionately. Some businesses reportedly were finding that with enhanced unemployment benefits under the CARES Act, employees were refusing to be rehired because they had a better short-term deal on unemployment; and the result for the employer would be reduced loan forgiveness. Although a reduction in full-time equivalent employees ordinarily would reduce loan forgiveness, SBA FAQ (# 40) creates an exception to the extent borrowers make a written offer to rehire an employee and the employee refuses the offer; but there must be supporting documentation of both the offer and rejection.
Additional special rules for seasonal employers:

See FAQ 41.

US companies owned by foreign entities:

See FAQ 44: To determine whether an applicant exceeds the 500-employee small-business loan eligibility threshold, the applicant must count all employees of its own and the employees of its U.S and foreign affiliates. Some had argued, based on wording in earlier SBA guidance, that only US-based employees were counted.

The good faith need certification and May 18 safe harbor to return loan proceeds:

As stated in prior blog posts, the CARES Act provides that, an “eligible recipient applying for a covered loan shall make a good faith certification— … that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operation of the eligible recipient ….” An SBA FAQ relating to “large companies” stated that “Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business.” A subsequent FAQ extended the same rule to “businesses owned by private companies.” Later SBA FAQs characterized the “large companies” FAQ as one that (1) “reminded all borrowers of an important certification required to obtain a PPP loan” and (2) “reminded borrowers to review carefully the required certification on the Borrower Application Form that ‘[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.’” Late Wednesday, the SBA issued this additional clarification:

Question: How will SBA review borrowers’ required good-faith certification concerning the necessity of their loan request?

Answer: When submitting a PPP application, all borrowers must certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” SBA, in consultation with the Department of the Treasury, has determined that the following safe harbor will apply to SBA’s review of PPP loans with respect to this issue: Any borrower that, together with its affiliates received PPP loans with an original principal amount of less than $2 million will be deemed to have made the required certification concerning the necessity of the loan request in good faith.

SBA has determined that this safe harbor is appropriate because borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. This safe harbor will also promote economic certainty as PPP borrowers with more limited resources endeavor to retain and rehire employees. In addition, given the large volume of PPP loans, this approach will enable SBA to conserve its finite audit resources and focus its reviews on larger loans, where the compliance effort may yield higher returns.

Importantly, borrowers with loans greater than $2 million that do not satisfy this safe harbor may still have an adequate basis for making the required good-faith certification, based on their individual circumstances in light of the language of the certification and SBA guidance. SBA has previously stated that all PPP loans in excess of $2 million, and other PPP loans as appropriate, will be subject to review by SBA for compliance with program requirements set forth in the PPP Interim Final Rules and in the Borrower Application Form. If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request. SBA’s determination concerning the certification regarding the necessity of the loan request will not affect SBA’s loan guarantee.

The SBA also created a safe harbor, now until May 18, for borrowers to reconsider this issue and possibly return loan proceeds – though if your loan was for less than $2 million, it appears that the need threshold is a bit easier to meet then before.

75% rule and 8-week period; litigation:

Treasury Secretary Mnuchin reportedly expressed openness to a “fix” that would change the percentage of loan proceeds that must be devoted to “payroll costs” to qualify for loan forgiveness from 75% to 50% and extend the time for using loan proceeds to more than 8 weeks. This reportedly followed complaints by certain industry groups, restaurants being among them, that the current structure was unworkable. There also are suits against the SBA challenging the validity of its guidance; so perhaps those suits will result in changes. For now, it’s still 75% and an 8-week period, and the guidance is what it is. But be alert for changes.

SBA economic injury disaster loans:

Congress recently authorized more money for this loan program. But, now, if you’re not a farmer, you need not apply. Farmers were given priority; no politics, of course! See this link for more details:

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IL Business Alert: COBRA; Workers Comp; New Executive Order/Plan; New Paid Leave, Payroll Tax Deferral; and Employee Retention Credit Guidance

May 14th, 2020 — 9:35pm

By Christopher J. Graham and Joseph P. Kelly

It’s hard enough to do business with the havoc arising from the pandemic. Then, as you probably know, there has been a flurry of legislation, ostensibly to help businesses and employees. And there is potential “help” in some of the legislation, but also a substantial compliance burden, which for small businesses can be especially difficult to deal with.

Here’s a summary of some of what’s new:

  • COBRA notice form and timing changes:

Many employers have laid off employees as a result of the pandemic. If your business has a group health insurance plan, there’s a new US Department of Labor form to provide notice to your employees of rights under COBRA and new extended times for employees to elect COBRA coverage. While not required, it’s best to use the DOL form to avoid any claim that the notice was legally insufficient and potential adverse consequences. See here for more details and the form.

  • Illinois workers compensation Covid-19 presumption – repeal:

Last month, the Illinois Workers Compensation Commission approved a new “emergency” Rule providing that certain employees who contracted COVID-19 would be rebuttably presumed to have contracted the virus in the course of employment. But that Rule has since been repealed.

  • Governor Pritzker’s modified stay-at-home order and plan to re-open Illinois:

You’ve likely seen these but here’s a link to the modified stay-at-home order and here’s a link to the plan to reopen up Illinois.

  • Emergency paid sick leave act and emergency family and medical leave expansion act—regulations and FAQs:

We provided an overview of these new laws in prior alerts here, here, and here.

Most of you presumably have posted or otherwise circulated the required poster for your employees about the new laws. And if your employee makes a claim for paid leave under either new law, there is now a mountain of regulations and guidance from the Department of Labor and IRS to wade through, in addition to the statutes. This is not an easy compliance burden for small businesses and the new laws apply even for businesses with a single employee.

Here is a link to the DOL regulations. And here is a link to the DOL guidance in the form of answers to Frequently Asked Questions, modified most recently on Friday. There are now 93 DOL FAQS!

There also are related IRS regulations and FAQS and forms for tax credits and advances that, assuming you jump through the hoops, should be there to fund required paid leave; the credits/advances also are available for certain self-employed persons for qualified sick leave and family leave equivalent amounts. Here are the IRS FAQs on the paid leave credits/advances.

If you get a paid leave claim, you will need to document the claim consistent with the DOL regulations and FAQs, whether you pay the claim or not. All paid leave claims also must be documented as required to obtain available tax credits or advances. Paid leave records also must be retained for at least 4 years. See the FAQs for details.

Although hardship exemptions may be available for businesses with less than 50 employees, there’s a compliance and documentation requirement for the exemption to apply.

If you have more than 50 employees and are already required to provide unpaid leave under the Federal Family and Medical Leave Act, there are details in the regulations and FAQs about coordinating the new paid leave with unpaid leave under the “old” Act. If you do business in a jurisdiction with State or local paid leave law (Chicago, for example, has a paid leave ordinance; the State of Illinois does not), you will need to coordinate your obligations under each law.

The DOL has enforcement powers and there are penalties for failure to comply; employees have the right to bring claims as well.

  • Payroll tax deferral and employee retention credit:

Payroll tax deferral was another new benefit for employers under the CARES Act – with certain 2020 payroll tax payments deferred until 2021 (50%) and 2022 (50%). The IRS has issued additional guidance on how this works. One clarification that’s been made: if you receive an SBA paycheck protection loan, you may benefit from payroll tax deferral, but only until the loan is forgiven; before the recent guidance, it was unclear before whether if you received a “PPP” loan, you also could benefit from deferral.

There are now detailed IRS FAQs about employee retention tax credits here. If you receive a paycheck protection loan, however, you are not eligible for these credits.

If you haven’t done so already, you should be coordinating with your tax advisor and payroll service on the tax matters identified above.

The SBA continues to issue new “guidance” and regulations almost every other day it seems—with more expected next week; and we expect to blog further about some of the new guidance soon.

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Mandatory sexual harassment training for ALL Illinois employers

May 5th, 2020 — 9:28pm

By Joseph P. Kelly

On January 1, 2020, the Workplace Transparency Act went into effect, imposing new obligations on Illinois employers. Among those new obligations is a requirement that all Illinois employers—even those with as few as one employee—conduct annual sexual harassment training. Employers that fail to comply face the possibility of civil penalties.

All employees—full-time, part-time, seasonal, etc.—must be trained. Employers can offer to let employees take the training outside of work—whether on a laptop or cell phone—but would have to compensate non-exempt employees for their time spent outside of work on the training.

The Illinois Department of Human Rights (IDHR) released its model Sexual Harassment Prevention Training (link here) that employers can conveniently rely on to conduct the required training. Employers should document that they received the training. The IDHR’s model training contains a Certificate of Participation form that can be used for such documentation.

The IDHR also put out an FAQ (link here) that is helpful resource to answer any questions Illinois employers may have about the training.

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How to assure you are using Paycheck Protection Loan proceeds for a permissible purpose and to maximize loan forgiveness

April 30th, 2020 — 8:24pm

By Christopher J. Graham and Joseph P. Kelly

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act became law, including the Keeping American Workers Paid and Employed Act which included the SBA’s paycheck protection program. The SBA thereafter issued three Interim Final Rules to implement the new law, with the most recent one being issued on April 14. The SBA also issued multiple “Answers” to “Frequently Asked Questions” (“FAQs”), providing guidance. And more rules and FAQs are expected. There have been some inconsistencies in what’s been coming from the SBA and some issues, in our view, could be clarified.

But, if you received a loan or are about to, you need to act now to assure that you are using the proceeds for a permissible purpose and to maximize loan forgiveness. Based on the new law and the SBA’s interim final rules and “Frequently Asked Questions” (“FAQs”) issued so far (and which may change), here are some things to keep in mind.

Use loan proceeds only for a permissible purpose and according to your “good faith”:

“During the covered period [from February 15, 2020 to June 30, 2020], an eligible recipient may, in addition to the allowable uses of such a loan made under this subsection [(Section 7(a) of the Small Business Act)], use the proceeds of the covered loan for—

(I) payroll costs; (II) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums; (III) employee salaries, commissions, or similar compensations; (IV) payments of interest on any mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation); (V) rent (including rent under a lease agreement); (VI) utilities; and (VII) interest on any other debt obligations that were incurred before the covered period.”

(CARES Act, Sec. 1102(a) (2)(F)).

If you received an economic injury disaster loan from the SBA, between January 31 and April 3, 2020, you also may use the proceeds to refinance that loan and must refinance the loan if it was used for payroll costs. (Sec. 1102((a)(2)(F)(iv); SBA Initial Interim Final Rule, at 15-16).

When you applied for the paycheck protection loan, you also were required to “make a good faith certification … acknowledging that the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments ….” (Sec. 1102(a)(2)(G)).

Using loan proceeds other than for a permitted purpose and according to your certification is not something you want to do! There are severe consequences, including potential charges of crimes under Federal statutes. According to the SBA’s Initial Interim Final Rule:

  • If you use PPP funds for unauthorized purposes, SBA will direct you to repay those amounts.
  • If you knowingly use the funds for unauthorized purposes, you will be subject to additional liability such as charges for fraud.
  • If one of your shareholders, members, or partners uses PPP funds for unauthorized purposes, SBA will have recourse against the shareholder, member, or partner for the unauthorized use.

Use the proceeds for the following costs incurred and payments made during the 8-week period following the initial loan disbursement:

  • Payroll costs
  • Any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a mortgage obligation).
  • Any payment on any covered rent obligation.
  • Any covered utility payments. (Sec. 1106 (b)).

Subject to some exceptions, “payroll costs” … means …

(aa) the sum of payments of any compensation with respect to employees that is a—

(AA) salary, wages, commissions, or similar compensations; (BB) payment of cash tip or equivalent; (CC) payment for vacation, parental, family, medical, or sick leave; (DD) allowance for dismissal or separation; (EE) payment required for the provisions of group health care benefits, including insurance premiums; (FF) payment of any retirement benefit; (GG) payment of State or local tax assessed on the compensations of employees; and

(bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractors that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount not more than $100,000 in 1 year, as prorated for the covered period [February 15, 2020 to June 30, 2020] ….” (Sec. 1102(a)(a)(A)(viii)).

The SBA clarified that qualified individuals with self-employment income, such as independent contractors and sole proprietors, may use loan proceeds for owner compensation replacement; and that owner compensation replacement—limited to eight weeks’ worth (8/52) of 2019 net profit as reported on their 2019 IRS Form 1040 Schedule C line 31, subject to a $100,000 cap—qualifies for loan forgiveness. (SBA Interim Final Rule dated April 14, 2020). Owner compensation replacement also appears to qualify as “payroll costs.”

The SBA also clarified that “self-employment income of general active partners [of a partnership] may be reported as payroll cost, up to $100,000 annualized, on a PPP loan application filed by a partnership.” (Id.). And, although the SBA has not said so explicitly, it appears that using loan proceeds over the 8-week period to pay a pro rata amount of up to $100,000 in partner self-employment income (8/52 of $100,000 = $15,385) likewise is permissible and qualifies as “payroll costs” and for loan forgiveness. (Id.). A similar rule appears to apply to members of a limited liability company actively involved in managing the company. (Id.) Perhaps the SBA will issue more guidance on these issues.

You could even use the proceeds to cover wages and salaries of additional employees you may hire.

The loan will not be forgiven to the extent you use loan proceeds for any other purpose.

Use at least 75% of the proceeds for costs incurred and payments made for payroll during the 8-week period:

“Not more than 25 percent of the loan forgiveness amount may be attributable to nonpayroll costs.” (SBA Initial Interim Final Rule). If you spend less than 75% on “payroll costs,” your loan obligation will be reduced dollar for dollar. To maximize loan forgiveness, you therefore should spend at least 75% on “payroll costs.”

Use the remaining proceeds only for paying interest on a covered mortgage obligation, rent on a covered lease obligation, or a covered utility payment:

“‘Covered mortgage obligation’ means any indebtedness or debt instrument incurred in the ordinary course of business that—(A) is a liability of the borrower; (B) is a mortgage on real or personal property; (C) was incurred before [February 15, 2020]”; ‘Covered rent obligation’ means rent obligated under a leasing agreement in force before [February 15, 2020]”; “‘Covered utility payment’ means payment for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before [February 15, 2020].” (Emphasis added) (Secs. 1106(a)(2) (4), and (5)). Using loan proceeds for those payments reduces the debt dollar for dollar. Be sure to keep invoices relating to those payments, together with proof payment.

Don’t use proceeds to pay interest for a mortgage debt incurred on or after February 15, 2020, rent on a lease agreement that was not in force before February 15, 2020, or any “utility” bill (electricity, gas, water, transportation, telephone, or internet access) for which service began on or after February 15, 2020.

Although permissible under the CARES Act, using proceeds any of those purposes reduces loan forgiveness. (Secs. 1102 (a) (2)(F)); 1106 (a)(2), (4) and (5); 1106 (b)).

Use no more than $15,385 of proceeds for cash compensation of any one employee over the 8-week period following the initial loan disbursement; non-cash employee benefits may exceed that amount:

Although “payroll costs” are a permissible use and the loan is forgivable to the extent used for that purpose, “payroll costs” don’t include “compensation of an individual employee in excess of an annual salary of $100,000, as prorated for the covered period.” $100,000 prorated over 8 weeks is $15,385 (($100,000/52) x 8)). (Sec. 1102(a)(2)(A)(viii)).

The SBA clarified that the “exclusion of compensation in excess of $100,000 annually applies only to cash compensation, not to non-cash benefits, including: • employer contributions to defined-benefit or defined-contribution retirement plans; • payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and • payment of state and local taxes assessed on compensation of employees.” (Emphasis added) (SBA FAQ #7). You therefore should pay cash compensation of an employee exceeding $15,385 during the 8-week period from a source other than the loan proceeds. Paying the excess cash compensation from loan proceeds reduces loan forgiveness dollar for dollar. Doing so is also impermissible under the new law. But using loan proceeds to pay non-cash employee benefits for those “highly-compensated employees”—employer contributions to defined-benefit or defined-contribution retirement plans; payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums; and payment of state and local taxes assessed on compensation of employees—is permissible use of loan and results in loan forgiveness.

Use no more than $15,385 of proceeds over the 8-week period following the initial loan disbursement for compensation of any active self-employed individual or partner or limited liability company member:

There’s a $15,385 cap for payments to self-employed individuals and apparently also for partners and limited liability company members actively involved in running a business. There’s nothing in the Act or any SBA rule or FAQ issued so far that permits additional payments, to cover retirement, health insurance, or other benefit payments made for them. In its April 14, 2020 Interim Final Rule addressing self-employed individuals, the SBA states that the loan is forgivable to the extent proceeds are used to pay covered benefits for an employee regardless of their other cash compensation, but that the same is not true for an “owner.” It would help though, if the SBA issued further guidance.

Don’t use proceeds to pay employer-side Federal payroll taxes:

According to the new law, “‘payroll costs’ shall not include … taxes imposed or withheld under chapters 21, 22, or 24 of the Internal Revenue Code of 1986 [(regarding withholding for Federal income taxes and FICA and employer share of FICA)] during the covered period ….” (Sec. 1102(a)(a)(A)(viii)). But the “SBA interprets this statutory exclusion to mean that payroll costs are calculated on a gross basis, without subtracting federal taxes that are imposed on the employee or withheld from employee wages.” (SBA FAQ # 16, footnote 3). As the SBA explains, “Unlike employer-side payroll taxes, such employee-side taxes are ordinarily expressed as a reduction in employee take-home pay; their exclusion from the definition of payroll costs means [that] payroll costs should not be reduced based on taxes imposed on the employee or withheld from employee wages.” (Id.).

The SBA explains further:

[P]ayroll costs are not reduced by taxes imposed on an employee and required to be withheld by the employer, but payroll costs do not include the employer’s share of payroll tax. For example, an employee who earned $4,000 per month in gross wages, from which $500 in federal taxes was withheld, would count as $4,000 in payroll costs. The employee would receive $3,500, and $500 would be paid to the federal government. However, the employer-side federal payroll taxes imposed on the $4,000 in wages are excluded from payroll costs under the statute. (SBA FAQ # 16).

Using loan proceeds for employer-side Federal payroll tax payments is impermissible and will at least reduce loan forgiveness.

Don’t use proceeds to pay “qualified sick leave wages” or “qualified family and medical leave wages,” as defined under, and for which a credit is allowed under the Families First Coronavirus Response Act.

You instead should pay those wages from a source other than the loan proceeds because they are excluded from “payroll costs” as defined under the new law. Using proceeds for that purpose is impermissible and will reduce loan forgiveness. (Sec. 1102(a)(a)(A)(viii)). Those “qualified” “wages” are excluded from “payroll costs” because, if documented properly, you will receive a tax credit against your employer share of social security taxes or an advance to cover them. Even a self-employed person will be entitled to a tax offset.

Don’t use proceeds for compensation of an employee whose principal place of residence is outside of the United States.

That type of payment is an exclusion from “payroll costs” and, therefore, is not a permissible use of loan proceeds, let alone a use that will result in loan forgiveness. (Sec. 1102(a)(a)(A)(viii)).

Spend all proceeds either for qualifying costs incurred or payments made within the 8-week period following the initial loan disbursement:

Forgiveness applies only to qualifying “costs incurred and payments made during the covered period.” (Sec. 1106 (a)(3) and (b)). “Covered period,” according to the Act, means “the 8-week period beginning on the date of the origination of a covered loan.” (Sec. 1102(a)(2)(A)(iii)). But the SBA clarified that the “eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower”—which must be “no later than ten calendar days from the date of loan approval.” (SBA FAQ # 20). Any costs incurred or payments made after the 8-week period will be ineligible for forgiveness. If you don’t use any loan proceeds up by the end of the 8-week period, you must repay them.

Don’t reduce your “average number of full-time equivalent employees per month” during the 8-week period beginning from the initial loan disbursement, as compared to your base period:

If you reduce your monthly average number of full-time equivalent employees during the 8-week period beginning from the initial loan disbursement—when compared to that monthly average for your base period, loan forgiveness is reduced proportionately. (Sec. 1106(d)(1)). Monitor changes in the number of your full-time equivalent employees and, as explained below, consider rehiring employees or hiring new employees to avoid a reduction in loan forgiveness. Unfortunately, the SBA has not issued guidance defining the phrase, “full-time equivalent employees.” But it’s safe to assume that anyone working at least 40 hours per week qualifies.

Choose the most beneficial base period for determining your “average number of full-time equivalent employees per month”:

Unless your employees are seasonal, you have a choice of which base period to use, for determining whether you’ve reduced your monthly average number of full-time employees, thereby reducing loan forgiveness. (Sec. 1106(d)(1)). You may choose a base period of from February 15, 2019 to June 30, 2019 or from January 1, 2020 to February 29, 2020. So, you will want to pick the base period during which your monthly average was the lowest. If your employees are seasonal, your base period will be from February 15, 2019 to June 30, 2019.

Don’t reduce the “total salary and wages” of any protected employee during the 8-week period following the initial loan disbursement, by more than 25%:

If you reduce the “total salary and wages” of any protected employee during that 8-week period by more than 25% compared to “the most recent full quarter during which the employee was employed before [then],” loan forgiveness is reduced proportionately. (Sec. 1106(d)(2)). A protected employee is an “employee who did not receive, during any single pay period during 2019, wages or salary at an annualized rate of pay in an amount more than $100,000.” So, reductions for “highly-compensated” employees are irrelevant for this purpose. To show that you have not reduced salary and wages over 25% from the “most recent full quarter,” you must determine the total base salary or wages of each employee for the last full quarter before the date you receive your loan and maintain corresponding records to submit with your application for loan forgiveness.

Rehire full-time equivalent employees or hire new full-time equivalent employees:

A proportionate reduction in loan forgiveness will not apply if you reduced the number of full-time equivalent employees during the period from February 15, 2020 until April 26, 2020 (30 days after the Act was signed into law) as compared to February 15, 2020, but then by June 30, 2020, eliminate the reduction. (Sec. 1106 (d)(5)). It therefore may be in your interests to rehire certain employees even if there’s insufficient work.

Restore reduced wages and salary of protected employees:

The proportionate reduction in loan forgiveness will not apply if you reduced wages and salary by more than 25% during the period from February 15, 2020 until April 26, 2020 as compared to February 15, 2020, but then by June 30, 2020, eliminate the reduction. (Sec. 1106 (d)(5)). It therefore may be in your interests to restore wages and salary even if there’s insufficient work.

If you refinanced an economic injury disaster loan with a paycheck protection loan and you received an advance on the economic injury disaster loan (in effect, a grant), “[p]roceeds of the advance up to $10,000 … will be deducted from the loan forgiveness of the PPP loan.” (Initial SBA Interim Final Rule, at 15-16).

Substantiate that, “to the extent feasible,” you “purchase[d] only American-made equipment and products”—consistent with the certification in your loan application.

Track use of loan proceeds, including through a new bank account exclusively for that purpose and maintain and segregate on a contemporaneous basis required back-up documents.

According to the new law:

An eligible recipient seeking loan forgiveness … shall submit to the lender that is servicing the covered loan an application, which shall include—

(1) documentation verifying the number of full-time equivalent employees on payroll and pay rates for the relevant time periods…, including—

(A) payroll tax filings reported to the Internal Revenue Service; and (B) State income, payroll, and unemployment insurance filings;

(2) documentation including cancelled checks, payment receipts, transcripts of accounts, or other documents verifying payments on covered mortgage obligations, payments on covered lease obligations, and covered utility payments;

(3) a certification from a representative of the eligible recipient authorized to make such certification that—

(A) the documentation presented is true and correct; and (B) the amount for which forgiveness is requested was used to retain employees, make interest payments on a covered mortgage obligation, make payments on covered rent obligation, or make covered utility payments; and

(4) any other documentation the [SBA] Administrator determines is necessary.” (Sec.1106(e)).

“No recipient shall receive forgiveness … without submitting to the lender that is servicing the covered loan the documentation required [ as described above].” (Sec. 1106(f)).

The best way to track use of proceeds is through a separate bank account for that purpose. And in that way, you avoid commingling proceeds with other general funds, which may make it much more difficult to track. To facilitate loan forgiveness, you also should keep and segregate on a contemporaneous basis, documents, such as payroll tax and State unemployment insurance filings, 401K and other retirement plan payments, cancelled checks, invoices for rent, mortgage interest, and utility payments (for electricity, gas, water, transportation, telephone, or internet access), and other documents required to verify eligibility for loan forgiveness.

The SBA is expected to release regulations regarding the application for loan forgiveness, perhaps even a required or recommended form.

If part of the loan isn’t forgiven after the 8-week period ends, decide whether to repay the loan right away or over the remaining term of the loan:

Promptly after the 8-week period following disbursement of the loan ends—presumably, in late June or in July 2020—you should apply for loan forgiveness to your lender, providing the application and all supporting documentation. According to the SBA, the “amount of loan forgiveness can be up to the full principal amount of the loan and an accrued interest.” (SBA Initial Interim Final Rule, at 13; but compare to Sec. 1160(d) (The amount of loan forgiveness … shall not exceed the principal amount of the financing made available under the covered loan.”). Your lender will have 60 days to act on the application. (Sec. 1160(g)). If your application and back up fail to show the proceeds were used for a forgivable purpose, you will have to repay the loan. More serious problems will arise if proceeds were used for an impermissible purpose. The term of the loan is 2 years. But no payment of principal or interest will be due on the loan until six months following the date of disbursement. Interest accrues on the loan at 1% during the 6-month deferral period. (SBA Interim Final Rule, 12-13).

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