Discussing Layoffs or Other Cost-Saving Measures? Hit the Pause Button.

As the COVID-19 pandemic continues to evolve, employers everywhere are being forced to consider layoffs, furloughs, and other alternatives. However, if your business finds itself in a similar situation, you might consider hitting the pause button.

Late Wednesday evening, the Senate passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Also known as “Phase III” of the federal coronavirus stimulus bill, the legislation will be the largest economic relief package in the history of our country. While the CARES Act will likely not be signed into law until late this week, the final version of the bill includes critical details that small and mid-sized employers should examine before proceeding with reductions to personnel or pay cuts.

Specifically, the Act provides for the Paycheck Protection Program, which substantially expands loans available through the Small Business Administration’s (SBA) 7(a) Loan Program.  Certain “small businesses” – defined as employers having 500 or fewer employees, or if applicable, employers falling within the SBA’s sizing/employee criteria – in operation as of February 15, 2020, will be entitled to emergency loans of up to $10 million based on the applicant’s 2019 payroll costs. Funds may be used for: (1) payroll costs; (2) costs related to the continuation of group health care benefits; (3) employee salaries, commissions, and other compensation; (4) payments of interest on any mortgage obligations; (5) rent (including rent under a lease agreement); (6) utilities; and (7) interest on any other fixed-debt obligations incurred prior to February 15, 2020.

Eligible employers will be able to immediately apply for loans through SBA-certified and delegated banks, credit unions, and other financial institutions. In completing its application, employers will be required to make a good-faith certification that the loan is sought due to the current economic uncertainty caused by COVID-19, the funds will be used to retain workers and maintain payroll, and that the business does not have either an active loan or a pending loan application through another SBA program for the same uses.

Perhaps most importantly, the Paycheck Protection Program also provides for partial loan forgiveness. Employers will be eligible for forgiveness on a covered loan equal to the amount spent during the 8-week period after the loan’s origination date for all of the following:

1. Payroll costs
2. Interest payments on any mortgage obligation incurred before February 15, 2020
3. Payments on any rental obligation incurred before February 15, 2020
4. Payments on any utilities obligation incurred before February 15, 2020

However, the amount forgiven for the above costs will be reduced in proportion to: (a) any reduction in employees; or (b) any material reduction (25% or more) in the pay to any employee during the covered period of the program. In other words, the layoffs or pay cuts you are considering now may hinder your ability to effectively turn a portion of your future loan into a grant. Employers should therefore begin to plan and react accordingly.

The above is just a snapshot of the upcoming CARES Act, and BrownWinick attorneys continue to monitor all developments as they arise on a daily basis.

If you need help applying for a loan under the program or are not sure if your business qualifies, please reach out to your BrownWinick attorney for assistance or submit a message through our Contact Us form.

For additional updates on COVID-19 and other relevant legal guidance, please visit our COVID-19 Resource Page.