The CARES Act – Title 1: Keeping American Workers Paid and Employed Act

Early in the morning on Thursday, March 26, 2020, the Senate passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  On Friday, March 27, 2020, the House of Representatives also passed the CARES Act and President Trump quickly signed it into law the same day.

In this continuing series of blogs by lawyers at Forrest Firm, P.C., we will examine the most important, relevant, and impactful provisions of the CARES Act.  Our goal is not to provide you with a granular level examination of each provision of the CARES Act, but rather to provide a macro view of the CARES Act in clear, concise, and understandable language that will enable readers to move forward with their businesses and lives with confidence.  These are trying times, and here at Forrest Firm we want these articles to support our clients, positively impact our communities, and be available to help you with questions and concerns raised by the CARES Act.

Title I of the CARES Act is separately titled the Keep American Workers Paid and Employed Act (the “Act”). Perhaps the most impactful provision of the Act is the availability of Small Business Association (“SBA”) loans that may, under certain circumstances, convert into grants.  The goal of the Act is to provide capital to otherwise underfunded businesses, including non-profit organizations, in an attempt to help those businesses retain employees on payroll, covered by healthcare insurance, and off of unemployment.

Paycheck Protection Program.  Section 1102 of the CARES Act creates the Paycheck Protection Program, which provides $349 billion in loan assistance to small businesses and nonprofits in 2020, on a first-come, first-served basis. These loans, administered through approved SBA lenders, are designed to assist borrowers to maintain operations and payroll through the coronavirus crisis.

Who is Eligible to Receive Paycheck Protection Program loans (“PPP Loans”)?

PPP Loans are available to “small business concerns” as well as eligible self-employed individuals, independent contractors, sole-proprietorships, tax-exempt 501(c)(3) organizations, tax exempt 501(c)(19) veterans’ organizations, and Tribal business concerns. These loans are 100% guaranteed by the SBA.

Prior to June 30, 2020, these organizations are eligible to receive a PPP Loan if they employ 500 or fewer people or, under certain circumstances, the number of employees the SBA determines to be the industry norm for their industry.

In order to be eligible for a PPP Loan, self-employed individuals, independent contractors, and sole proprietorships must provide their lender with income and expense documentation for submission to the SBA.  

Small business concerns in the restaurant and hospitality industry (NAISC Codes beginning with 72) with more than one physical location may participate in the program if, between February 15 and June 30, 2020, they do not employ more than 500 employees at any one location.

What Do PPP Loans Cover? 

While PPP Loans are mainly designed to assist borrowers to maintain payroll costs through June 30, 2020, they may be used for certain other qualified operational expenses. 

Payroll costs include salaries, wages, commissions and other compensation; payment of cash tips or equivalents; payment for vacation or leave; dismissal and separation allowances; payments for group health care benefits, including insurance premiums; payment of retirement benefits; and payments of state or local tax assessed on compensation of employees. 

For sole-proprietors and independent contractors, payroll costs include payments of income, salary, commission or similar payments to any sole proprietor or independent contractor up to a prorated $100,000 per year of payments. 

Payroll costs do not include compensation over $100,000 for any individual employee; federal income taxes; compensation of employees who reside outside of the United States; or emergency sick or family leave for which a credit is already due under the recently enacted FFCRA.

In addition to payroll costs, borrowers may use these PPP Loans funds to cover operational costs during the eight weeks after their loan origination (“the covered period”) related to group benefits; employee salaries or commissions; interest on a mortgage obligation (not including prepayment interest); rent; utilities; and interest on other debt obligations incurred prior to the origination of their loan.

What is the Maximum Amount of a PPP Loan?

PPP Loans are designed to cover two and half months of the borrower’s average monthly payroll. The maximum amount of a PPP Loan for any borrower is therefore determined, in most cases, by multiplying the borrower’s average total monthly payments for payroll costs for the one year period prior to the date the PPP Loan is made by 2.5 and then adding the outstanding amount of any prior disaster relief loan it obtained after January 31, 2020, allowing for the refinancing of those earlier loans under the terms of the new loan program.

Other calculations apply to seasonal employers or employers who were not in business the prior year.

In all cases, no borrower may obtain a PPP Loan in excess of $10 million.

How Does a Borrower Apply for a PPP Loan and Who Administers the Loan Process?

The SBA has the authority to delegate administration and approval of PPP Loans to qualified SBA lenders.  Other lenders will also have the authority to make PPP Loans once the SBA develops and approves a process. 

Is There Personal Liability if a Borrower Cannot Pay Back the Loan? 

No.  The Small Business Administration has no authority to attempt to recover PPP Loans from individual shareholders or members or partners of borrowers, except to the extent that the PPL Loan proceeds are used for unapproved purposes.

What Does a Business Have to Show to Qualify for a PPP Loan?

A potential borrower must make a “good faith certification” that the uncertainty of current economic conditions makes the PPP Loan necessary to support ongoing operations; acknowledge that the PPP Loan proceeds must be used to retain workers and maintain payroll or make the other qualified payments; state that the recipient does not have another PPP Loan request pending; and that it has not received any other PPP Loans between February 15, 2020 and December 31, 2020.

Anything Else?

The Act also makes certain changes to creditworthiness standards, waives certain fees, and waives personal guarantee requirements in order for borrowers to obtain PPP Loans.

PPP Loan Forgiveness. Section 1106 of the CARES Act provides for the forgiveness of these PPP Loans in certain circumstances by converting the PPP Loans into grants. 

The amount of PPL Loan forgiveness allowed for a borrower is the amount equal to the sum of costs incurred and payments made in the “covered period” of the eight weeks after a PPP Loan is originated for (1) payroll costs. (2) covered interest on mortgage obligations, not including prepayments, (3) covered payments on rent obligations, and (4) any covered utility payment.

In each instance, a “covered” obligation is an obligation which was originally incurred prior to February 15, 2020.  Thus, these obligations are business obligations incurred in the ordinary course that existed before the crisis occurred. For instance, a mortgage note or lease agreement signed before February 15, 2020 on which the business had been paying, or a utility account in the business’s name that existed prior to February 15, 2020. 

The amount of the PPP Loan forgiven may not exceed the principal amount of the PPP Loan. 

The amount of the PPP Loan forgiven is reduced if the borrower has reduced its workforce, comparing its average number of full-time equivalent employees per month (or their average pay) to various measurement periods prior to the coronavirus outbreak.  A borrower can avoid this reduction, however, even if it reduces its workforce between February 15, 2020 and April 26, 2020 (thirty days after the enactment of the CARES Act) if it eliminates that reduction (through rehiring employees) by June 30, 2020.  For example, a restaurant that laid off staff on March 15, 2020 and is eligible to receive a PPP Loan to remain operational and pay its employees will not be subject to a reduction of the amount of the PPP Loan forgiven if it rehires its staff before June 30, 2020. 

As of the date of this article, the SBA has not yet created the forms and established the rules that will govern the PPP Loan forgiveness. The CARES Act anticipates, however, that lenders will administer it, borrowers will present proof of their qualified expenses to their lender, and the lenders will in turn calculate the amount of PPP Loan forgiveness to which the borrower is entitled.

Entrepreneurial Development.  Section 1103 of the CARES Act requires the SBA to make financial assistance available, in the form of grants, to “resource partners” that provide education, training, and advising to Small Business Concerns. These “resource partners” include small business development centers and women’s business centers. The provision waives matching grant requirements, and the goals and metrics of success of these programs are required to take into account the effect of the coronavirus.

State Trade Expansion Program.  Section 1104 of the CARES Act extends the term of the Small Business Act State Trade Expansion Program to allow recipients of grant funding in fiscal years 2018 and 2019 to use the grant funding through the end of fiscal year 2021. It also provides for reimbursement of losses suffered as a result of cancellation of foreign trade missions or shows due to the coronavirus.

Waiver of Matching Funds Requirement Under the Women’s Business Center Program.  Section 1105 of the CARES Act waives, for three months, certain matching grant requirements for recipients of assistance under the Women’s Business Center Program.

Minority Business Development Agency.  Section 1108 of the CARES Act, much like the Entrepreneurial Development and Women’s Business Center Program provision ofSections 1103 and 1105 of the CARES Act, addresses grants for agencies that assist in education, training, and advising minority business enterprises how to access Federal programs, avoid the transmission and communication of the coronavirus, and mitigate the effects of the coronavirus pandemic on supply chains and operations through remote operations and other strategies. The provision waives matching grant requirements, and the goals and metrics of success of these programs are required to take into account the effect of the coronavirus; grant recipients, however, do have certain reporting obligations.

Emergency Economic Injury Disaster Loan Grants. Section 1110 of the CARES Act provides funding for emergency advances of $10,000 to small businesses concerns, nonprofit organizations, and certain other entities that apply for an SBA economic injury disaster loan (an “EIDL”) within three days of applying for the EIDL. 

  • EIDLs provide loans of up to $2 million with interest rates capped at 3.75% for companies and 2.75% for nonprofit organizations, with payment of principal and interest deferred for up to 4 years. 
  • These loans may be used to pay for expenses that could have been met had the disaster not occurred, including payroll and other operating expenses. 

Eligible grant recipients must have been in operation on January 31, 2020. The recipient of an Emergency EIDL may use the funds to provide paid sick leave to employees unable to work due to the coronavirus, maintain payroll, meet increased production costs due to supply chain disruptions, or repay business obligations that cannot be met due to revenue losses.  Notably, the Emergency EIDL does not need to be repaid, even if the grantee is subsequently denied an EIDL.

In addition, a business that receives an EIDL between January 31, 2020 and June 30, 2020 as a result of a coronavirus related disaster declaration is eligible to apply for a PPP Loan or the business may refinance their EIDL into a PPP Loan. In either case, the Emergency EIDL grant is subtracted from the amount of the PPP Loan forgiven.

Section 1110 of the CARES Act also loosens credit standards for borrowers eligible to apply for PPP Loans.  For instance, the SBA may approve PPP Loans based solely on the applicant’s credit score, without requiring submission of tax returns, or may use alternative appropriate methods of determining ability to repay. 

Bankruptcy Provisions. Section 1113 of the CARES Act amends new Chapter 11 bankruptcy procedures to increase the cap on debt limitation for reorganizing small business debtors from $2.7 million to $7.5 million, for petitions filed on or after March 27, 2020 through March 27, 2021.  Section 1113 of the CARES Act also, through March 27, 2021, eliminates payment from the government relating the coronavirus pandemic from inclusion as income in Chapter 7 and Chapter 13 filings, and allows for existing Chapter 13 debtors to request modifications to their plans if they are experiencing or have experienced a material financial hardship due, directly or indirectly, to the coronavirus. These provisions will all sunset one year after enactment.  

If you have any questions, please do not hesitate to contact Brian Bernhardt for more information.