Avoiding Layoffs: An Overview of the Employee Retention Credit and Enhanced Unemployment Benefits Under the CARES Act
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. Its key provisions include an Employee Retention Credit, which allows employers to recoup certain wages paid to employees who are not providing services due to a suspension of operations related to COVID-19, and the creation of a temporary Pandemic Unemployment Assistance Program. Both of these mechanisms provide ways for businesses to avoid layoffs by implementing temporary shutdowns or reductions in hours.
Previously, we shared Alternatives to Layoffs in Massachusetts During the COVID-19 Crisis. In this follow-up post, we will provide an overview of the Employee Retention Credit and expanded unemployment benefits and discuss how employers can use these tools to keep employees on their payroll during these challenging times.
Employee Retention Credit
Employers of any size, including tax-exempt organizations, are eligible for a payroll tax credit equal to 50% of “qualified wages” paid to employees from March 13, 2020 through December 31, 2020. This credit is available to employers who meet either of the following conditions:
- the employer’s operations are either fully or partially suspended by a government order relating to COVID-19; or
- the employer’s gross receipts during a calendar quarter are less than 50% of the gross receipts for the same calendar quarter during 2019.
What constitutes “qualified wages” depends on the average number of employees in 2019:
- If an employer’s average number of full-time employees during 2019 was more than 100, “qualified wages” include only wages that continue to be paid to employees who are not providing services due to a COVID-19 suspension of business operations, or the greater than 50% reduction in gross receipts.
- If an employer’s average number of full-time employees during 2019 was 100 or less, qualified wages include all wages paid to employees regardless of whether or not the employee is providing services.
- Regardless of an employer’s number of employees, the total amount of qualified wages that can be counted for an individual employee during the entire COVID-19 period cannot exceed $10,000.
Employers can be immediately reimbursed for the credit by reducing their required deposits of payroll taxes that have been withheld from employees’ wages by the amount of the credit. Eligible employers will report their total qualified wages and the related health insurance costs for each quarter on their quarterly employment tax returns or Form 941 beginning with the second quarter.
An eligible employer can fund its payments of qualified wages before receiving the credits by reducing its federal employment tax deposits by requesting an advance payment from the IRS by submitting Form 7200, Advance Payment of Employer Credits Due to COVID-19.
Note that the Employee Retention Credit is not available to employers receiving small business interruption loans under the CARES Act. Additional IRS information on how to obtain this payroll tax credit can be found here.
Enhanced Unemployment Benefits
The Pandemic Unemployment Assistance Program temporarily expands unemployment benefits through December 31, 2020 to a broadly defined group of “covered individuals.” These significantly enhanced unemployment benefits can have a significant effect on employer decisions about how to address near-term payroll costs.
“Covered individuals” now include anyone who self-certifies that they are able and available to work, but are unemployed or partially unemployed, due to:
- a COVID-19 diagnosis or COVID-19 symptoms for which a medical diagnosis is being sought;
- a member of the household being diagnosed with COVID-19;
- the need to care for a family member or member of the household who has been diagnosed with COVID-19;
- as primary caregiver, the need to care for a child or other person in the household who is unable to attend school or daycare because of the COVID-19 pandemic;
- a COVID-19 quarantine which prevents travel to work;
- a healthcare provider’s recommendation to self-quarantine due to COVID-19 concerns;
- an inability to commence employment or reach the job, as previously scheduled, because of COVID-19;
- taking on the role of the breadwinner or major support for the household because the former head of the household has died as a result of COVID-19;
- the need to quit their job as a direct result of COVID-19;
- the closing of their place of employment as a result of COVID-19; or
- meeting any additional criteria as established by the Secretary of Labor
Unemployment benefits have been extended to categories of workers not traditionally eligible for unemployment, including self-employed individuals, independent contractors, and those with limited work history, who are unable to work as a result of the coronavirus health crisis. However, Covered Individuals will NOT include anyone who is able to work remotely and continue to be paid, or who is otherwise receiving paid sick leave or other paid leave benefits.
Importantly, unemployment benefits have also been enhanced by (1) providing a $600 weekly federal supplement in addition to state law benefits through July 31, 2020; (2) extending the number of weeks an individual may be eligible to receive unemployment benefits (up to 39 weeks in most states) and (3) waiving any unpaid one-week waiting period.
Employees who are placed on a temporary furlough, or have their hours reduced, will be able to take advantage of these expanded unemployment benefits.
Employers should consider whether they can take advantage of these additional sources of income for employees to avoid permanent layoffs and instead reduce hours or implement temporary furloughs. Additional financial incentives, including forgivable loans under the Paycheck Protection Act have also been created by the CARES Act to encourage small businesses to retain workers instead of laying them off.
We encourage employers to seek legal advice prior to implementing a furlough, reduction in hours, or layoff, to ensure proper legal compliance. For more information, please feel free to contact Jacqueline Piscitello at firstname.lastname@example.org or 781-799-7090 or any other member of the Outside GC team, or visit our website’s Contact Us page.
Jacqueline Piscitello has nearly 25 years of legal experience and has been a partner with Outside GC since 2005. Jackie has experience in a wide range of areas, including advising on sophisticated employment and labor matters, technology, litigation and dispute resolution, as well as a variety of general corporate and governance matters.
This publication should not be construed as legal advice or a legal opinion on any specific facts or circumstances not an offer to represent you. It is not intended to create, and receipt does not constitute, an attorney-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal questions you may have. Pursuant to applicable rules of professional conduct, portions of this publication may constitute Attorney Advertising.