The Families First Coronavirus Response Act (FFCRA) and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), both enacted last week, provide significant new federal benefits to small businesses and their employees. Critically, both statutes target smaller employers. To that end, they each contain provisions that are only applicable to employers with fewer than 500 employees. However, each statute counts employees differently. This distinction in counting methods between the statutes presents a dangerous compliance trap for the unwary.
I. FFCRA and the CARES Act overviews
In relevant part, FFCRA and the CARES Act create a new paid leave regime for small employers while also creating a massive forgivable loan program for those same employers.
FFCRA, which goes into effect on April 1, 2020, provides employees of businesses with fewer than 500 employees up to 12 weeks of leave (10 of which are paid) under certain circumstances as an extension of the Family and Medical Leave Act (FMLA), as well as up to 80 hours of paid sick leave under certain circumstances. FFCRA, in turn, provides employers with refundable tax credits to cover the full cost of qualifying leave.
The CARES Act provides critical loans to small businesses (generally, those with fewer than 500 employees), which can be used to pay for payroll and certain other business expenses and which may be, to some degree, forgiven (in some cases completely). Accordingly, whether employers must provide paid leave under FFCRA and whether employers are eligible for forgivable loans under the CARES Act involves answering the same question – whether the employer has fewer than 500 employees.
II. Counting employees under FFCRA and the CARES Act
The above test does not apply to the CARES Act analysis. Instead, the CARES Act is governed by the U.S. Small Business Administration (SBA) regulations. Under those regulations, employee counting is determined, in large part, by aggregating the head counts of all “affiliated” entities. The evaluation of whether an entity qualifies as an affiliate is not intuitive. Rather, it is governed by highly technical guidance, including 13 C.F.R. sections 121.103 and 121.301, that is ill adapted for the new broadened scope of SBA lending under the CARES Act. Additionally, we are awaiting supplemental guidance from the SBA that may fundamentally change how affiliate assessments – and even basic counting – will be conducted. Bottom line: CARES Act employee counting is not susceptible to a familiar, established method of assessment like that found under FFCRA, and it will require deep and thoughtful review.
As discussed in a prior blog post (link), in determining whether employees of separate entities should be counted together for purposes of determining whether an employer is subject to FFCRA, the FMLA’s “single integrated employer test” should probably be used. The following factors are considered in determining whether such a relationship exists: (1) common management; (2) interrelation of operations; (3) centralized control of labor relations; and (4) degree of common ownership or financial control. No single factor is determinative.
III. Balancing FFCRA and the CARES Act amid this uncertainty
Until the SBA issues clarifying regulations, many employers will not be able to definitely conduct a CARES Act count and compare that outcome to FFCRA. Nonetheless, employers can take a number of steps now to be better prepared to make quick determinations about FFCRA obligations, CARES Act eligibility, and related business decisions about reducing head count versus using federal programs to maintain payroll.
- Conduct the “single integrated employer” test analysis and determine whether FFCRA applies to your business. If your calculation puts you close to 500 employees, be prepared to comply with FFCRA if you fall below the threshold.
- Examine your company’s organizational structure and current population. Do you have fewer than 500 employees in the core company? Are you a subsidiary or portfolio company that shares any amount of control with a parent or investment entity?
- Identify workers you would not normally claim as employees, such as temporary workers, day laborers, and independent contractors. Evaluate whether claiming those workers as “employees” would be a change in position for your company. If so, seek additional advice on those consequences.
- Assess the relative benefits of utilizing FFCRA and the CARES Act to retain current employees versus the benefits to employees of enhanced unemployment. Whether to use forgivable borrowing and refundable leave to avoid reductions will depend on a number of company-specific factors.
These questions are not easy, and they create a complex calculus. However, as employers look to create liquidity and maximize their ability to recall their workforce, FFCRA and the CARES Act present a critical new way to shift payroll costs, leave costs, and certain other expenses to the federal government rather than ending valuable employment relationships. At the same time, every decision in this process likely will have significant collateral consequences later on that should be evaluated in making these value determinations.
Employers with questions or concerns regarding how to handle the intersection of FFCRA and the CARES Act should contact their Reed Smith attorney for guidance.