A Summary of the FFCRA and CARES Act
This is a summary provided to ISBN by a fellow member for your reference. Please read this message and linked resources carefully.
Families First Coronavirus Response Act (FFCRA) UPDATES
The Department of Labor (DOL) issued recent guidance clarifying a number of questions facing employers related to scope and applicability of the expanded FMLA leave and paid sick time provisions of the FFCRA.
As an initial matter, DOL guidance clarified that the FFCRA takes effect on April 1, 2020—not April 2, 2020, as originally noted. All employers must be aware of this updated effective date.
Other key clarifications issued by the DOL related to the FFCRA include:
- Employees are not eligible for FFCRA benefits if the employer’s place of business closes for COVID-19-related reasons.
- Furloughed employees are not entitled to FFCRA benefits.
- In both scenarios above, employees are encouraged to seek state unemployment benefits (which, as you will read below, may bring separate issues given certain provisions in the newly-passed CARES Act).
- DOL guidance provides clarity around many other mechanics related to administering FFCRA benefits for your employees.
Coronavirus Aid, Relief, and Economic Security (CARES) Act Signed into Law
On Friday, March 27, 2020, President Trump signed the CARES Act into law. The Act is a $2 trillion coronavirus (COVID-19) federal relief/stimulus package aimed at helping small business and impacted individuals navigate this time of crisis. While there are several components to the CARES Act aimed at helping individuals, businesses and industries survive the current economic crisis, we believe four components of the Act are of particular importance to Great Clips franchisees. Each of those components, and a summary of their key provisions, appears below.
Summary of Key Provisions
Our goal in preparing this information is to provide you with a summary of the latest legislative updates that we are seeing from various sources, including the IFA, PBA and other legal and business connections. The four components of the Act that we want to highlight for you are as follows:
1. EMPLOYEE RETENTION TAX CREDIT. The Act incentivizes employers to retain employees during the COVID-19 crisis by providing a tax credit for wages paid. Below is a summary of what we have been able to gather from various sources:
- Under the Act, an employer whose business declined by 50% quarter over quarter as compared to the prior year, or whose business was either fully or partially closed due to COVID-19, can obtain a refundable payroll tax credit equal to 50% of the wages paid to employees during the crisis.
- The credit is tied to qualified wages paid to an eligible employee from March 13, 2020, through December 31, 2020.
- Employers who take advantage of the employee retention tax credit are not eligible for the Paycheck Protection Program (described below).
2. PAYCHECK PROTECTION PROGRAM. As an alternative to the Employee Retention Tax Credit, the Act provides streamlined access to capital by way of a forgivable loan program known as the Paycheck Protection Program. Below is a summary of what we have been able to gather from various sources:
- Under the CARES Act, the SBA will administer forgivable loans up to $10 million per company (based on a specific formula) to provide cash flow assistance for small businesses (defined as 500 employees or less). The loans are intended to cover payroll costs for eligible employees, utility payments, mortgage or rent payments, and other qualifying business-related expenses.
- This program allows complete deferment of loan payments for at least six months and not more than one year. Loan proceeds can be used for paying employees as well as rent and utilities.
- This section of the Act calls for streamlined loan approval processes and the potential for loan forgiveness if the borrower maintains the average number of full-time equivalent employees.
- Importantly, and to encourage rehiring employees who may previously have been terminated due to the COVID-19 crisis, borrowers that rehire workers will not be penalized for purposes of qualifying for loan forgiveness benefits under the Act.
- This is a guaranty of a private lender’s loan, so the borrower’s lender applies to the SBA for the guaranty.
- A borrower cannot receive both a Paycheck Protection Program loan and an EIDL loan (described below) for the same purpose. However, the program allows a borrower who received an EIDL loan after January 31, 2020 and before the date on which Paycheck Protection Program loans are made available to refinance the EIDL loan under the Paycheck Protection Program.
- Note that receiving a Paycheck Protection Program loan disqualifies the borrower from obtaining certain payroll tax credits to which the borrower may have otherwise been entitled, and having a Paycheck Protection Program loan forgiven appears to render an employer ineligible for deferral of the employer’s share of Social Security Taxes that the employer may have otherwise been able to take advantage of under the CARES Act.
3. ECONOMIC INJURY DISASTER LOAN. This section of the Act authorizes $10 billion to help small businesses survive the COVID-19 crisis by way of expanding the Economic Injury Disaster Loan Program (EIDL). Below is a summary of what we have been able to gather from various sources:
- The Act loosens traditional qualification requirements for the EIDL program, including those tied to length of business operation and availability of other credit. We have been cautioned that borrowers may expect delays with funding through the EIDL as compared to the Paycheck Protection Program.
- The size of an EIDL can be up to $2 million to help overcome the temporary loss of revenue borrowers are experiencing as a result of COVID-19. There are no loan forgiveness provisions in the EIDL program. The loan must be repaid to SBA over time.
- These loans may be used to pay fixed debts, payroll, accounts payable and other bills that can’t be paid because of the COVID-19 impact. The interest rate is 3.75% for small businesses.
- Unlike a Paycheck Protection loan, an EIDL may still permit a borrower to apply for certain payroll tax credits available under the CARES Act.
- SBA disaster loans may be long-term, up to a maximum of 30 years. Terms are determined on a case-by-case basis, based upon each borrower’s ability to repay.
- Applications are online, submitted directly to SBA by the borrower. Background financial information on the business is required to be submitted. https://disasterloan.sba.gov/ela/
Please note: The information above related to the Paycheck Protection Loan program and the EIDL program is a summary only. The SBA has 30 days to implement regulations. It appears that some loan proceeds may be used for covered retroactive expenses. It is extremely important that you discuss these loan programs and other options with your lender and other advisors. Each has benefits but also limitations. Any option you might pursue is very dependent on the individual circumstances for you and your business.
4. EXPANDED UNEMPLOYMENT. In addition to authorizing one-time payments to many Americans, the Act provides additional unemployment benefits to employees impacted by COVID-19. Below is a summary of what we have been able to gather on this issue from various sources:
- Unemployment periods are extended to 39 weeks (versus 26 weeks in most states).
- This section of the Act provides $600 per week in addition to the unemployment insurance benefit normally paid in your state. The CARES Act specifies that unemployment eligibility is available for certain COVID-19-related reasons, including many of those specified in the FFCRA for expanded FMLA leave eligibility.
- This additional $600 benefit, along with the normal unemployment insurance benefit, is available for up to four months.
- The typical one-week waiting period for unemployment does not apply.
Practical Considerations and Insights
Based on our discussions with various third parties and other resources, below are various insights related to how we’ve learned that others are thinking about their business in light of this legislative development, which you may find helpful.
- Unemployment expansion creates a hurdle. The Act’s expansion of unemployment (i.e., the $600 additional weekly payment) may make it difficult to find staff who want to work, even after the crisis subsides. An employer’s inability to find and retain staff post-crisis may impact its ability to qualify for the loan forgiveness benefits under the Paycheck Protection Loan program.
- What can you do to combat the potential appeal of expanded unemployment? Short of offering compelling financial propositions (e.g., sign on bonus, incentives, competitive hourly wage, etc.), you may experience some difficulty in this effort. Recognizing that some segment of your workforce may try to remain on unemployment is an important step, as you simply may have to wait for some employees to return on their own timeline. We also recommend that you stay in touch with your people, maintain strong connections, and give them an emotional reason/connection to want to get back into the salon. There is no easy solution to this dilemma, especially in the many states/localities where government agencies have enforced closure orders and shelter-in-place orders.
- Who can I contact to learn more about my borrowing options? Franchisees can speak to any existing lender with whom they work. As additional options, we are providing information on lenders referred to us either by other industry contacts. We are providing these as lead assistance for potential lenders, not as any sort of endorsement. Please click to learn more about FranFund and ApplePie Capital, two franchise-focused lenders. In addition, please see the informational sheet for Live Oak Bank.
- What is coming next from the federal government? Despite the CARE Act being signed into law yesterday, discussions already are underway related to a fourth round of legislation aimed at combating the economic impacts caused by COVID-19. We understand that nothing is likely to happen for about a month, as the Senate is on recess for 30 days. If anything, we can anticipate that the decisions you make today may be impacted by laws yet to be drafted – a somewhat regular occurrence in these COVID-19 times.
- Can larger organizations benefit from the loan benefits? As drafted, the loan programs offered under the CARES Act apply to businesses with less than 500 employees. Despite this, the Act directs the Secretary of the Treasury to design a loan program for businesses that have between 500 and 1,000 employees. Under this program, interest rates on loans could not exceed 2% and borrowers would receive a grace period of 6 months after loan origination before payment is due.
YOUR NEXT STEPS
We strongly recommend that franchisees take the following steps now:
- Get familiar with the CARES Act by reviewing the resources that we reference in this alert, including those listed below our signatures.
- Sign up for industry webinars happening weekly on topics including the Small Business Payroll Protection Program and new Paid Leave requirements.
- Consider signing up for one of many webinars related to the mechanics of applying for different types of CARE Act relief. Please see an option offered by ApplePie Capital.
- Engage now with other ISBN members, particularly in your state, and share best practices and information. Franchisees also may have insights and referrals regarding lenders with whom they have had success in the past and who are qualified to help you assess loan options, if that is your preference.
- Consult with your tax advisor, accountant or business lawyer to help you determine whether the tax credits are more or less beneficial to you than one of the Act’s available loan programs.
Note: The information referenced above is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney licensed in your state.
Here are some resources we recommend you consult: