By William Hays Weissman on
March 30, 2020
Congress enacted three bills in three weeks – the Coronavirus Preparedness and Response Supplemental Appropriations Act of 2020, the Families First Coronavirus Response Act (FFCRA), and the Coronavirus Aid, Relief and Economic Security Act (CARES Act) – designed to address the public health emergency caused by the spread of COVID-19. These laws are supplemented by various state and local government actions coming in the form of both executive orders and informal guidance. All of these government actions, which are unlikely to be the only ones taken, have the potential to reshape the nature of work across the United States over the coming weeks and months in ways that are likely both intended and unintended.
First and foremost, the coronavirus is a public health problem. Its rapid spread around the world is not unprecedented. Pandemics are well documented, from bouts of plague in the Middle Ages through the influenza pandemic that lasted from January 1918 through December 1920, to more recent pandemics such as SARs. Nonetheless, the COVID-19 pandemic is unprecedented in modern times in the United States, and efforts taken to control its spread are causing significant disruptions to the economy. Most, but not all, of the United States is currently under some kind of shelter-in-place restrictions. While these restrictions vary by state, they have generally meant that many retail, travel, entertainment and hospitality locations are temporarily closed, forcing these and other employers to make difficult business decisions, including how to address their workforce.
The most significant question is how long these restrictions will last. The answer is no one knows, but clues from the FFCRA and CARES Act suggest the government expects economic activity to begin to pick back up within the next eight weeks, and be more robust by the beginning of August. This is evident from the fact that forgivable loans to cover payroll are intended to last for eight weeks, while enhanced unemployment benefits run until July 31.
Regular unemployment benefits versus pandemic unemployment benefits under the CARES Act
While the state unemployment insurance (UI) systems vary,1 fundamentally they are all premised upon the same basic principles: an individual who is totally or partially unemployed through no fault of their own is entitled to UI benefits if they are able and available for work and in fact looking for work. That generally means the employee neither quit nor was fired for misconduct, which has a technical and narrow meaning in UI law.2
The calculation of an individual’s UI benefits is based the wages earned in a “base period,” which generally comprises four of the last five calendar quarters. A minimum amount of wages is required to have been earned in both a particular quarter and base period, but the highest amount of wages in a base period quarter is generally used to determine the individual’s “weekly benefit amount” (WBA). In most states an individual can claim UI benefits for up to 26 weeks.
The CARES Act does not change the basic structure of the existing UI system. Rather, it adds five key features to the existing UI system:
- Expands the eligibility for UI benefits for COVID-19-related reasons
- Adds 13 additional weeks of eligibility (for up to 39 weeks of benefits)
- Adds a flat $600 to the WBA (known as “Federal Pandemic Unemployment Compensation”)
- Encourages states to loosen certain restrictions on UI such as the one-week waiting period and looking-for-work requirements
- Supports both existing and the creation of work-share programs (also called “short-term compensation” programs)
Using the State of California as an example, the following table summarizes the UI systems’ key features before and after the CARES Act.
Employer competition from expanded unemployment insurance eligibility
“Essential businesses,” whose definition varies by jurisdiction and are not always clear, but generally include grocery stores, food manufacturing, pharmacies and drug stores, hardware stores, laundromats, gas stations, medical facilities, among others, are continuing to operate. For such employers, care must be taken to address the health and safety of workers as well as customers. Several government agencies, including the Centers for Disease Control (CDC) and Equal Opportunity Employment Commission (EEOC), have issued guidance on health and safety issues as they relate to workers, such as whether employers can do temperature checks on employees coming to a facility. Beyond these kinds of operational issues in coming to work, what happens if workers do not want to work?
The CARES Act provides that nearly anyone who is able and available to work, but cannot do so because of COVID-19 is general eligible for UI benefits. This includes individuals who were self-employed (independent contractors), did not have sufficient work history in the base period to qualify for benefits, and individuals who had not started working.
There are two exceptions to the expanded eligibility criteria: (1) if the individual can telework with pay, or (2) the individual is receiving paid leave benefits, even if they otherwise meet the eligibility criteria.
The CARES Act requires the individual to self-certify that they fall into one of 10 enumerated categories (see table above.) These categories are extremely broad and include virtually no guardrails. There is no clear guidance on how these will work in practice. Say an individual self-certifies that they are an individual who is “experiencing symptoms of COVID-19 and seeking a medical diagnosis.” There is no time limit imposed on the individual for seeking the diagnosis. Can an individual seek a diagnosis for several weeks without actually obtaining one? And what happens if the diagnosis comes back that the individual does not have COVID-19?
Another eligibility category is an individual cannot work because a child cannot attend school, and having the child at school is necessary to allow the individual to work. Under the CARES Act, this individual may stay home from work and collect UI benefits. However, say the individual’s employer states that the individual can work from home with pay, and is willing to be flexible with hours so they can juggle dealing with kids and work. The CARES Act expressly states that an individual “who has the ability to telework with pay” is ineligible for benefits. How will this play out?
The U.S. Department of Labor has issued FAQs that address this issue in the context of the FFCRA and paid sick and family leave benefits. For example, FAQ 18 provides guidance on telework: “If you and your employer agree that you will work your normal number of hours, but outside of your normally scheduled hours (for instance early in the morning or late at night), then you are able to work and leave is not necessary unless a COVID-19 qualifying reason prevents you from working that schedule.” However, FAQ 19 then appears to leave it to the employee’s discretion to determine if that is even feasible, stating: “If your employer permits teleworking—for example, allows you to perform certain tasks or work a certain number of hours from home or at a location other than your normal workplace—and you are unable to perform those tasks or work the required hours because of one of the qualifying reasons for paid sick leave, then you are entitled to take paid sick leave.” FAQ 19 goes on to state, “Of course, to the extent you are able to telework while caring for your child, paid sick leave and expanded family and medical leave is not available.”
In the context of UI eligibility, what does this mean? There is no guidance on how to reconcile staying home with a child as an eligibility criteria with the disqualification for telework with pay. Arguably, even if an employer makes the offer to the employee to telework with pay, allowing them to start work early and end late, the employee could refuse because they assert this is not practical or doable for the employee. As noted in the table above, there are two disqualifications from UI benefits under the CARES Act: telework with pay and receipt of paid sick leave or other paid leave benefits. The paid sick leave disqualification expressly states that the disqualification applies even if the claimant is otherwise eligible. Telework with pay, however, does not contain that express language, suggesting that any eligible reason could trump the disqualification.
Even more difficult to address will be the eligibility criteria that the “individual has to quit his or her job as a direct result of COVID-19.” The phrase “has to quit” implies that quitting is mandated in some manner, but by whom, and why? If an employee self-certifies that they have “to quit as a direct result of COVID-19,” even if the employer offers to allow the employee to telework with pay, is that individual still eligible? The CARES Act provides no guidance whatsoever.
What this means for employers who are operating is that the expanded reasons that an employee may not work could make it more difficult to both attract or retain workers, particularly when, as explained next, it may be more lucrative to not work.
Employer competition from expanded UI benefits
Even if the expanded right to UI benefits is of minimal concern to an employer, it will still face the basic labor market principle that workers gravitate to higher wages. What happens when higher wages come from not working at all?
The CARES Act generally provides as much as 39 weeks of UI benefits to individuals affected by COVID-19. In addition to the WBA an individual would receive, the CARES Act provides for an additional flat $600 payment to all eligible recipients. As the examples below describe, this may make keeping employees in place challenging.
Example 1. An individual works in California at a retail store that is forced to close because of government orders. The individual makes $13/hour (minimum wage in California beginning in January 1, 2020, for employers with more than 25 employees), works 40 hours and makes $520 per week. The high base period wages are $6,240 and the WBA is $240. Compare the possible payments over the next four months:
Example 2. Same facts as example 1, except the retail store remains open because it is an essential business. The individual is not sick, nor is anyone in their household sick. They do not have children nor need to care for anyone else. They are able and available to work, but are afraid of getting COVID-19 from customers and self-certifies that they have “to quit as a direct result of COVID-19.” Under regular unemployment the individual is likely disqualified from UI benefits because of the quit, but under the CARES Act will collect as much as $13,440 over 16 weeks.
Example 3. An individual works 10 hours per week for $20 per hour. The individual self-certifies that they cannot get to their place of business and quits. The WBA is $93. Under the CARES Act the individual could receive the following potential compensation over 16 weeks:
As these few examples demonstrate, the CARES Act may make it very difficult to maintain a workforce, particularly on a part-time or limited basis, when an individual can self-certify an eligible reason, stay off work and potentially make three times more than they would if they had continued working. This creates a substantial disincentive to work.
Reviewing claims and policing questionable UI claims
The CARES Act does contain funding for fraud prevention, and requires anyone who improperly receive benefits to repay them. At a practical level, how will it work? There is no current guidance on what kind of documentation will be required to substantiate COVID-19-related reasons. Some states have put out some FAQs to begin to address these issues, but they vary. For example, using the facts from Example 2 above, the Connecticut Department of Labor’s recently issued FAQs provide the following explanation:
I received an offer to return to work, but I am concerned about the safety of the position in light of COVID-19. Will I be denied unemployment for that week?
Unemployment benefits are paid on a week to week basis. If the Governor’s restrictions are still in place regarding essential and nonessential employment, or you have concerns regarding your specific place of employment, you may have good cause to refuse your employment as it is not suitable due to possible exposure to the COVID-19 virus, and would not be denied benefits on that basis.
As a practical matter, how will a state UI agency, already under tremendous strain, have the time or even the ability to police such claims for fraud? It would be virtually impossible to establish that the claimant did not have a good-faith fear of COVID-19, such that they should be denied UI benefits. Unless there is a rapid lifting of restrictions, reopening of schools and a general consensus that the risks of COVID-19 are gone, individuals will largely be able to control the decision whether to work or not work.
Forgivable loans and tax credits for maintaining workers
The CARES Act also includes both tax credits and forgivable loans to help businesses maintain a workforce. Under the “Payroll Protection Program” loan provisions, an employer can obtain a loan to cover payroll costs that is forgiven after eight weeks if the employer maintains its workforce. The formula, however, does appear to take into consideration that payroll costs may drop not because employees terminate workers, but because they stop working on their own. Can an employer, trying to maintain a workforce, be whipsawed by taking out loans to cover payroll, only to find a dwindling payroll through “no fault of its own?”
Further, no employer can guarantee that it will be able to maintain sales revenue sufficient to stay open even if it wants to maintain its workforce. In light of these realities, and notwithstanding the 100 percent federal government guarantee on Payroll Protection Program loans, some lenders may be less willing to lend to small businesses concerned about the broader prospects for default of the business.3
In addition, the CARES Act provides a refundable payroll tax credit against the employer’s 6.2 percent Social Security tax for 50 percent of qualified wages, which includes qualified healthcare expenses, paid by employers whose (1) operations were fully or partially suspended due to a COVID-19-related shutdown order or (2) whose gross receipts declined by more than 50 percent when compared to the same quarter in the prior year. For eligible employers with greater than 100 full-time employees, qualified wages are wages paid to employees when they are not providing services due to the COVID-19-related circumstances described above. For eligible employers with 100 or fewer full-time employees, all employee wages qualify for the credit, whether the employer is open for business or subject to a shut-down order until the employer has a quarter where its receipts exceed 80 percent of what they were for the same quarter in the prior year. The credit is limited to the first $10,000 of compensation (including qualified health benefits) paid to an employee between March 13, 2020 through December 31, 2020.
Will this be enough of an incentive to stay open? Assume a company has a worker making $15 per hour and no benefits, or $31,200 per year. At a 40-hour week and $15 per hour, this tax credit would last a little over eight months.4 Even if the employee has benefits worth the same amount per hour, this still stretches out the benefit over four months. The business might not survive that long trying to operate by taking advantage of the tax credits.
For a business faced with potential cash-flow issues and diminished revenues, it may be less expensive to lay off employees and let them earn as much or more from unemployment than it is to keep operating. Thus, notwithstanding the loans and tax credits, the unemployment provisions may tip the balance in favor of shutting down, furloughing workers, reducing hours, or other drastic reductions, at least until the economic climate appears to be substantially improved. Doing so raises numerous other issues, such as obligations to provide certain notices, pay out accrued but unused vacation in some states, among others.
Of course, against this backdrop is the unknown of what states will do. Will they waive the one-week waiting period? Will they enter into agreements with the federal government to provide the expanded pandemic UI benefits? The assumption is that they all will, but when will the agreements be effective?
Further, will the states scrutinize UI claims carefully to ensure eligibility? Will businesses be forced to try to contest questionable COVID-19 claims, particularly if telework or part-time work is available? Some states have provided limited guidance to date, but many have not, and much of the guidance is itself still subject to various interpretations. The only conclusion known for sure is that there is still more questions than answers.
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This article only includes general information and IMS is not, by means of this article, rendering any tax, legal or other professional services. This communication should not be relied upon for any decision or action that may have an impact on your business. Prior to taking any action, you should be in contact with your advisor.