On March 27, 2020, the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) (H.R. 748).
In this blog post we (1) lay out an initial action plan for employers considering obtaining relief under the CARES Act, (2) summarize the compensation-related provisions of the CARES Act, and (3) identify the key questions that the CARES Act leaves unanswered.
CARES Act – An Employer Action Plan to Comply with Compensation-Related Provisions
Any employer considering obtaining loans, loan guarantees or payroll assistance under the CARES Act should:
- Review the CARES Act compensation-related provisions and workforce maintenance requirements, which are summarized in further detail in the next section.
- Identify affected officers and employees and compensation arrangements (for those employers accepting loans, loan guarantees or other relief).
- Identify all officers and employees with total compensation in excess of $425,000 for calendar year 2019 (an “Applicable Employee”).
- Identify all Applicable Employees with total compensation in excess of $3 million in calendar year 2019.
- Identify last-12-months’ compensation levels for all Applicable Employees as of latest practicable date (the “LTM Compensation”).
- Identify and review all compensation arrangements between the business and each Applicable Employee, focusing on: (1) dollar amounts; (2) guaranteed increases / guaranteed compensation; and (3) amendment and termination provisions.
- For purposes of provisions requiring workforce and compensation/benefits maintenance, identify workforce and compensation and benefits levels as of relevant dates.
- Identify and review collective bargaining agreements (if any).
- Act to comply with the CARES Act compensation provisions (once the loan or loan guarantee has been executed or other relief has been received).
- Mobilize resources to track ongoing compliance (e.g., GC / Deputy GC; CHRO or HR team leaders; stock plan administrators; benefits administrators).
- Establish administrative framework to track compensation on a rolling 12-month basis and to track benefit levels.
- If current LTM Compensation for any Applicable Employee exceeds maximum levels, amend any applicable agreements, plans, programs or policies to implement required reductions and obtain any required consents from any such Applicable Employee.
- For all other plans, programs or policies between the business and an Applicable Employee, amend to include prospective cutback provisions, as needed.
- For all new agreements with Applicable Employees, include savings language that would allow changes to compensation as may be required to comply with federal requirements without triggering any rights for the Applicable Employee (e.g., severance rights upon a “good reason” termination or breach of any such agreement).
- Restore workforce and compensation / benefits levels as necessary to comply with workforce maintenance requirements as described below.
Summary of Compensation-Related Provisions of the CARES Act
The CARES Act is intended to provide financial assistance to individuals and businesses affected by the crisis caused by the Coronavirus (COVID-19) pandemic, including funding for loans and loan guarantees and other sources of funding.
(1) Compensation-Related Provisions Applicable to Loan and Loan-Guarantee Recipients under Title IV of the CARES Act (the Economic Stabilization Act of 2020 or the “ESA”) (For more information about the Title IV loan programs, see here.)
(a) Which Employers Are Covered?
- Compensation-Related Limitations: Any employer that accepts a loan or loan guarantee under the ESA (with certain exceptions for salaries determined by an existing collective bargaining agreement entered into on or before March 1, 2020).
- Workforce Maintenance Requirements: Any employer that (i) accepts a loan or loan guarantee under Section 4003(b)(1)-(3) of the ESA that is a passenger or cargo air carrier (“Air Carrier”) or a business critical to maintaining national security or (ii) accepts a loan under Section 4003(b)(4) of the ESA and has between 500 and 10,000 employees (“Mid-Size Business Recipient”).
(b) How Long do the Limitations/ Requirements Stay in Effect?
- Compensation-Related Limitations: From the time the loan or guarantee is executed through the first anniversary of the date that the loan or loan guarantee is no longer outstanding.
- Workforce Maintenance Requirements: Generally, September 30, 2020. For Mid-Size Business Recipients, certain representations survive until 2 years after loan repayment.
(c) What Compensation is Limited?
- An officer or employee whose total compensation exceeded $425,000 in calendar year 2019 (an “Applicable Employee”) may not receive:
- total compensation in a consecutive 12 month period that is in excess of the total compensation that the Applicable Employee received in calendar year 2019; or
- severance pay or other benefits upon termination that exceeds twice the maximum total compensation received by the Applicable Employee in calendar year 2019.
- An Applicable Employee whose total compensation exceeded $3 million in calendar year 2019 may not receive total compensation in a consecutive 12 month period that exceeds $3 million plus 50% of the excess over $3 million of the total compensation that the Applicable Employee received in calendar year 2019.
- For example if an Applicable Employee’s total compensation was $5 million for calendar year 2019, the maximum 12-month rolling total compensation level that the Applicable Employee can receive is $4 million ($3 million plus 50% of the excess of $5 million over $3 million).
- For purposes of the above limitations, total compensation includes salary, bonuses, awards of stock, and other financial benefits provided by the eligible business to the officer or employee of the eligible business.
(d) What are the Workforce Maintenance Requirements for Air Carriers and Businesses Critical to Maintaining National Security? Any employer that accepts a loan or loan guarantee under Section 4003(b)(1)-(3) of the ESA and is an Air Carrier or a business critical to maintaining national security will be required to maintain their employment levels as of March 24, 2020, to the extent practicable, and may in no event reduce employment by more than 10% from March 24, 2020 levels until September 30, 2020.
(e) What are the Workforce Maintenance Requirement Applicable to Mid-Size Business Recipients?
In addition to the compensation limitations described above, for employers receiving loans under the ESA with between 500 and 10,000 employees, such employers must make a good-faith certification that includes, but is not limited to, the following:
(i) the funds received will be used to maintain at least 90% of the workforce, at the employees’ same compensation and benefits, until September 30, 2020;
(ii) they intend to restore at least 90% of their workforce to February 1, 2020 levels, and the employees’ compensation and benefits no later than four months following the termination of the public health emergency declared by the Secretary of Health and Human Services on January 31, 2020;
(iii) they will not outsource or offshore jobs for the term of the loan and 2 years after completing repayment of the loan; and
(iv) they will remain neutral in any union organizing effort for the term of the loan.
(2) Compensation-Related Provisions Applicable to Air Carrier Worker Support Recipients.
(a) Similar compensation-related limitations to those described above apply to Air Carriers and certain contractors servicing Air Carriers that receive assistance funds to pay employee salaries, wages, and benefits (“Payroll Assistance”) under the ESA. However, the limitations apply from March 24, 2020 through March 24, 2022.
(b) Air Carriers that receive Payroll Assistance under the ESA must refrain from conducting involuntary furloughs or reducing pay rates or benefits until September 30, 2020.
Key Questions Unanswered by the CARES Act
The compensation-related provisions of the CARES Act leave open a number of unanswered questions that employers will need to understand in order to comply with the compensation-related provisions of the CARES Act. Many of these questions are similar to the questions raised when Congress passed the Troubled Asset Relief Program (TARP) in 2008.
While, the CARES Act requires the Secretary of the Treasury to publish procedures for application and minimum requirements in order to receive the federal loans and loan guarantees under Section 4003(b)(1)-(3) of the ESA within 10 days of the enactment of the CARES Act (i.e., by April 6, 2020). However, it is unclear whether these regulations will include guidance with respect to federal loans or loan guarantees under Section 4003(b)(4) of the ESA (which covers the majority of the funds allocated to the loan and loan guarantee program and includes loans and loan guarantees for Mid-Size Business Recipients).
- Key Unanswered Question 1: How is “total compensation” calculated?
- As noted above, it includes salary, bonuses, awards of stock, and other financial benefits.
- Is it based on Regulation S-K Item 402 rules (e.g, “Total Compensation” in Summary Compensation Table) or based on compensation as reported for income tax purposes?
- If based on compensation for income tax purposes, should it be based on Form W-2 Box 1 or some other amount (e.g., including any deferrals into a 401(k) plan or nonqualified deferred compensation plan)?
- How will an Applicable Employee hired or retained for a portion of 2019 be treated? Would total compensation be calculated based on actual compensation earned or will such compensation be annualized?
- How will officers or employees who were hired or retained in 2020 be treated? Would such officers or employees be considered Applicable Employees?
- Key Unanswered Question 2: How are “awards of stock” valued?
- Is it based on accounting grant date fair value (FASB ASC Topic 718), Black-Scholes value, or number of shares multiplied by fair market value at grant/vesting/settlement?
- This question may be particularly complicated for performance awards, stock options and, if partnership interests constitute “awards of stock”, profits interest units.
- Key Unanswered Question 3: Will any pre-CARES compensation be “grandfathered”?
- Although unanswered, it is possible, for example, that stock awards that were granted prior to the enactment of CARES but that vest, are settled or exercised after the enactment of CARES and compensation pursuant to a legally-binding contract in effect prior to the enactment of CARES, may be grandfathered under the rules.
- Key Unanswered Question 4: Will stock award modifications that result in an accounting charge count toward “total compensation”?
- This is particularly relevant as employers consider modifying equity and equity-based awards granted prior to the COVID-19 pandemic to adjust for market volatility and performance goals that may have become impracticable.
- Key Unanswered Question 5: What are “other financial benefits” and how are they valued?
- Is it based on Regulation S-K Item 402 rules (e.g., “All Other Compensation” in Summary Compensation Table) or based on taxable perquisites?
- Key Unanswered Question 6: Will payments under defined benefit / actuarial pension plans or non-qualified deferred compensation plans count towards “total compensation”?
- Key Unanswered Question 7: How will employers deal with existing contractual obligations?
- If grandfathering of existing obligations will not be permitted, will nonpayment of amounts under those obligations be protected from individual breach of contract claims brought by Applicable Employees?
- Key Unanswered Question 8: What does “received” mean for purposes of the CARES Act compensation limitations?
- Will arrangements entered into during the period in which compensation limitations apply but that are only payable after the compensation limitations expire count as “received” for purposes of the compensation limitations?
- Key Unanswered Question 9: How will the CARES Act interact with other laws governing compensation, including Internal Revenue Code Section 409A (“Section 409A”)?
- If grandfathering of existing obligations will not be permitted, will there be relief under Section 409A? For example, if an Applicable Employee previously deferred compensation and such compensation is required to be paid during the period in which compensation limitations apply, can the employer re-defer the payment without the additional income tax imposed by Section 409A, or will the officer or executive have to forfeit such amounts?
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