The loans don’t need to be paid back as long as conditions are met related to employee retention and pay.
The CARES Act, the $2 trillion U.S. stimulus package approved in March 2020 to combat the financial effects of the coronavirus, provides incentives for companies to keep their employees and to avoid layoffs.
The Coronavirus Aid, Relief, and Economic Security Act includes a Paycheck Protection Program that creates a $350 billion pool of money for Small Business Loans.
Each company of 500 or fewer employees is allowed to borrow up to 2.5 times its monthly payroll. Effectively, each small business can get its payroll covered for 2 and a half months.
The part where retaining employees comes into play is in a provision for loan forgiveness. The loans are 100% forgivable -- they don’t need to be paid back -- as long as certain conditions are met related to employee retention and pay.
Effectively, laying off an employee is sending free money out the door behind them.
One of those conditions is that the money is spent on payroll, with payroll broadly defined to include things like benefits and time off, even for employees who are contractors or not full-time. The company’s rent or mortgage is an eligible expenditure, too.
The other key condition is that companies who lay employees off or greatly reduce their salaries will begin to lose loan forgiveness; in other words, they will begin to owe the loans back to the government as payroll and number of employees fall.
The Act looks at number of employees and payroll in the "covered period” of eight weeks after the loan and compares it to a period of the employer’s choosing (either Feb. 15, 2019 to June 30, 2019; or Feb. 1, 2020, to Feb. 29, 2020).
The extent to which a company eliminated employees or payroll is the extent to which the company must repay the government.
Given the substantial integration between the U.S. and Canadian economies, these U.S. developments inevitably impact Canadian businesses and investors. Thus far, there is very little guidance geared towards non-U.S. companies with U.S. subsidiaries regarding the considerations that are applicable to them in light of the U.S. governmental response to the COVID-19 pandemic.
Information on Canadian econmic relief are available from the BBC and the Department of Finance.
The Paycheck Protection Program is designed to protect employees, with incentives for companies to keep their teams together.
The Fox Rothschild lawfirm has a detailed breakdown of the Paycheck Protection Program, and The Tax Foundation, a tax policy nonprofit organization, provides more information, plus an FAQ on several parts of the CARES Act including payroll portions.
Each company faces its own scenarios and should draw its own conclusions, ideally after consulting legal and accounting professionals.
In general, however, the CARES Act and its Paycheck Protection Program are designed as their names imply to protect employees with incentives for companies to keep their teams together.
Based on the design of the Act and the advice of legal professionals, companies should try to keep staff intact as much as possible in order to gain the maximum benefit from the law.
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