Client Alert: CARES Act Compliance Issues

Soon, an unprecedented number of large and small businesses will apply for and receive more than a trillion dollars in government funds as part of the Coronavirus Aid, Relief, and Economic Security Act, known as the CARES Act. Business applicants must meet certain eligibility criteria, and funding is contingent on an applicant's certification of particular facts and future conduct.

The CARES Act created several new entities to assure compliance with its requirements, including the Pandemic Response Accountability Committee (made up of various Inspectors General), the Special Inspector General for Pandemic Recovery, and the Congressional Oversight Commission. These bodies stand alongside the host of traditional enforcement mechanisms, including FBI/DOJ investigations and DOJ and whistleblower lawsuits under the False Claims Act.

The CARES Act requirements present the types of risk already encountered in connection with government enforcement mechanisms targeting fraud. Many honest and well-run companies already find themselves on the wrong side of fraud investigations and enforcement actions. [GK principal David Chizewer recently spoke to this subject at a conference in New York City]

Herd mentality, misguided advice and competitive pressures are typical contributors. In the case of the CARES Act, the conditions that typically cause missteps will be magnified by the urgency of the pandemic and the scale of the economic distress it has caused. Mid to large-sized businesses should be particularly aware of the specific CARES Act eligibility and compliance requirements for loan requests, including:

1. The uncertainty of economic conditions as of the date of the application must necessitate the loan request to support the ongoing operations of the recipient;

2. The funds received will be used to retain at least 90 percent of the recipient's workforce, at full compensation and benefits, until September 30, 2020;

3. The recipient intends to restore not less than 90 percent of its workforce as it existed on February 1, 2020, and to restore all compensation and benefits to its workers no later than 4 months after the termination date of the public health emergency the Secretary of Health and Human Services declared on January 31, 2020, under Section 319 of the Public Health Services Act (42 U.S.C. 247d), in response to COVID–19;

4. The recipient is not a debtor in a bankruptcy proceeding;

5. The recipient is created or organized in the United States or under the laws of the United States and has significant operations in and a majority of its employees based in the United States;

6. The recipient will not pay dividends with respect to the common stock of the eligible business, or repurchase equity security that is listed on a national securities exchange of the recipient or any parent company of the recipient while the direct loan is outstanding, except to the extent required under a contractual obligation that was in effect as of the date of enactment of the Act (March 27, 2020);

7. The recipient will not outsource or offshore jobs for the term of the loan and for a period of 2 years after completing repayment of the loan;

8. The recipient will not abrogate existing collective bargaining agreements for the term of the loan and for a period of 2 years after completing repayment of the loan; and

9. The recipient will remain neutral in any union organizing effort for the term of the loan.

Furthermore, a business that receives a CARES Act loan or loan guarantee is subject to limits on employee compensation. An officer or employee of the eligible business whose total compensation exceeded $425,000 in calendar year 2019 may not, in the year following the loan,:

1. Receive total compensation which exceeds, during any 12 consecutive months of such period, the total compensation received by the officer or employee from the eligible business in calendar year 2019; or

2. Receive severance pay or other benefits upon termination of employment with the eligible business which exceeds twice the maximum total compensation received by the officer or employee from the eligible business in calendar year 2019.

And, no officer or employee of the eligible business whose total compensation exceeded $3,000,000 in calendar year 2019 may receive during the following 12 consecutive months total compensation in excess of the sum of:

1. $3,000,000; and

2. 50 percent of the excess over $3,000,000 of the total compensation received by the officer or employee from the eligible business in calendar year 2019.

The CARES Act is intended to provide critical help to US businesses in the wake of the economic devastation of the global pandemic, and businesses which qualify should be able to take advantage of this support. If not handled correctly, however, the CARES Act's requirements could create significant problems down the road. Goldberg Kohn can apply its extensive experience with government fraud investigations to assist businesses hoping to seek the government's help under the CARES Act rescue legislation.