Client Alert: The CARES Act and Your Compensation: What Every Executive Should Know
Signed into law on March 27, 2020, the Coronavirus Aide, Relief, and Economic Security Act (the “CARES Act”) provides access to loans and loan guarantees from the United States Treasury to various businesses. Not surprisingly, such financial support comes with strings, some of which impact executive compensation and careers.
The Paycheck Protection Program (“PPP”)
PPP Compensation Caps
Employers that avail themselves of the PPP forgivable loan program are limited in their use of such funds, and the circumstances under which such loans may be forgiven. For example, the combined total of salary and other wages that may be paid to any one employee is capped at the annualized equivalent of $100,000. Employee benefits such as paid leave, separation pay, payments of health and other insurance premiums, and retirement contributions are not included in that cap.
PPP Headcount and Compensation Incentives
In addition to limiting how such funds may be used, the PPP provides loan forgiveness tied to maintaining both head-count (either by retention or timely re-hire) and the compensation of certain employees (those who earned less than $100,000 in 2019). Specifically, loan forgiveness is reduced if the wages of any such employee is reduced by more than 25%. Thus, intentionally or not, the PPP may incentivize employers to eliminate the employment of higher-paid employees.
The Coronavirus Economic Stabilization Act (“CESA”)
CESA Total Compensation Caps and the Covered Period
Employers that receive loans and loan guarantees under the CESA are binding themselves to certain restrictions relative to executive compensation for any officer or employee who received total compensation greater than $425,000 in 2019. During the period of the loan or loan guarantee, and for one year thereafter (or longer for employers in certain industries), the following restrictions apply:
- During any consecutive 12-month period, executives who received total compensation between $425,000 and $3 million in 2019 may receive no more than what they received in 2019;
- During any consecutive 12-month period, executives who received total compensation over $3 million in 2019 may receive no more than $3 million, plus 50% of the excess (the amount over $3 million) received in 2019, e.g., if the executive received $4 million in 2019, the cap would be $3.5 million (3 plus ½ of 1); and
- Affected executives may not receive severance or other termination benefits in excess of twice the total compensation received in 2019.
Definition of Total Compensation, and Additional Requirements
Total compensation is defined as including salary, bonuses, equity, and other financial benefits, but there is, as of yet, no guidance regarding what is meant to be included. For example, it is uncertain whether unvested and/or deferred compensation will be counted. Also, mid-size employers (those with 500 to 10,000 workers) receiving CESA loans must also make aspirational commitments, e.g. maintaining compensation and headcount, not sending jobs off-shore, and remaining neutral regarding unionizing.
Employment Contracts, Deferred Compensation Plans, and IRC, § 409A
Needless to say, CESA restrictions may run contrary to contractual obligations owed by an employer to an executive, giving rise to a breach of contract claim and/or by triggering a good reason termination by the executive under the terms of the executive’s contract. The CESA restrictions may also put executive compensation plans in violation of their own rules.
Furthermore, efforts to protect executive compensation by agreeing to post-restriction deferral may run afoul of Internal Revenue Code, § 409A. This would be of dire consequence as a § 409A violation could result in the immediate recognition of deferred amounts as income to the executive and the imposition against the executive of a 20% penalty tax and other possible penalties. Hopefully, the Internal Revenue Service will provide interim emergency relief – but, again, there is no guidance and the matter is currently unresolved.
If you have reason to believe that your compensation or contractual rights may be impacted by the CARES Act, we urge you to seek legal counsel as soon as possible.