COVID-19 is impacting almost all aspects of business and our community. The drastic changes are happening daily, in real time. Our Community Support & Business Response Legal Team is analyzing COVID-19 and its effect on Arizona’s businesses. We’re building on our 40+ years in Arizona to offer thoughtful guidance on how businesses can navigate this complex and fast-changing situation. We’re here to help. If the information below does not answer your pressing questions, please feel free to contact our team of professionals.
Gallagher & Kennedy’s Business Continuity Response to COVID-19, 3/18/2020
Considerations for Board and Shareholder Meetings
In-person meetings of shareholders, directors, partners, or other owners or managers may prove difficult to convene in light of governmental restrictions on the occurrence, size, time, or place of gatherings.
Obtaining signatures on legal documents may present logistical problems when people are away from business offices or in places where electronic communication is not available or reliable.
With the temporary closure of certain governmental offices and private businesses, the obtaining of official certifications or other third-party confirmations might not be practical.
Terry Thompson is available to answer questions about Considerations for Board and Shareholder Meetings.
Force Majeure Clauses
Due to the Coronavirus (COVID-19) pandemic, many businesses are confronting unique and unforeseen circumstances that could either excuse or delay the obligation to perform under existing contracts as a result of the occurrence of a force majeure event. Force majeure is a contractual defense generally allowing a party to postpone, defer, or discontinue performance of its contractual obligations in certain specified circumstances. What constitutes a force majeure event is determined on a case-by-case basis and depends upon the terms of the relevant contract, applicable law, and the relevant facts and circumstances. Concerned business should be analyzing the following:
For businesses that have received a force majeure notice, they should be:
A G&K attorney is available to answer questions about Contracts and the possibilities of force majeure claims.
International Chamber of Commerce Comments on Force Majeure Clauses
What are our basic legal obligations with regard to the prevention of infection in the workplace?
Employers do not have a legal duty to “guarantee” that no one in the workplace will ever be infected with COVID-19. But you definitely should take reasonable steps to reduce the risk of infection, as recommended by the CDC and OSHA: frequent hand‑washing, sanitizing, and disinfecting of surfaces, and other proper hygiene practices. And you should follow the CDC guidelines when employees show symptoms of COVID‑19 (see below).
What should we do when an employee actually has symptoms of COVID-19?
When an employee has symptoms (fever, cough, or shortness of breath), you should follow the CDC guidelines: Send the employee home, and don’t let him or her return to work until he or she meets the CDC’s announced criteria for discontinuation of home isolation.
If the employee reports that he or she actually has tested positive for COVID-19, it also is good practice to advise other personnel with whom that employee routinely had contact that “a company employee” has received a positive test result, and that other personnel should be even more conscientious about follow proper infection control practices (frequent hand‑washing, sanitizing, and disinfecting of surfaces), and that they also should closely monitor themselves for any their own wellbeing for any symptoms of COVID‑19.
If an employee has to be absent because of COVID-19, is that paid time off?
Absences that are due to the employee’s own illness, the need to care for a family member who is ill, or the need to stay home with a child whose school has been ordered closed qualify for Paid Sick Time under Arizona’s Proposition 206. Employees who have PST available, therefore, must be permitted to use it to cover an absence caused by COVID‑19.
After April 2, absences caused by COVID‑19 also may qualify for paid time off under the new Emergency Paid Sick Leave Act. That law applies to all employers with fewer than 500 employees, and basically mandates that employers provide 80 hours of paid sick time (subject to certain caps on the rate of pay) for various absences caused by COVID‑19.
Absences after April 2 due to an employee’s need to stay home to care for a child whose school has been ordered closed also will qualify for time off under the new Emergency FMLA Leave Expansion Act. That new law similarly applies to all employers with fewer than 500 employees, and mandates up to 12 weeks of paid leave (again, subject to certain caps on the rate of pay) for employees who need to stay home due to a school closure.
Keep in mind that an employee who needs to be at home for one reason or another might still be able to work remotely. If remote work is feasible and can be productive in any given case, the employee would not be “absent,” and therefore would not need or qualify for any of these types of paid time off.
We may need to implement some layoffs to deal with the economic crisis. What are the rules concerning reductions-in-force, furloughs, layoffs, etc.?
Non‑union employers with 100 or more workers may need to consider whether a particular reduction or layoff might be subject to the federal plant closing law (the “WARN Act”) or to any state‑law version of the WARN Act.
But in the absence of WARN Act or similar coverage, non‑union owners and managers have significant discretion to exercise their best business judgment to structure workplace adjustments, reductions, and layoffs in the manner they feel is best for the operation. Employers can use whatever business-related criteria they prefer to select personnel for a reduction or layoff: seniority, salary level, scores on most recent performance reviews, production levels, preservation of relationships, for example, and/or any combination thereof. Employers also can weight those criteria however they wish, in the exercise of their own business judgment. And employers are not legally required to provide workers with any specific “recall” or “rehire” rights.
Don Johnsen is available to answer questions about Employment & Labor issues.
Preparing to Re-Open the Workplace; Critical Issues for Arizona Employers
EPA Delays TSCA Chemical Data Reporting
EPA’s extension of the 2020 CDR submission period will allow manufacturers, already stressed in the current COVID-19 business environment, to prioritize their environmental compliance and other obligations while attempting to navigate COVID-19 implications.
Although not directly related to the COVID-19 pandemic, on March 17, 2020, the U.S. Environmental Protection Agency (EPA or Agency) announced an extension of the submission deadline for 2020 Chemical Data Reporting (CDR) pursuant to the Toxic Substances Control Act (TSCA). The new reporting period is June 1, 2020 – November 30, 2020 (extended from June 1, 2020 – September 30, 2020).
What is the TSCA CDR?
The TSCA CDR is a reporting program administered by EPA wherein manufacturers (including importers) of chemical substances identified on the TSCA Inventory must report information to EPA on a four-year cycle (the last submission period was in 2016, based on 2012-2015 data).
What information must be reported?
EPA requires manufacturers to report information on their production of chemical substances, as well as information on the down-stream processing and use of the substances. The information reported for each substance includes the (a) company and plant site information, (b) chemical name and Chemical Abstracts Service number, (c) number of workers exposed to the substance during its manufacture, (d) physical form of the substance, (e) down-stream uses of the substance, (f) number of down-stream sites using the substance, (g) types of down-stream industrial sectors using the substance, (h) number of workers exposed to the substance in the down-stream operations, and (i) consumer and commercial uses of the substance (including whether the substance is used in any consumer products intended for use by children).
Are there exemptions from reporting?
Yes, EPA’s CDR regulations identify both exemptions and exclusions from reporting. However, a manufacturer should thoroughly evaluate the applicability of an exemption/exclusion and document its conclusion in the event of an EPA inspection.
How is information reported to EPA?
Information must be electronically submitted to EPA using the Agency’s Central Data Exchange (CDX).
Why did EPA extend the 2020 CDR submission period?
EPA extended the 2020 CDR submission period because of recent changes to the CDR regulations contained in a March 17, 2020 final rule. The final rule, which is effective for purposes of 2020 CDR reports, modifies a number of reporting data elements.
Chris Leason is available to answer questions about 2020 TSCA CDR obligations and Dal Moellenberg and Chris Leason are available to answer Environmental Law issues.
EPA Sets Termination Date of August 31,2020, for its COVID-19 Enforcement Discretion Policy
EPA’s COVID-19 Policy Challenged by Lawsuits
While many businesses probably welcomed the flexibility offered by the U.S. Environmental Protection Agency (EPA) in a March 26, 2020 policy statement, several non-governmental entities and states disagreed, according to a motion for summary judgment and a lawsuit filed in the U.S. District Court for the Southern District of New York, State of New York et al., v. EPA. On April 29, 2020, a group of non-governmental entities filed a motion for summary judgment, requesting that EPA file an emergency rulemaking, which would obligate facilities that intend to invoke the COVID-19 defense for non-compliance to formally notify EPA and for EPA to make that information available to the public. Then, on May 13, 2020, the State of New York, along with several other states, filed a complaint alleging that EPA has exceeded its authority by issuing the policy, which gives “regulated parties free rein to self-determine when compliance with federal environmental laws is not practical because of COVID-19” and “makes it optional for parties to report that noncompliance to EPA, and to state and local agencies.”
The lawsuits challenge EPA’s March 26, 2020 temporary guidance regarding “EPA’s enforcement of environmental legal obligations” during the COVID-19 pandemic, which generally applies to noncompliance that occurs at time that the policy is in effect, and that results from the COVID-19 pandemic. The policy only covers situations that may occur as a result of the COVID-19 pandemic and applies generally to those making good faith efforts to comply with obligations. EPA sets forth several items that regulated entities should track and submit if compliance is not “reasonably practicable” due to COVID-19 related issues.
Following in EPA’s footsteps, both the Arizona Department of Environmental Quality (ADEQ) and the New Mexico Environmental Department (NMED), have provided guidance policies that rely heavily on EPA’s temporary policy. ADEQ issued one guidance document that summarizes several issues (following EPA’s policy) and discusses how ADEQ will implement any compliance assistance. NMED issued several policy guidance documents for different categories of environmental businesses, including Public Drinking Water Systems and Utility Operators, Solid Waste Facilities, Wastewater and Treated Effluent Facilities, and the Oil and Gas Industry (air quality compliance issues).
For a more in depth review of the EPA policy, ADEQ and NMED guidance, and a summary of the basis for the challenges: READ MORE…
COVID-19 will affect both prosperous and already distressed businesses. Bankruptcy, moratoriums, and other tools implemented to ameliorate the disruption are initially likely to apply to all companies seeking relief. It will be necessary to understand modifications of creditor rights as companies receive an opportunity to see if they can successfully operate in a post-COVID-19 economy.
There will be indirect consequences experienced by individuals and companies as their employees, customers, borrowers, and others struggle to meet their commitments. It will be necessary to understand how defaults or delays in performance are best addressed and which transactions are no longer possible or prudent.
Below are some initial, practical steps businesses can take in evaluating their current situation and determining how to proceed in the future:
Dale Schian is available to answer questions about Financial Distress, Bankruptcy & Creditors’ Rights.
Arizona Bankruptcy Court Rulings Facilitate PPP Loans for Business in Chapter 11
CARES Act Expands Bankruptcy Relief for Small Businesses
COVID-19 Impact on Franchise Disclosure Documents
The North American Securities Administrators Association (“NASAA”), the national association of state franchise regulators, issued new guidance on Item 19 financial performance representations that several states are implementing immediately. The newly published guidelines (See Additional Resources) require certain franchisors who include historical financial results in an Item 19 financial performance representation to amend already filed Franchise Disclosure Documents that should consist of up-to-date 2020 results. These guidelines will ensure that prospective franchise buyers are aware of the impact that COVID-19 has had on those businesses and reasonably reflect current economic conditions.
In determining whether a franchisor is obligated to file an amended FDD, the franchisor should consider the following factors:
A franchisor that included actual historical sales and profits data in their 2020 FDD and whose business has been impacted by the pandemic should update their FDD to include disclosures concerning that impact. NASAA did not provide specific guidelines on the required amendments. Still, the State of Washington, which has implemented similar requirements already is requiring franchisors to acknowledge that the virus has negatively impacted their business and to include sales results for the first part of 2020 in their financial performance representation. We suspect that other states will accept similar disclosures. The sale of franchises without these disclosures might increase risk because franchisees may later claim that they would not have purchased a franchise if they knew about the impact that COVID-19 had on the franchised business.
Josh Becker is available to answer any questions about Franchising issues.
New Federal Order Combats Economic Impact of COVID-19 through Regulatory Reform
On May 19th, President Trump signed Executive Order 13924 with the goal of combating “the economic consequences of COVID-19 with the same vigor and resourcefulness” as the health and safety fight against the outbreak. To the extent allowable under federal statutes, EO 13924 seeks to stimulate economic growth and job creation through the following directives to federal agencies:
Most of these directives require future agency action to take effect, and time will tell how many bear fruit. A company with the means to do so might help bring some of these to pass through direct communications with an agency or through a trade association. However, the directives identified in the second, third, and fourth bullets might be of more immediate benefit to regulated persons and entities facing difficult decisions or immediate compliance concerns.
Stan Curry is available to answer questions regarding Arizona state and county inspections, permitting, and compliance enforcement issues for businesses.
A Company’s Rights after the Inspection
A Company’s Rights during an Inspection
Coming Soon after COVID-19: When the State Reopens and the Regulators Return
COVID-19 continues to create significant uncertainty for companies and individuals with respect to business and contractual relationships. The impact of the pandemic on current and future litigation is dynamic, changing on a daily basis, but some of the key issues businesses are facing include:
The Federal and State courts throughout Arizona continue to balance the ongoing health risks with the necessity to remain operational. Courts have adjusted aspects of the process to minimize any potential delay while still ensuring litigants are not prejudiced in the enforcement and protection of their legal rights. Some elements of the civil litigation process have been halted in light of the social distancing guidelines.
Here are some key ways in which COVID-19 has impacted Federal and Arizona State Court litigation and some of the ways in which these Courts are responding:
Mike Ross is available to answer questions about the Impact on Litigation for businesses in litigation or contemplating litigation.
Maricopa County Superior Court establishes Late Case Fair Limits Proceeding
On July 13, 2020, in an effort to continue to respond to the needs of those with ongoing civil cases, the Maricopa County Superior Court entered Administrative Order regarding the establishment of a Late Case Fair Limits Proceeding. This new process, which will be in effect until July 15, 2021, applies to all civil cases that are not otherwise part of mandatory arbitration.
As detailed in the Court’s Administrative Order, before cases are scheduled for trial, the Court will assign a Judge, a retired Judicial Officer, or a practicing attorney, to help the parties evaluate the opportunity to settle the dispute, to narrow the remaining areas of dispute, and to pare down the matters to be tried. This latest order reflects an effort to minimize the resources needed to safely conduct jury trials, and the Court’s overt attempt to urge litigants to avoid the risk, uncertainty, and extensive resources associated with trial.
To be clear, this latest Administrative Order does not limit access to the Court system for those in need. In fact, it enhances the resources available to litigants to resolve their disputes short of trial, and is just another example of the dynamic ways that the system is adjusting to the protection of the public’s health and safety.
Maricopa County Superior Court Guidelines to Reopen
Pursuant to Arizona Supreme Court Administrative Order No. 2020-79 which provides direction to the Judicial Branch in Arizona on transitioning to resumption of certain operations beginning June 1, 2020, the Arizona Superior Court located in Maricopa County has issued guidelines for reopening in its Administrative Order No. 2020-078. In particular, the Arizona Superior Court located in Maricopa County ordered the following as it pertains to reopening:
Arizona Supreme Court Authorizes Limited Court Operations
On May 8, 2020, the Arizona Supreme Court issued Administrative Order No. 2020-75 authorizing limited court operations while the COVID-19 public health threat is ongoing. The Order directs the resumption of certain court operations and outlines measures being taken to promote the safety of the public, judges, and employees of the judiciary. In particular, the Arizona Supreme Court ordered the following:
Additionally, the Order addressed the use of technology to minimize in-person proceedings:
Many businesses are and will continue to be financially impacted by COVID-19. Depending on the circumstances and terms of the policy, insurance coverage may be available to defray some of the losses and additional expenses incurred as a result of the virus outbreak. Below are steps businesses can take to evaluate their potential insurance coverage.
Jennifer Cranston is available to answer questions about coverage and communicating with carriers regarding your business insurance policies.
OSHA Issues COVID-19 Interim Enforcement Response Plan
On April 13, 2020, the U.S. Occupational Safety and Health Administration (OSHA) issued an Interim Enforcement Response Plan (the “IRP”) regarding how OSHA will investigate COVID-19-related complaints, referrals, and severe illness reports. The IRP includes specific inspection and citation guidance for potentially applicable standards, which describe when to exercise enforcement discretion.
What does the IRP say about investigating violations of OSHA standards as a result of the COVID-19 pandemic?
OSHA states that its regional offices should investigate complaints, referrals, and employer-reported fatalities and hospitalizations to identify potentially hazardous occupational exposures and to ensure that employers take prompt actions to mitigate hazards and protect employees. According to OSHA, complaints received during the initial months of the COVID-19 outbreak describe concerns related to lack of personal protective equipment (PPE), such as respirators, gloves, and gowns. In addition, OSHA received complaints expressing concern about a lack of training on appropriate standards and about possible COVID-19 illnesses in the workplace.
Will OSHA inspect workplaces under the IRP?
It depends. Prior to any inspection regarding COVID-19-related alleged violations, each OSHA Area Director (AD) should evaluate the risk level of exposure to COVID-19 in the workplace, and prioritize resources in coordination with the OSHA regional offices to determine if an on-site inspection is necessary. If the AD determines an on-site inspection is warranted, the OSHA compliance officer assigned to the matter must carefully evaluate potential hazards and limit any possible exposures. For such inspections, the IRP requires the AD to maximize the use of electronic means of communication (e.g., remote video surveillance, phone interviews, email correspondences, facsimile and email transmittals of documents, and video conferences).
Whenever an OSHA compliance officer identifies a workplace with the potential for high-risk exposure to COVID-19, and determines that an inspection is warranted under the IRP, the officer should immediately coordinate with his supervisors and regional office, and, if necessary, contact the Office of Occupational Medicine and Nursing (OOMN). OOMN may then serve as a liaison with relevant public health authorities, and can facilitate Medical Access Orders to obtain worker medical records from employers and healthcare providers.
COVID-19 inspections will be treated as unique cases. This means that before a citation is issued, the OSHA Directorate of Enforcement Programs must be notified of all proposed citations and OSHA notices that relate to a COVID-19 exposure. In addition, states with authorized programs, such as Arizona, should report any COVID-19 inspections to their OSHA regional office.
How does OSHA handle a workplace with a shortage of PPE?
In view of the shortages and limitations of PPE, OSHA provides specific enforcement discretion for inabilities to comply with the OSHA Respiratory Protection Standard, 29 C.F.R. § 1910.134, during the COVID-19 outbreak. At a minimum, employers should make a “good-faith” effort to provide and ensure workers use the most appropriate respiratory protection available for exposures to COVID-19. The IRP sets forth how employers can meet the “good faith” requirement.
Chris Leason is available to answer questions about OSHA’s Safety and Health Law issues.
OSHA Issues Enforcement Discretion Memorandum Regarding Violations Due to COVID-19
Following on the heels of the U.S. Occupational Safety and Health Administration’s (OSHA) issuance of an Interim Enforcement Response Plan detailing how OSHA will investigate COVID-19 related complaints from employees, on April 16th, OSHA issued a Memorandum encouraging enforcement discretion for certain violations of OSHA Safety and Health Standards during the pandemic.
What does the Memorandum say regarding an employer’s inability to comply with an OSHA Standard during the pandemic?
OSHA recognizes that some employers may face difficulties complying with OSHA Standards due to the ongoing health emergency. Widespread business closures, restrictions on travel, limitations on group sizes, facility visitor prohibitions, and stay-at-home or shelter-in-place requirements may limit the availability of employees, consultants, or contractors who normally provide training, auditing, equipment inspections, testing, and other essential safety and industrial hygiene services. Business closures and other restrictions and limitations may also preclude employee participation in training even when trainers are available.
Therefore, during inspections, OSHA indicates that its compliance officers should evaluate whether the employer made “good faith” efforts to comply with applicable OSHA Standards and, in situations where compliance was not possible, to ensure that employees were not exposed to hazards from tasks, processes, or equipment for which they were not prepared or trained. As part of assessing whether an employer engaged in “good faith” compliance efforts, compliance officers should evaluate whether the employer thoroughly explored all options to comply with the applicable Standards (e.g., through the use of virtual training or remote communication strategies). In addition, prior to issuing a citation, a compliance officer should also consider any interim alternative protections implemented or provided to protect employees, such as engineering or administrative controls, and whether the employer took steps to reschedule the required annual activity as soon as possible.
Will an employer be cited for OSHA Standard violations if it exercises “good faith” efforts to comply?
OSHA indicates that an employer may be cited during the pandemic for failure to comply with an OSHA Standard if the employer cannot demonstrate any efforts to comply. However, where an employer has made attempts to comply in “good faith,” OSHA requires its regional offices to take such efforts into strong consideration in determining whether to cite a violation. Where enforcement discretion is warranted, the regional office must provide sufficient documentation (e.g., notes on the efforts the employer made to comply, letters or other documentation showing that providers had closed) in the case file to support the decision.
In order to ensure that corrective actions have been taken once normal activities resume, OSHA will develop a program to conduct monitoring inspections from a randomized sampling of cases where violations were noted, but not cited, based on an employer’s “good faith” efforts to comply. Thus, employers should come into compliance as soon as possible in the event of a follow-up OSHA inspection.
Does OSHA provide examples of what constitutes a “good faith” effort to comply?
Yes, OSHA provides a number of examples of what it considers “good faith” efforts to comply. Some of the examples include (1) Process Hazard Analyses recertifications on a three-year basis, (2) annual audiograms for required employees, and (3) annual employee fit testing and training for respirators
In response to the COVID-19 crisis, the PPP authorizes up to $349 billion in forgivable loans with a fixed 1% interest rate to small businesses to assist them to continue to pay their employees during this challenging time. These loans may be used to pay payroll costs of up to $100,000 on an annualized basis for each employee. The payment on the loans can be deferred for six (6) months, and businesses may be eligible for complete loan forgiveness if the funds are used only for the following purposes in the first 8 weeks after getting the loan:
The loan forgiveness is only available to businesses that maintain their staff and payroll—your forgiveness will be reduced if you decrease your full-time employee headcount or decrease compensation by more than 25% for any employee that made less than $100,000 annualized in 2019; but, if you restore your full-time employment and salary levels for any changes made between February 15, 2020 and April 26, 2020, eligibility for forgiveness can also be restored. Businesses that receive loans may be eligible for a portion of the loan to be forgiven if used for other costs.
If a business applies for and receives a loan under the PPP, it will not be eligible to defer the employer’s 6.2% of social security taxes nor will it be eligible for the 50% credit on the first $10,000 of wages paid to employees.
See Tax Developments guidance for a more detailed discussion of this deferral and credit.
Applications for the PPP are available starting April 3, 2020 for payroll and other expenses for small businesses and sole proprietors. Independent contractors and self-employed may apply starting on April 10, 2020. The typical requirement that an applicant for an SBA loan seek some or all of the loan funds from other sources are waived under the PPP.
All businesses (including nonprofits) with 500 or fewer employees can apply. Larger employers can apply if they meet applicable SBA employee-based size standards for those industries.
The application for the PPP (available at the link below) requires certain documentation and certifications. Gallagher & Kennedy’s attorneys can help answer questions you may have about the application and provide guidance on your business’s eligibility and requirements.
Matt Engle is available to answer questions about the Paycheck Protection Program.
SBA Releases Revised PPP Loan Forgiveness Applications, Including New Streamlined EZ Application; Deadline
for New Loan Applications Fast Approaching
On June 17, 2020, the U.S. Small Business Administration released a revised loan forgiveness application for the Paycheck Protection Program, along with a new EZ version of the forgiveness application that requires fewer calculations and less documentation. The EZ application applies to borrowers that:
Both applications give borrowers the option of using the original 8-week covered period (if their loan was made before June 5, 2020) or an extended 24-week covered period. Both applications are available on the SBA’s website.
The application deadline to obtain a PPP loan remains June 30, 2020, so business owners who might want to apply for funds need to act fast. The SBA reported that, as of June 10, 2020, more than 4.5 million PPP loans have been approved, so the program remains very popular.
President Trump Signs the Paycheck Protection Program Flexibility Act
On June 5, 2020, President Trump signed into law the Paycheck Protection Program Flexibility Act (“PPPFA”), which makes several important changes to the Paycheck Protection Program designed to address concerns expressed by the small business community. The key features of the PPPFA include:
While questions will certainly arise as the SBA implements these changes, the PPPFA should come as a welcome supplement to the very popular PPP for business owners as they transition to reopening following the extraordinary COVID-19 shutdown.
SBA Issues Additional Guidance Regarding PPP Certifications
On May 13, 2020, the Small Business Administration extended the date from May 14, 2020, to May 18, 2020 by which borrowers that have received PPP funds may repay the loan and as a result be deemed to have made the required certification concerning the necessity of the loan request in good faith.
Also on May 13, 2020, the SBA issued additional guidance regarding how it will review borrowers’ required good faith certifications of the necessity of a PPP loan request. Under the new guidance, borrowers that received PPP loans of less than $2 million will be deemed to have made the required certification in good faith. The SBA felt that borrowers with loans below this threshold are generally less likely to have had access to adequate sources of liquidity in the current economic environment than borrowers that obtained larger loans. The new guidance provides some well-needed certainty to smaller borrowers. As previously announced, the SBA will review loans in excess of $2 million prior to approving forgiveness of some or all of the loan proceeds. However, the SBA made clear that borrowers with loans greater than $2 million may still have an adequate basis for making the required good-faith certification based on their individual circumstances.
The SBA also announced that if it determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, the SBA will seek repayment of the outstanding loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving this notification, the SBA will not pursue administrative enforcement or referrals to other agencies based. This new guidance appears to reflect a shift in SBA’s treatment of the certification that greatly reduces the risk to borrowers, especially in terms of fines and other potential penalties.
Notice 2020-32: Deductibility of Expenses When Loan is Forgiven Under the Paycheck Protection Program
On April 30, 2020, the IRS issued Notice 2020-32 providing guidance regarding the deductibility for federal income tax purposes of certain otherwise deductible expenses incurred in a taxpayer’s trade or business when the taxpayer receives a “covered loan” pursuant to the Paycheck Protection Program (PPP).
Notice 2020-32 clarifies that no deduction is allowed for an expense that is otherwise deductible if the payment of the expense results in forgiveness of a covered loan pursuant to provisions of the CARES Act and the income associated with the forgiveness is excluded from gross income under the CARES Act.
Treasury Announces Audits of PPP Loans in Excess of $2,000,000
Treasury Secretary Steven Mnuchin recently stated that all PPP loans in excess of $2 million will be audited by the U.S. Small Business Administration prior to being forgiven, in order to ensure they were justified and that loan proceeds were used for proper purposes. Although details on procedures for loan forgiveness are still forthcoming, Mnuchin stated to the Wall Street Journal in an April 28 report that “[o]ne of the things that will be required is you will have to show a payroll report that you actually spent the money on payroll and other items that qualify for forgiveness.”
Reminder: The Payroll Tax Credit May be Available to Businesses if the PPP is Not
If your business is not eligible for a PPP loan because it does not qualify as a “small business” or if your business was unable to obtain a PPP loan, don’t forget about the employee retention payroll tax credit, which can provide a credit of up to $5,000 per employee. For more details on the employee retention payroll tax credit, see the Tax – Federal Developments summary on this page.
Guidance from the SBA on PPP Funds and Additional Funding Appropriated
On Thursday April 23, 2020, the U.S. Small Business Administration issued guidance in response to outcry following revelations that some businesses owned by large public companies and institutions had applied for and in some cases received loans under the Paycheck Protection Program, which is intended to principally support small businesses. A new entry to the SBA’s ongoing Frequently Asked Questions guidance clarifies that large companies will have to prove they actually need the funds, and that doing so might prove difficult. Specifically, before submitting a PPP application, borrowers should review carefully the required certification that current economic uncertainty makes the loan necessary to support the ongoing operations of the borrower. This certification must be made in good faith, taking into account the borrower’s current business activity and ability to access other sources of liquidity sufficient to support its ongoing operations in a manner that is not significantly detrimental to the business. The SBA notes that it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith. Borrowers that have already received funds and are concerned that they might not have been able to make this certification in good faith can return the funds by May 7 without penalty.
On Friday April 24, 2020, President Trump signed legislation providing an additional $484 billion in funds to bolster the federal government’s efforts to combat the COVID-19 pandemic. The bill adds another $310 billion in appropriations to the popular Paycheck Protection Program, $60 billion of which will be set aside for issuance of PPP loans by community development lenders, credit unions, and other smaller lenders. Funds initially appropriated for the PPP had been exhausted, so these additional funds will allow more businesses to obtain loans. The legislation also includes $75 billion for hospitals, $25 billion to support testing efforts, and $60 billion for emergency disaster loans and grants.
Initial Funding for the PPP is Exhausted
As of April 14, the U.S. Small Business Administration has approved approximately 1,680,000 loans originated by 4,700 lenders nationwide. On Thursday morning, however, the SBA announced that the $349 billion initially appropriated to fund PPP loans had been exhausted. Due to strong demand, the Treasury Department and lawmakers continue to work on adding $250 billion to the PPP loan program. As of now, the SBA is no longer accepting and processing applications for new PPP loans, although some banks continue to accept applications with the expectation that additional funds will be made available.
Increased Funding for the PPP
Interest in the PPP remains very strong. Recently, the U.S. Small Business Administration reported that banks have already approved more than 725,000 loans totaling over $205 billion from the initial $349 billion appropriated for PPP loans. Due to continuing demand, the Treasury Department and lawmakers are working on adding $250 billion to PPP loan program.
Certain lenders have instituted requirements beyond those set forth in the PPP legislation itself. For example, some lenders require a potential borrower to have a pre-existing lending relationship with the lender. Following public outcry, at least one major lender recently changed this requirement to expand the potential applicant pool to include customers with any banking relationship and not just current customers with a pre-existing lending relationship.
We continue to work with businesses to evaluate whether they qualify and should apply for a PPP loan. For example, there was some initial confusion as to whether franchise businesses are eligible for the PPP. However, the SBA has made clear that franchisees are eligible and should apply for a PPP loan, as are independent contractors, sole-proprietors, and certain self-employed individuals.
Gallagher & Kennedy is also assisting clients in determining what expenses qualify as reimbursable “payroll costs” under the PPP. In general, payroll costs include salaries, wages, commissions, and similar compensation payments; payments for vacation, and parental, family, medical, and sick leave; payments required for group health care benefits such as insurance premiums; payments for retirement benefits; and payments of state and local tax on such compensation payments. Nevertheless, certain questions remain as to the practical implementation for business owners, such as whether it is advisable for businesses to open a new bank account solely for the PPP funds in order to better track the use of such funds.
Additionally, the SBA published extensive responses to FAQs on April 14, 2020. See Additional Resources below.
We continue to stay abreast of the situation and are working with clients with the PPP, the CARES Act, and the tax consequences and other legal issues relating to COVID-19 and its impact on businesses
Businesses and Banks Struggle as PPP Rolls Out
Applications became available on Friday April 3, 2020, and already hundreds of thousands have been submitted. As lenders struggle to handle the deluge of applications, certain bottlenecks have arisen which lenders are struggling to address. In one case, a lender operating under a cap on its lending base of $10 billion has already reached its limit. Other questions have arisen as to whether a business that is currently is bankruptcy proceedings is eligible for the relief programs. We are constantly monitoring the situation to update our guidance to businesses.
For many aspects of a real estate transaction, a pandemic, a public emergency, and perhaps (if applicable) a “stay in shelter” order, may rise to the level of “force majeure” or act of God, which in turn allows for the excuse, delay, extension or waiver of performance. Where the performance by a party to a contract is rendered impossible, or materially and adversely affected, by unforeseeable factors, then under the principles of force majeure that party may be excused.
In assessing whether an event or condition would qualify for such treatment under the concept of force majeure, often the “foreseeability” of the event is a significant factor. At its essence, a force majeure clause is an attempt to recognize that some risks are not reasonably foreseeable, and therefore, no single party should suffer the resulting consequences and losses.
COVID-19 has created significant uncertainty in the real estate industry, and we are currently sorting through numerous issues including the following:
Jim Connor is available to answer questions about the impact of the current business climate on commercial and residential Real Estate.
City of Phoenix Extends Several Permit Deadlines Due to COVID-19
By action taken on May 20, 2020, the City Council for the City of Phoenix extended several deadlines which apply in the plan review and development process. Overall, the City is being very sensitive to the impact of the COVID-19 situation on the development process. The City has created a “Service Model” with links and guidelines to assist developers. See: https://www.phoenix.gov/pdd
As a general rule, non-vested entitlement approvals, which if not acted upon within the time frames provided in the applicable development ordinance (by paying requisite fees, submitting follow up materials, or otherwise pursuing the development effort), will lapse. If an approval lapses, for example, a developer may be required to commence the process from the beginning, thus wasting the time and investment incurred to such point.
In general, with a recognition that developers may need additional time to complete certain entitlement processes, including when permits are required to be issued, the time periods affecting preliminary plats, preliminary development review, building and civil plan reviews and/or permits, have been extended by 12 months. Further, certain time limits for planning schedules for sign permits and zoning adjustment matters have also been addressed. For specific time extensions, see Additional Resources below.
We would expect other Arizona municipalities to either provide such extensions, or alternatively, to be receptive to grant specific extensions upon request.
We encourage developers to be proactive to avoid any risk of having an entitlement approval lapse, particularly if the present circumstances have resulted in unforeseen delays.
Issues When Considering Lease Modifications in a COVID-19 Business Environment
In this current environment, many tenants are seeking relief on rent and other monetary obligations under leases. Landlords are weighing the alternatives: negotiating short term relief versus pursuing eviction and other enforcement action, retaking possession, and then marketing and re-leasing the recovered, vacant premises. There are several matters to be considered by both sides in structuring any short term lease modification, and any modification should be written by all parties to a lease, including guarantors. Factors to consider include:
Raising Capital with COVID‑19 As a Disclosure Requirement
Securities laws require disclosures of material factors that may impact among other things business operations and financial results. Disclosures are both of existing conditions and prospective impact of macroeconomic events or so called acts of God. Clients raising capital will need to consider how COVID‑19 could impact sales, result in layoffs, create supply issues if components need to be shipped from China or Italy and related logistics of reduced transport options with flight curtailments, consider whether key employees are not able to work due to illness from COVID‑19, and many other factors specific to their business.
For example, a medical facility meant to be a surgical center may need disclosure as it may be repurposed for COVID‑19 patients.
Disclosures need to be in private offering documents and public securities reports both in the form of risk factors and the narrative on the business itself. They may even be in the management discussion impacting liquidity particularly if the client has a blown covenant with a lender. There is no “one size fits all” and working with the management team and auditor will help securities counsel determine the needed disclosures.
Steve Boatwright is available to answer questions about Securities Law, Raising Capital, and Disclosure Requirements.
Legislative Tax Relief
Tim Brown is available to answer questions about the challenges in Tax Developments for businesses.
IRS Adds New FAQs on Faxing Fefund Claims, NOL Carrybacks Under CARES Act
On April 30, 2020, the IRS updated a set of “frequently asked questions” (FAQs) addressing how taxpayers can file applications for eligible refund claims related to the net operating loss (NOL) carryback provisions of the CARES Act.
As a way of background, certain measures included in the CARES Act provide that:
On April 30, 2020, the IRS:
Read the full FAQs, as updated on April 30, 2020
Federal Tax – Administrative Relief
On April 9, 2020, the IRS issued Notice 2020-23 which extends additional key tax deadlines for individuals and businesses in response to the COVID-19 pandemic. Notice 2020-23 expands on the relief previously provided in Notice 2020-18 and Notice 2020-20. While the previous notices generally extended until July 15, 2020 the time to file and pay federal income taxes originally due on April 15, 2020, Notice 2020-23 now expands this relief to additional returns, tax payments, and other actions. The July 15, 2020 extension generally now applies to all taxpayers (including individuals, trusts, estates, corporations, and other non-corporate tax filers) that have a filing or payment deadline on or after April 1, 2020 and before July 15, 2020. This relief is automatic and no election or other filing is required. Taxpayers who need additional time beyond July 15, 2020 to file a return may choose to file the appropriate form by July 15, 2020 to obtain an extension to file the return, but the extension date may not go beyond the original statutory or regulatory extension date.
Notice 2020-23 also provides relief with respect to “time-sensitive actions” that are due to be performed on or after April 1, 2020 and before July 15, 2020. These actions include filing all petitions with the Tax Court, seeking review of a decision rendered by the Tax Court, filing a claim for credit or refund of any tax, and bringing suit upon a claim for credit or refund of any tax.
In addition, the list of “time-sensitive actions” includes the 45-day identification period and the 180-day exchange period under IRC Section 1031 for like-kind exchanges. Specifically, under Notice 2020-23, a taxpayer whose 45-day identification period or 180-day exchange period ends between April 1, 2020 and July 14, 2020 has until July 15, 2020 to complete the identification or exchange, as the case may be.
Notice 2020-23 also includes as a “time-sensitive action” a taxpayer’s deadline to invest in a qualified opportunity fund (QOF) under IRC Section 1400Z-2(a)(1)(A). IRC Section 1400Z-2(a)(1)(A) requires a taxpayer to generally invest in a QOF during the 180-day period beginning on the date of the sale or exchange giving rise to the gain. Under Notice 2020-23, a taxpayer has until July 15, 2020 to make its investment in a QOF if the taxpayer’s 180-day-period ends between April 1, 2020 and July 14, 2020.
The vast majority of states have extended state income tax filing deadlines commensurate with the federal extensions. A more limited number of states have recently begun providing various forms of relief for sales taxes, at least for small businesses meeting certain annual gross revenue thresholds. These forms of relief may include: extended deadlines for sales tax returns; waiving penalty and interest for late-filed sales tax returns; and granting use tax deductions for COVID-19 related donations.
The states currently offering some form of sales tax relief include: Alabama, California, Colorado, Connecticut, District of Columbia, Florida, Illinois, Indiana, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, New York, North Carolina, Pennsylvania, South Carolina, Texas, Vermont, Virginia, and Wisconsin.
Work-from-home and Nexus: Multistate businesses whose employees are required to work-from-home should be mindful of physical presence nexus and monitor guidance from states in which employees work from home. The District of Columbia, Indiana, Minnesota, and Pennsylvania have issued guidance that in general, employees required to work from home do not establish nexus for the employer while a federal, state, or local government order is in effect. Maryland has issued a notice that nexus determinations are based on the specific facts and circumstances of each taxpayer.
Information on the Arizona and New Mexico responses to COVID-19 is below.
New Mexico: New Mexico Taxation & Revenue Department (TRD) COVID-19 Response
Income Taxes and Estimated Payments:
No Other Extensions:
New Mexico Taxation and Revenue Department Bulletin 100.35
Operations and Tax Enforcement Actions:
Arizona: Arizona Department of Revenue (ADOR) COVID-19 Response
2019 Income Taxes and Estimated Payments:
ADOR GTN 20-1
Unemployment Reports and Payments:
Frank Crociata is available to answers questions about State and Local Tax Developments for businesses.
Potential Liability for Exposure to COVID-19
As the economy re-opens, many employers and businesses have expressed concern about civil liability arising from exposure to COVID‑19. Companies are wondering about their potential liability to persons who claim they were exposed to COVID‑19 while on their property and became ill following that exposure. Such allegations will require a careful analysis of the facts and circumstances relating to the particular claim.
Claims for sickness and injury to an employee may be subject to worker’s compensation laws, such that an employee’s exclusive remedy, with limited exceptions, would be through the worker’s compensation system. During that process, the employee would need to establish that the injury resulted from exposure in the workplace while performing a function in the course and scope of the employee’s work duties.
For non-employees, a company may face claims from a social guest or business invitee if the business knew or had reason to know of a dangerous condition that caused the guest or invitee harm. The elements of such a claim would include establishing (1) the existence of a legal duty owed by the company to the claimant, (2) the company’s fault, (3) injury sustained by the claimant, and (4) a causal connection between the company’s conduct and the claimant’s injury. Of these elements, fault and causation will likely be the key focus of most disputes. Specifically, claimants will bear the burden of proving that the business failed to act as a reasonably careful person would act under the circumstances, including following any industry-specific standards, and that the business’s conduct helped produce the injury and that the injury would not have happened without the business’s conduct.
Accordingly, in addition to following all requirements established by federal, state, and local authorities in connection with re-opening, businesses should research any guidelines or recommendations applicable to their industry and develop reasonable policies and practices based thereon. Likewise, businesses should carefully document all efforts to implement their adopted standards, as that documentation be used as evidence in defending future exposure claims.
Many businesses routinely require customers, guests, or other persons coming onto the premises to sign “waivers of liability” or other “assumption of risk” documents.
Businesses and property owners should be extremely wary about relying on such waivers to avoid potential liability for exposure to COVID‑19. As one might expect, judges tend to scrutinize prospective waivers very carefully, and in any given case can be tempted to search for some way to void the waiver (and permit the injured person to proceed with his or her suit).
Under those circumstances, businesses and property owners who are considering using such waivers should not use any “pre‑Coronavirus” forms, but should consult with legal counsel to develop documents that are tailored to the particular nuances and risks of the COVID‑19 pandemic.
Arizona Proposed Legislation
Arizona legislators have made protecting Arizona business from tort liability a priority. HB 2912 is currently pending in the Arizona House of Representatives, and the proposed law would raise the standard of liability from mere negligence to “gross negligence.” That is, a plaintiff claiming an injury related to COVID-19 caused by a business or similar educational, non-profit, or governmental entity would have to prove by clear and convincing evidence that the entity acted with reckless disregard for the safety of the plaintiff and other members of the public.
As of late May 2020, the bill is still being debated in committee, but even if it doesn’t become law in the current legislative session it is very likely to come up again in the expected legislative special session to deal with the impact of the pandemic later in 2020. As with all pending legislation the specific details of the bill are very likely to change, but it is possible that some sort of law protecting businesses and other entities from COVID-19 liability will be enacted in the near future.
Shannon Clark and Lincoln Combs are available to answer questions about the interaction between tort liability and workers’ compensation laws and risk management best practices.