Many small businesses applied for and were relieved to receive Small Business Administration (SBA) loans under the Payroll Protection Program (PPP) of the CARES Act.
For these loans to be forgivable, at least 75% of the money must be used for paying employees, whether they are actually working or not (this can include certain benefits costs too, which is a plus for both employer and employee). The intent of Congress was to keep money in people’s pockets for at least eight weeks so they can continue paying for normal household expenses. The PPP loan is a great tool for employers to address employee retention, at least for a few weeks. Employers and employees should be very happy about this legislation.
However, the CARES Act added another tool to the toolbox that expanded the normal provisions of unemployment compensation dramatically. This was intended to replace income for employees who were laid off where there was no access to PPP loans, no work available and no prospect of work becoming available any time soon (e.g., hospitality and leisure industries).
The extra $600/week in unemployment benefits
Although there are several unemployment compensation provisions in the CARES Act, the one causing the most significant amount of angst for employers is the extra $600 a week in federally funded benefits to any employee who qualifies for normal state unemployment compensation benefits through July 31, 2020. This $600 calculation was based on the so-called replacement rate, which is the share of a worker’s wages that is intended to be replaced by unemployment compensation benefits. Typically, that number is about 40% of wages on average across the U.S. The extra $600 is intended to totally replace 100% of average wages and keep people home (though some postulate that $600 divided by 40 hours = $15 an hour — a politically charged number due to the push to increase minimum wage).
Under the CARES Act, several states already replace more than 40% in wages. With the addition of the federal unemployment compensation benefits, many employees are making more on unemployment than they do from actually working. And there is no requirement to look for work while on unemployment compensation during the pandemic, as again, the intent is to keep people home to stop the spread of the coronavirus.
The result is that we have employers who need to hire employees to work, but many of the unemployed aren’t pursuing employment. Rather than adopting a “keep the paycheck whole” approach, it is now, for a short period of time, often more financially beneficial for employees to be unemployed. This is causing challenges for some employers.
It’s important to note that although unemployment compensation is a federal program, it’s administered by each of the 50 states independently. There is significant variability in the minimum and maximum benefit levels (like from a low max of $213/week to well over $700, though the national average is $371), waiting periods and eligibility requirements. Some states were woefully unprepared for the onslaught of unemployment compensation claims, which was exacerbated by ancient computer programs that could not handle the additional $600 per week, the sheer volume of claims or the calculation details. Many people have been waiting weeks for their unemployment compensation to come through, adding great stress to their finances.
It’s also important to note that the federally funded $600 per week will not be charged to employer unemployment compensation accounts for setting future tax rates.
One-size-fits-all approach to additional unemployment compensation
The one-size-fits-all unemployment compensation tool has created issues for employers who are doing the right thing to get a PPP loan to pay and retain employees. We have heard many reports of some employees being upset with their employers wanting to pay them their regular wages with PPP money when they can make more on unemployment. The real issue is that it is not up to either the employee or the employer to decide who will get unemployment — it’s up to each state’s agency to determine that based on truthful and timely information provided by both.
The unintended consequence of well-intended but rich unemployment compensation benefits is that it has created a significant communication and employee-relations issue for employers. You need to make sure your employees know what is at stake. If you have work available, or you need to use your PPP funds, employers can pay employees and then report it on each of the employee’s weekly unemployment compensation claim forms (the employee is required to submit their hours and wages weekly as well).
Administratively, it may take a couple of weeks for unemployment compensation to catch up to actual work weeks paid by employers, but if employees applied for benefits when they really were not eligible, they may then be required to repay the unemployment compensation money they received in error. It is very important for employers to communicate this well, especially with employees who are getting paid for not working.
A few scenarios to consider are:
- Employees paid by PPP loan: Employees who are paid via a PPP loan typically will have their benefits stay in place (e.g., health insurance, retirement plan contributions, other insured benefits, earning PTO, etc.). In this scenario, it does not matter if the employee is actually working or not.They are getting paid to either stay home, work remotely or work on location. They would likely not be eligible for unemployment compensation (though anyone can apply, the process usually weeds out those who are not eligible). The employee-relations issue with this is potential resentment by employees who are working against those who are not. Some employers are splitting their crews and rotating them to work a week on site and then a week at home (or similar arrangement).
- Employees laid off: This is basically a termination or employers not being able to say when (or if) employees may return to work. It is unlikely any benefits are continued if an employee is laid off.COBRA kicks in, and that enhanced unemployment compensation benefit suddenly doesn’t look as attractive as the employee pays for 100% of benefit costs (plus unemployment compensation benefits are taxable income).
- Employees furloughed: Some employers are asking employees to take time off voluntarily or reduce hours or pay rate for a specified period of time, in return for employers maintaining at least major benefits like health insurance. The employer is saying, “We want you back but can’t afford to pay both wages and benefits.” These employees may also qualify for some level of basic state unemployment compensation, and if they do, they will automatically get the extra $600 a week too. There is a lot of weekly administrative paperwork involved for both employees and employers (see next section).
- Work-Share programs: Some states have Work-Share programs that can be used for partial furloughs. This would qualify employees to get paid for at least some hours or some portion of pay from their employer, plus eligibility for some state unemployment compensation and all of the federal money through July 31, 2020. The CARES Act expanded the provisions of these programs through December 31, 2020, and made them more attractive for states that don’t have them yet. The setup takes some effort, but the subsequent paperwork for both employers and employees is then streamlined. These programs are worth considering.
- Part-time employees: For employees who were part-time before being furloughed or laid off, this could be very lucrative, as there is no differentiation for who gets the extra $600. Assuming they qualify for the underlying basic state unemployment compensation benefit, even if it is only $1 a week, the additional $600 becomes payable.
Unemployment compensation eligibility issues
Each state’s unemployment compensation office is solely responsible for determining any individual’s eligibility for unemployment compensation benefits. It is not an employee’s decision to stay on unemployment compensation. Employees who have been laid off or had hours reduced are required to certify any hours they worked and income they received every single week. Employers get weekly forms from their state’s unemployment compensation office to verify wages paid. Employers can state that there is work available and report if an employee refused to return to work. The fundamental basis of unemployment compensation eligibility is that the employee is unemployed due to no fault of their own and they are available to work.
Where this gets very sticky is when employees are fearful of returning to work because of concern about COVID-19. Fear alone is not necessarily a valid reason for employees to qualify for unemployment compensation benefits, but again, it is not the employer’s decision on eligibility, any more than it is an employee’s decision. Just because employees would prefer to be on unemployment compensation does not mean they eligible. The guiding principle for employers should be truthfulness when completing their weekly unemployment compensation benefits forms for each employee who has filed.
The question we often get is, “Can employees collect unemployment while out sick or quarantined?” Generally, the answer to this is no, as they are not available to work (one of the two basic tenets of qualifying for unemployment compensation benefits). Although anyone can apply for unemployment compensation benefits, it does not mean they will get it.
However, COVID-19 is creating many compensation dilemmas that may require further legislation to address these concerns. In our next article, we address integration with Americans with Disabilities Act, FMLA and OSHA concerns.
Employer responsibility to communicate
Although Congressional intent was great in providing all the tools for employers to use in retaining employees, it’s no wonder there is great confusion for both employers and employees. Detail was sacrificed for speed, so there were bound to be problems. It really is the employer’s responsibility to understand these options and facts and discuss them with their employees to ensure they understand why a course of action is being taken.
Click here to read our follow-up article on compensation options during COVID-19 (aka alphabet soup).
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