Relief Available to The Restaurant and Hospitality Industries Under the Cares Act

A Philadelphia Inquirer article published on March 26, 2020 referred to the effects on the industry of the outbreak and resulting shutdown as “total annihilation”. Undoubtedly the shutdown of restaurants in Philadelphia, the rest of Pennsylvania, New Jersey and beyond has already led to hard choices by restaurant owners. Layoffs, missed rent payments, missed loan payments and non-payment of utilities have led to a harsh new reality for restaurant owners, their employees (particularly undocumented employees), vendors, landlords and lenders.

While the future remains uncertain in many ways due to the outbreak, the $2 trillion stimulus bill (the CARES Act) contains measures to keep the economy afloat amid the COVID-19 pandemic and beyond.

There are provisions in the stimulus bill that seek to provide relief to small businesses that may be particularly helpful to the restaurant industry and other hospitality-related businesses at this time.

1. Business continuity and payroll assistance loans.

Businesses with fewer than 500 employees or businesses in the restaurant and accommodation industries (i.e., any business assigned a NAICS code beginning with 72) with more than 500 total employees (if those businesses do not employ more than 500 employees per physical location of the business) can borrow up to 2.5 times their monthly payroll, based on the one-year period before the loan is made, or $10 million, whichever is lower. The business must have been in operation as of February 15, 2020 with a payroll and with applicable payroll taxes. The funds can be used for payroll, leave, insurance, mortgage payments, rent and utilities.

The CARES Act also allows the Treasury Department to approve lenders for a Paycheck Protection Program (PPP). The PPP funds can be used for payroll and lease and utility payments not covered through other government programs. Interest rates are capped at 4% and fees are waived.

2. Loan forgiveness.

Small businesses will be able to use the above loans for payroll, mortgage, rent and utilities between February 15, 2020 and June 30, 2020. Amounts spent on qualifying payroll, rent, utilities and other expenses for the 8-week period following issuance of a loan will be converted into grants that do not have to be repaid. The amount forgiven will be reduced proportionately based on the number of employees laid off during the period from February 15, 2020 to June 30, 2020 relative to the borrower’s prior employment levels, and for each employee whose salary and wages are reduced by more than 25% relative to the most recently completed fiscal quarter. Employees previously terminated who are rehired prior to June 30, 2020 will be considered to have never left the payroll.

3. Assistance for tipped employees.

With many restaurants no longer operating sit-in service, restaurant workers who rely on tips have been particularly affected. Under the CARES Act, restaurants with sit-in service can base their payroll and forgiveness for purposes of the above programs on the wages employees are currently being paid not an employee’s previous salary plus tips received prior to the COVID-19 outbreak.

4. Unemployment.

Industry workers who apply for and qualify for unemployment may be entitled to an additional payment of $600 per week for four months. Important to note, for employees receiving payments for accrued paid leave under Philadelphia’s paid sick leave program, is that the Pennsylvania Department of Labor and Industry has suggested that employees cannot receive both unemployment benefits and paid leave, as it may result in an overpayment that requires them to return benefits.

5. Deferred taxes.

Businesses that have been forced to close or have suffered a 50% drop in revenues from a year ago that have continued to pay employees during the outbreak will be refunded the payroll taxes paid on 50% of the wages. For businesses with 100 or more employees this applies just on wages paid while shuttered, but businesses with fewer than 100 employees are credited for all paid wages.

Social Security taxes will be deferred with half due on Dec. 31, 2021 and the remainder one year after that.

6. Leave.

Fees paid by employers for paid sick leave are capped at $200 per day and $10,000 in the aggregate per employee. Fees paid by employers for paid family leave are capped at $200 per day or $2,000 in the aggregate per employee.

The stimulus package, while providing some relief, still falls woefully short of what the National Restaurant Association had initially asked for, and what it believes it needs to avoid the kind of “total annihilation” predicted in the Philadelphia Inquirer. In a letter sent on March 18 to President Trump, Speaker of the House Nancy Pelosi, and Senate Majority Leader Mitch McConnell, the National Restaurant Association had asked the U.S. Treasury Department to create a $145B recovery fund for the restaurant and food service industry. The letter asked that $35 billion be provided for Community Development Block Grants for Disaster Relief assistance[1] and assistance in allowing businesses to defer mortgage, lease and loan obligations. The National Restaurant Association explained that they anticipated sales to decline by $225 billion during the next three months, which would inevitably prompt the loss of between five and seven million jobs.

The National Restaurant Association’s letter had further requested loans and insurance options for impacted small businesses, to include $100 billion in federally-backed business interruption insurance; a federal loan program for a business to get a loan equal to lost revenue during an emergency three-month period, with the option for extension through 2020; $45 billion in expanded access to federal and conventional loans; and $130 million in disaster unemployment assistance.[2]

Please note, on April 5, 2020, the Pennsylvania Secretary of Health issued an Order mandating enhanced cleaning and disinfecting requirements for owners of large buildings. The Cleaning Order applies to owners of buildings of at least 50,000 square feet used for commercial, industrial or other enterprises, including but not limited to facilities for warehouses, manufacturing, commercial offices, airports, grocery stores, universities, colleges, government, hotels, and residential buildings with at least 50 units.

The Coronavirus Task Force at Klehr Harrison stands ready to assist you in your business and legal needs. We will continue to provide additional information and guidance as the COVID-19 situation develops.

Co-author Patrick J. Murphy, Jr. is a partner in the Corporate & Securities Department at Klehr Harrison. Co-author Augusta O’Neill is an associate in the Real Estate & Finance Department at Klehr Harrison.

[1] Typically, this program is utilized when regions and communities – and their local businesses – may not recover after a federally declared emergency or disaster.

[2] The National Restaurant Association had also asked that it be given special tax incentives, including a temporary payroll tax cut that would increase economic activity; allowing businesses to amend their returns and receive money back that they effectively overpaid in taxes, as well as the benefit of bonus depreciation; allowing businesses to delay, defer, or forgo their tax obligations; providing tax credits to businesses that retain employees; and reducing credit card interchange fees.