Employment Webinar Series: How COVID-19 Impacts Your Business

Date: April 21, 2020
Welcome to McDermott Will & Emery’s weekly Employment Webinar Series: How COVID 19 Impacts Your Business. I’m Pankit Doshi, partner in McDermott’s Employment Practice group based out of San Francisco. If you have any questions during the webinar, please submit them using the Q&A feature and we’ll address as many as we can at the end of the webinar. We have a busy agenda today. So if we’re unable to answer your questions, we’ll get back to you directly afterwards. A link to the webinar recording as well as the slides, will be shared afterwards. Now this program also offers CLE credit. Those who participate in the full program will receive a certificate post webinar. It’s important that you fill out the post event survey that will be emailed to you in order to include your required information for CLE. For those of you in New York, I’ll read out a validation code at some point in the webinar that you should write down and then enter into the post event survey. For additional information and to stay informed of the latest developments, please visit our resource center mwe.com/coronavirus. So, without further delay, let’s right—launch right into these important insights. I want to first introduce my fellow panelists. Evan Belosa is a partner in our Employee Benefits and Executive Compensation Practice group based out of the firm’s New York office. He has extensive experience advising both companies and executives in all facets of employee relationships, with a particular focus on negotiating and drafting employment agreements, comp plans and grant documents. He also litigates with a particular focus on restrictive covenants and compensation claims. Stephen Ryan is in our Government Strategies Practice group based out of the firm’s Washington DC office. Steve has held important government post as an organized crime prosecutor and as an assistant US attorney and as Chief Counsel of the Senate Homeland and Governmental Affairs Committee for our American hero, John Glenn. He heads our lobbying practice in Washington. And for myself, again, my name is Pankit Doshi and I’m a partner in our Employment Practice Group based out of the firm’s San Francisco office. My practice is focused on labor and employment counseling litigation throughout the country up through trial, and recently, it’s been 24/7 helping employers navigate the tricky waters created by the COVID19 pandemic. So as the virus continues to be a global health concern, our goal today is to arm you with actionable information to help you deal with the changing landscape. And frankly, to prepare to face challenges that will likely arise in the coming days and weeks if they haven’t been there already. We’re going to start with the latest considerations for furloughs, layouts and salary reductions today. Then we’ll discuss some liability considerations for employees’ eventual return to work. We’ll discuss the impact of the current landscape on employment agreements. And then an updated discussion on the CARES Act, PPP, and the anticipated COVID IV bill. So without further delay, let’s jump right into, right into the first, first discussion.

How to address continuing employment related economic concerns for businesses. Many employers have already taken some first steps to reduce operating and payroll costs such as furloughs or layoffs or reductions in compensation. But what if these measures need to be expanded? What if the financial incentives of the FFCRA and the PPP within the CARES Act is not enough? Or what happens when those benefits run out? What happens if salaries need to be further reduced or, for the first time reduced? Or furlough is extended or started for the first time? Are furloughed employees terminated, and/or removed from a recall list? Today, we’ll look at those issues as well as continue to WARN implications and an alternative option to these actions in the form of a work share program. We’ll also look at current liability considerations and eventually getting your employees back to work. Now, note that if you’ve already been approved for a PPP loan through the CARES Act, any decisions made for eight-week PPP period, that reduce head count or salary, may impact loan forgiveness. So you want to be mindful of that and making your decisions on these issues. Generally speaking, there’s nothing in the CARES Act suggesting that employee terminations of furloughs following June 30th, 2020 will impact loan forgiveness. But there could be additional measures, measures put into place in the future, which you will want to be very mindful of before making some of these decisions that we’re going to be talking about today.

So first, salary and wage reductions. When considering salary and wage reductions, you’ll want to, of course, continue to ensure that any reduction or further reduction to the salaries of exempt employees remains above the minimum exempt salary requirements under the FLSA or the state’s individual requirements. Now, some states have a higher minimum salary than you would expect. For example, California requires a minimum salary of about $54,000 with the employees of—with more than 25 employees for employers. New York City has a minimum approximately $58,000, depending on the circumstances. And so you want to be mindful of any continuing reductions in compensation for exempt employees still remains above the, the exemption threshold for salary requirements. Next, you want to ensure that your New York continued wage reductions or furloughs do not impact a federal or state WARN analysis. For example, in certain states like California, short term zero work furloughs, even as short as four weeks, they do implicate WARN if the requisite number of employees are affected. In most states, this about 50 employees. So you’ll need to look at what the aggregate number of affected employees is. Also, if the continued furlough extends the furloughed period at least six months, then in most states and under federal WARN, a WARN notice would be required. And in addition, if wages are reduced drastically alongside, for example, reduced work furloughs, this can require notice under federal WARN as well. Now, it may be the case that you previously furloughed employees or reduced salaries, and the required number of people were not affected, so you didn’t issue a WARN notice at the time. But in considering now whether to engage in further reductions or furloughs…, you want to look at similar identical considerations as with your first round. You may need to give WARN notice at a later point that accounts with an aggregated total number of employees affected. So note that, if in total your reductions, furloughs or terminations affect the minimum number of employees, for example, 50 employees under the federal WARN Act, and all are related to a single cause, ie. all due to business circumstances related to COVID 19, but the layoffs may be spread out over more than 30 days, it’s still best to give notice as soon as practicable. Regulations note that in lawsuits enforcing WARN, plaintiffs may aggregate those layoffs up to 90 days. This is to make sure that employers are not attempting to avoid WARN by letting 49 employees go every 30 days or so. So, in short, you may need to give notice as soon as practicable after you have an understanding that 50 or more employees will be affected by a new and larger layoff, furlough, or salary. So as a hypothetical, let’s say if due to COVID 19, you had to let 25 influence go last month. Starting this month, also due to COVID 19, you have to let another 35 employees—you made the decision that they would be working at a reduced 50% of wages. In this situation, we’d recommend giving WARN notice as soon as practicable, after you know that more than 50 employees will be affected, even those separated by 30 plus days.

Now, with respect to continuing furloughs, if you previously had provided employees with a recall date, with which you can no longer comply, you will likely, again, have to consider some issues. So, for example, a final paycheck. Depending on your jurisdiction and company policy, a furlough or a termination may trigger a final paycheck or vacation payout obligations. Or, there might also be WARN implications. So even if you as the employers had already provided a WARN notice regarding that employee’s employ—employment, the employer might still be required to issue another WARN notice for the permanent layoff of the same employees if the requisite number of employees are affected. So for example, if a California employer had to issue a WARN notice due to a number of expected short-term furloughs, and then has to lay off those into individuals from the furlough, another WARN notice may need to be issued describing the changes in the circumstances and the change in status. And making to cite the unforeseeable business circumstances exception, if applicable, which we’ll discuss in a little bit. So, now, when considering furloughs or hours reductions, you also want to note that furloughs of exempt and non-exempt employees are different. So an exempt employee is typically classified as exempt because the employees value added is not defined by any specific hours worked. So any work done by a salaried exempt employee in a week means full pay for that entire week. And you’ll, of course, want to ensure that your notification document clearly specifies that no work is to be done, remote or not. No worksites are to be reported to, and they don’t have to respond to any type of emails. And you want to carefully vet this documentation with counselor or with your, with your HRT. Now one of the questions we’ve been getting when it comes to WARN is, are business circumstances still unforeseeable? So if states or, excuse me, if state or federal WARN notice is required, you of course want to make sure that you review for any potential exceptions to those notices. Many states and federal WARN, they have a natural disaster and an unforeseeable business circumstances exception to the WARN notice period. So for natural disaster exception, that, despite this pandemic resulting in a state of emergency, it’s unlikely that the natural disaster exception is triggered under WARN because that was likely to or intended to apply if buildings are being destroyed and fires, earthquakes or floods. More likely, and what’s happened in the past, and the recent past, is that when many employers laid off or furloughed employees last month or earlier this month in response to COVID 19, they likely did so with fewer than 60 days advance notice, either anticipating that the recall, recall would, would, of their employees, would happen within six months. Or they were relying on the unforeseeable business circumstances exception, UBC, that exists in the federal WARN Act and many, but not all of the state’s mini acts. The question that we’ve been getting is, as the pandemic continues, are layoffs and furloughs less and less unforeseeable? So it’s certainly arguable and will likely be the argument and potential future WARN lawsuits, that an employer whose business is in a steady decline and has to continue to perform layoffs, that this is not an unforeseeable territory and that the exception wouldn’t apply. Also, if you receive PPP funding, potential plaintiffs might also try to claim that the UBC exception is not available because the circumstances underlined the potential future second layoff or the furlough of employees after the PPP funding runs out as currently foreseeable. So, in other words, the employer could or should know now that they will not be able to retain most, if not all, of the employees they placed back on payroll with the PPP loans when the government assistance runs out. One position that employers might be able to take is the state that, look, even if the declines intensify, or shutdowns or shelter orders continue longer than originally anticipated, or there are more drastic circumstances that are arising, it could be arguable that continued layoffs, still due to COVID 19, may continue to be unenforceable. So we anticipate that the specific circumstances that are happening around the country and around the world will impact this analysis, but you should take very careful steps before deciding to undergo another furlough or salary reduction, and whether or not it implicates the WARN notice requirements, and then, whether or not the exception applies. Recognizing some of these issues, Governor Cuomo in New York issued an executive order modifying the New York WARN Act from April 17th through May 17. And that allows businesses that receive PPP funding to provide WARN notice as soon as practicable, but not necessarily within 90 days. If business is receiving their PPP funding, provided the WARN notice when it initially laid off the employee. So, in essence, the governor created a UBC-like exception for employers that are going to receive PPP funding but cannot give the full 90-day notice under New York law.

Now there’s a lesson here for us, just as recently as last week, a group of employees filed a class action against Hooters restaurant chain in Florida, stating that Hooters violated its requirements under WARN by giving less than 60 days advance notice. And by not properly documenting and explaining the unforeseeable business circumstances for the lessened period of notice. They’re seeking to represent almost 700 employees in Florida. It’s unclear if they’re alleging that the UBC exception was not properly utilized, or proper notification of it was not demonstrated. But either way, litigation is already starting when it comes to these WARN notices and we need to be even more careful than might ordinarily be. Now, in addition to WARN notice, if you’re considering doing additional salary or wage reductions or additional furloughs, you’ll need to consider whether you’re required under relevant state law to provide any period of notice for the wage reduction to your affected employees. So New York, for example, the New York Wage Theft Protection Act requires that employers provide seven days advance notice any wage reduction. Nevada’s another state that requires seven days advance notice. And most states require some type of advance notice, not necessary by a certain amount of days or time frames, but just some notice so that the wage not retroactive to work already preformed. You’ll also want to ensure you have proper documentation, not only for prior layoffs and furloughs and salary reductions, but for any future continued layoffs or furloughs or terminations. You want to make sure that you look at any adverse impacts to any protected classes. It’s ideal to affect employees within a position equally, if you can. So, for example, all managerial positions receive an 18% salary reduction. But you’ll certainly want to make sure that all reasonable and impartial business justifications exist for decisions. And you want to document the business status as of the date of each furlough or salary reduction. Why certain person was, for example, furloughed. The clearer documentation you have, the better it’ll, it’ll be for you down the line in case it’s ever challenged. And you’ll want to ensure, also, that any notice letter does not modify or provide any promise of recall and/or reminds employees that employment relationship is at will, if true.

Now, what are potential alternatives to doing another furlough or a salary reduction or engaging some other action if a payroll costs continue to be high and expenses continue to, continue to be burdensome. One, one option that many clients are taking advantage of is to consider by utilizing a work share program. What a work share program is, is it allows employers to create groups of employees who will have a uniform reduction in hours and pay. Generally 10-50%. So, for example, reducing all management-level employees’ salaries by 20%. This kind of program can be especially useful where these employees, if their salaries were reduced the same amount, but outside of a work share program may not otherwise qualify for standard state unemployment benefits. So, for example, if you reduce your employees’ hours or pay by, let’s say 20%, this is significant. But their income may still remain above eligibility thresholds for the state’s unemployment insurance program, unless it’s done through some work share program. Work share programs can significantly relax thresholds for employees participating in the plan. And so that’ll alleviate from employers that cost, the effect, effect of cost saving measures taken as a result of the current circumstances. Employees who also received partial unemployment through a work share program are also eligible to receive the additional $600 per week through July 31st, 2020 that’s currently being provided under the CARES Act. So currently there are 26 states and the District of Columbia that have operational work share programs place. You’ll want to note that in drafting your work share programs, it does involve the state government. So it brings an additional level of bureaucracy to employer decisions regarding your employees that are participating in this. And so you want to, you want to be mindful of that. So for example, in most states, hours of all participating employees must be tracked, including exempt employees. This may or may not be practicable, but it’s certainly something that you’ll want to consider by way of the information you have provide, to provide—to participate in these programs.

So here on this slide, there’s a, there’s a hypothetical that we put together about, about an individual who might receive partial unemployment but no work sharing. And then someone who receives partial unemployment but was involved in the work share program. Under the, I won’t go through the full details of it, but you can see by way of this example, if the employee receives a partial unemployment but doesn’t participate in the work share program, he could, he could get close to almost 10% less than his previous salary, or close to there. If you look at the option that includes partial unemployment and work sharing, it could be it could be possible that the employees would get an excess of what their normal weekly earnings might be. So there are some significant find—financial conversations there. Again, we’d recommend that you, you consult with a counsel or HR in, in just determining whether a work share program works for you.

And then finally, we just wanted to highlight for you some potential liability considerations. With respect to this pandemic, it’s likely you’ve already thought of many of these, and it will continue to evolve as this state and circumstances of the world continue to evolve. And regulations and guidance continues to come out from the federal and state government. But as you consider your workforce returning to work and what their current circumstances are, there are potential liability impacts there. So, for example, tort claims. Those are claims you want to consider if you’re an employer who is continuing to operate as an essential business with the shelter in place order. You’ll want to make sure the detailed records and an analysis of why you’re essential. Why, why those particular employees have to work, so that if it’s ever challenged down the line by any employees. Otherwise, if, if there’s a finding of violation of the orders, they could, there could be potential … consequences, especially with the local finding. You certainly want to also be mindful that in either returning to work or based on the current circumstances, are continuing to abide by OSHA and CDC recommendations and guidelines about a safe work environment. There could be a situation where, where you, depending on the industry you’re in, let’s say you’re in retail, for example, you open up your retail shops again. What do you do in a situation where a customer, consumer comes into your place of operations? Are they, could they be exposed to COVID 19? What if they do? And they later suffer any consequences? So you want to make sure that your work environment complies with all of the applicable guidance, certainly at the time. But for employees as well as for, for consumers. And, from a worker’s compensation perspective, if you, if there’s a violation of a shelter in place order, it could potentially invalidate worker’s comp coverage. OSHA claims. Again, if an employer continues to operate as an essential business, you want to make sure that you’re taking, as above, the recommended steps by the CDC and OSHA to reduce transmission among employees, identifying and separating any potential sick employees, and educating employees on the spread. You want to update your company policies to reflect this as well. You want to ensure that all your employees are provided with the personal protective equipment as necessary. If applicable, and potentially consider it, when even the remote workforce comes back, do they need such equipment, in, depending on the circumstances that they will return to work in?

Potential labor code claims as well. Numerous businesses are using work from home model currently, so we’ll want to ensure that employees were being reimbursed for their business expenses that they’re incurring. We’ll want to make sure that you have drafted appropriate policies and guidance on how to properly record time in a home work environment, including meal and rest breaks as applicable in your jurisdiction, and overtime pay. There could be the potential for whistleblower claims. So you want to ensure that if any employees are complaining about inadequate measures taken for protection against COVID, that it’s strongly documented and that and that those employees don’t face any verse employment actions that could be construed as a result of that.

And then finally, there could be potential ADA and reasonable accommodation issues that you should be wary of and should be thinking about going forward. So, if your model has been structured to involve work from home, it may be more difficult to engage in the interactive process for similar requests to work from home, or partially from home, going forward, and certainly as the business has shown flexibility. You may want to prepare for influx of reasonable accommodation claims for people who have experienced difficulty or trauma as a result of increased symptoms due to, due to COVID 19. So there are a number of potential liability implications. Those could continue and they’ll only continue, they’ll only evolve. And so you want to make sure that all decisions that you’re making during this time are careful and thought out and vetted with counsel and with your HR team to, to be mindful of some of these items. So with that, I’m going to turn it over, the floor to my colleague, Evan Belosa, who is going to talk about employment agreements.

All right. Thank you very much, Pankit. And good, good to connect with everyone. Thanks for, for taking time out of your day tuning in. So I’m going to talk about employment agreements and some of the issues related to interpreting them, changing them, and just dealing with them in general during this pandemic. So I start with, as I would love to start with, a quote from one of my all-time favorite movies, the Empire Strikes back. This is the scene, for those of you that don’t recall, where Lando Calrissian just made a deal with Darth Vader. Darth Vader changes the deal and says the famous line, I’m altering the deal, pray I do not alter it any further. He says it in a lot cooler way that I can. But the point is that parties to a contract, when things go a little haywire, often wish they had Vader-like power to unilaterally alter deals to reflect circumstances that may not have contemplated but wish they had contemplated, or wish could be done these days. But we’re in the real world and here in the real world, we’ve got to look at the actual employment agreements and go through a number of the elements that impact on what you can do. So the first consideration I wanted to highlight is salary reductions. Because this is one that we’re hearing an awful lot. Pankit talked about it a little bit with regard to at-will employees, as far as changing their salary. But we’re in a different universe when we’re talking about an executive for employment and an employee who is subject to a binding employment agreement that discusses the terms of salary. So first off, obviously, I’m talking only prospectively. You can’t change salary retrospectively without triggering labor laws regarding earned wages. So the, the impetus of course, is going to be, we’ve changed it for the at-will folks. The executives need to take some of the pain here. Let’s just change their salaries. So take a look at a couple of different clauses that you might find in employment agreements. These are drawn from real world scenarios, actual agreements, and you see that the language of the clause really impacts what you can do. So in the first—or at least what you can do unilaterally, which is really a lot of the questions these days. So if you look at the first example that we’ve given, that the executive has a certain base salary and it is not subject to adjustment other than, and then there’s a, a clause written there, pari passu reduction in response to exigent business circumstances or in accordance with reduction and salary paid to all similarly situated executives. So the first permits flexibility and reduction. Now there could be dispute about what’s exigent business circumstances, certainly. And I’ve seen agreements that have some further language that say once the exigent circumstances have concluded in the reasonable direction of the employer, your salary will be, again, pari passu, changed back with in regard to other executives. That’s got flexibility for the employer. You can state, we’re in exigent circumstances. You can make adjustments as long as you are not targeting that specific executive directly. Now the second one is quite different. There, we’ve got a base salary rate, which is specified that can only be increased, not decreased, and that there will be an annual increase for inflation. There’s no outlet to reduce salaries there. It’s a one way ratchet upwards. And in that case, the executive has a lot of flexibility to simply tell the employer, I get it, I understand, but you can’t make a change unless I’m in agreement with you. Again, these are taken from real agreements so it’s not theoretical. The recurring theme I kind of want to hit on here is that the specific language of the agreement is going to be your first stop. And in many cases, that specific language is going to be what might have been called boilerplate. Language that in negotiating the agreements, which unless it was negotiated in the last month, never contemplated a scenario quite like which we’re seeing today. And you’re going to start to see, looking at the guts of that boilerplate, what does it permit me to do that I didn’t really think I was going to need to do? I’ve often compared employment agreements to prenups, in that when things are going great, everyone sticks them in the drawer, and nobody looks at them. It’s only when the parties start to have divergent interests that everyone really scours the language of the contract. And you can see from these differences here that the plain language of that contract is really going to drive what flexibility do I have to simply say, here’s what we’re doing. As opposed to, I need to make another deal. The other thing, of course, to remember is the lessons that we learn now, and this is very familiar to anyone who was practicing in 2008 and 2009 time frame, the lessons that we learn now about what we have on paper will impact how you draft the next contracts. Because the circumstances that you didn’t really contemplate, the exigent business circumstances, that you would say, you know, not really going to happen, everything’s kind of been on the up and up. Now they’ve happened, and this will impact how you draft things going forward. So that’s kind of the consideration with regard to, simply, salary. But salary will impact some other clauses within the employment agreement, so we can click forward to the next slide.

We’ll see—another one is, is a good reason clause. So, many of you are familiar with the concept of a good reason clause, which is a termination provision which gives the employees some additional rights to say, if I resign, but I resigned because you, employer, changed some of the material terms. You bridged the agreement. You did something that really made this not the deal that I signed up for. I have the right to exit, and in exiting, I will be treated as if you had terminated me not for cause. So, before reducing salaries, even if you think you have the right to under the agreement, be careful you don’t blunder into the language that’s contained in the termination provision. Which you might say, well, I’m not contemplating terminating this individual. I don’t even need to check that. But if we take a look at, and again, this is taken from actual agreements, if you take a look at what a good reason provision looks like, and I highlighted the one that I’m talking about here most specifically, a material reduction in the executive’s base salary. So, in that case, if you materially reduce the executive’s base salary, the executive may have the right to say, hang on a second. You need to fix that, cure that. And if you don’t, I can leave and have the right to be treated as if I was termed not for cause. Now, in an agreement, depending on the size of the agreement, the executive, and the termination provision, that can be a pretty significant impact. Not only are you losing an executive that you may want to help guide you through this pandemic, but you also might be on the hook for substantial severance at a time when you really don’t want to pay that. But also the, the good reason in termination provisions are all, are usually keyed on vesting of equity or phantom equity. And in that case, the effect can be quite significant. The few dollars you might save yourself by reducing salaries might cost you a substantial amount down the road. Now that’s where some of these boilerplate really comes in handy. The provisions provide that an executive has to give the company written notice and the company should have some time to cure. In this case, the company has got 30 days to cure. So that may help you, and it may save you from what could be a substantial error, causing a substantial price to be paid on termination. Keep in mind it’s not just this base salary. If you check your good reason provision and say, well doesn’t exist there, so I’m okay. You could also trigger a material breach of the agreement. An executive can easily make a claim that, what I was paid as a base salary is a material part of this agreement, and by changing that unilaterally, you’ve breached the agreement depending, of course, on the terms of that salary provision. Of one of the things I do want to highlight in a good reason provision, since we’ll talk about furloughs later on, notice that material adverse change in the executive’s title or material duties. Now if the executive’s material duties are reduced, essentially, to zero for some period of time, the executive might have a claim that they have been term—that they have good reason to terminate. And in that case, of course, again, the, the minor savings you’re making by changing the salary slightly is going to be swamped if you end up stuck paying a substantial amount of severance or vesting equity that you really don’t want to vest. The takeaway on this is check the amendment provisions. Your best bet in, in contracts is take a look at what the agreement provides for amendment. This is a classic one. The agreement can’t be amended or modified other than by a written agreement executed by the parties. There is a substantial amount of weight that the written agreement is going to have here. I’ve been involved in a number of cases where someone said, well, you changed it. And the answer was, we talked about it, but we never actually wrote it. So even in this circumstance where no one’s in the office, it’s hard to, you know, effectuate a writing, use some sort of writing that can be verified. You know, e-signature, something of that sort. So you don’t blunder into a situation where you said, while he agreed to reduce his salary, or he agreed to waive his good reason provision, and answer is, I said I’d think about it, but I never agreed to it, and show me a writing that says I did. Last point on this one is I’ve heard a number of questions about force majeure clauses, which are a common animal, perhaps in, in other kind of contracts, not a usual provision you see in employment contracts. You can see them. I’ve seen them, you know, after Katrina they became a little bit more prominent in the healthcare industry, but it’s pretty rare to have it. If you do have a force majeure clause, and you might have in a longer term contract, you know, take a look to determine if it excuses all performance or just during whatever that emergency, that act of God under the force majeure is because you may be able to shelter under that to say I, I don’t have to provide certain benefits for the period of emergency. But you may have to kick that really in, back in if, for example, any of the governors within the states that what you are lift shelter at home provisions or anything else that suggests that whatever the act of God, the force majeure emergency is has been lifted. So the last prong, I guess, I would say on this is if you don’t have a unilateral right and you don’t have an executive that’s willing to make an amendment, your last, your last hope, I guess, might be the doctrine of impossibility in contract law, which is not often invoked. When virtually cataclysmic or wholly unforeseeable events make performance under an agreement impossible, performance can be excused sometimes. So the classic example is you, you signed an agreement to sell a boat and then lightning hits the boat. It blows up and there’s no boat anymore. Changes in market condition or economic hardship are not going to give you that impossibility right. But, as a long shot, contemplate whether if an employee is self-quarantining it can’t perform duties at all. You might have some argument to say, my performance under this is excused, it is impossible to get the performance I’m looking for on the other side. Again, something of a long shot, but one of the considerations.

So we’ve talked about now good reason, we’ve talked about salary. Let’s talk about some of the biggest components of compensation employment contracts, which is bonuses. And bonuses, unlike salary, come in a whole bunch of different flavors. So guaranteed bonuses. Check the language about what you can pay, what I call a soft guarantee, which is, if you’re here on the bonus payment then you will receive a certain amount versus a hard guarantee. Meaning, unless you quit or are fired for cause, you’re going to get this amount. That will determine whether you have any flexibility to avoid payment by termination or otherwise with amounts that may have been guaranteed by contract when, again, circumstances looked very different. When you change base salary, you’re often impacting target bonus. So keep that in mind, that if you say look, I’m going to change your salary $50,000 less, that’s all you’re losing. If the target is, you’re going to receive a bonus up to X percent of base salary, the change in the base salary is going to impact the target as well. And then the other thing to keep in mind is, when you’re looking at an employment contract with regard to bonuses, bonuses which are stated directly in the contract are a little bit of a different animal than bonuses which refer to an incentive plan. So on one hand, we have guaranteed bonuses. On the other hand, we have fully discretionary bonuses. And somewhere in the middle we have these kind of bonuses, and I put a couple of examples. The top one is executives shall receive a bonus equal to a certain amount of base—of net profits paid at the same time bonuses are generally payable. You don’t have a lot of flexibility on them. Of course, you can terminate the employee, but then we talked, we looked at the termination provision. Changing or simply saying I don’t have that money right now or that’s not what I was thinking is a lot harder in that one in which the language is shall receive, and it’s keyed off a quantitative metric that’s a, an easily recordable amount. A percentage of net profits, which is usually defined elsewhere. You’ll see this a lot in portfolio manager agreements. And although you might pay less than you think because the net profits are lower, in the end, you don’t have a lot of flexibility to simply say, I know what the calculation was. I just don’t want to do that. The latter one is a little bit different. That, that uses the language of eligibility. Which is not the same as entitlement number one, and it targets rather than guarantees, in essence, a certain percentage. It’s a target of 60% and it’s payable in accordance with the terms of an annual incentive plan. Now that’s helpful because you’re usually going to have a lot more flexibility under an AIP or something of that sort for an amendment or interpretation. You don’t need to amend the employment agreement itself to alter some of the provisions of the bonus, depending, of course, on what your AIP says, and how much flexibility you have therein.

So, moving ahead, let’s talk about that. Because that’s been, again, one of the key questions I’ve heard. Which is, okay look, can we amend some of these bonus plan agreements? Or if we haven’t set targets, what do we do? Because what I thought the world was going to look like in January, and I usually set my target, the AIP is going to be funded by a certain percentage of profits, if I do that this year, I’m not sure what’s going to happen. Or, it’s, it’s funded by a certain metric of that we usually consider success that probably is just not possible anymore. So the first thing is, check the plan itself. Check the AIP, and I’m just using that as a shorthand, check the amendment provisions. You may be able to make changes, particularly if you’re a private entity, which cascades down through a number of employment agreements. So if you have those kind of agreements and say you’re eligible under the AIP, the AIP itself may be able to be amended or changed to state, here’s what we’re going to do. So you may have flexibility to set targets for the year, individual and companywide. And if the targets aren’t set, because that’s another question I’ve heard, considered delaying. There’s no regulatory requirement to adopt performance criteria right now. And there’s some logic to delay pending and more fulsome view of what the economy looks like, what your business looks like, what the world looks like. Now, note for public companies, those of you with public companies, the longer you delay, the more it’s looked not as proper performance incentive by some of the ISSs is of the world because you’re incorporating actual data at that point. But that’s not really a legal consideration as much as it is a consideration of what’s a proper pay practice. Now, delaying may unsettle your workforce, so keep that in mind. People don’t like to work longer and longer into the year without knowing what they’re likely to see as incentives. But, you know, I wrote in there a little bullet, there’s no longer 162(M) concern. 162(M) was a provision of the Internal Revenue Code that provided an exception for qualified performance-based comp. Basically, all compensation paid, you know, in excess of $1 million is non-deductible unless its performance based. But that was eliminated. We don’t have that anymore. That was eliminated in 2017 Trump tax code. So we have some flexibility, if you haven’t set targets yet, to get a little bit better view of the universe. If your targets have been set, the question that’s coming in is, well, can I amend them? Can I change them? And, you know, a bonus plan that, for example, provides an increasing funding of the plan for in store purchase for a retail chain is a key performance metric that’s just not going to happen this year. And it’s, it’s not practical, worse—and worse, it risks deincentivizing employees. So or, you know, even a portfolio company CEO whose compensation is tied to increasing EBITDA. That, that executive may do a wonderful job to keep, EBITDA from, from diminishing, but the likelihood of increasing it seems pretty unlikely right now. So, what do we do? You could take a wait-and-see approach, but balance the desire to amend targets right now with waiting to see if conditions stabilize. Multiple adjustments are going to suggest you’re confused, you’re not sure what to do here. And the longer, again, you go into the year changing things, the worse it looks, both to your workforce and to proxy advisers. Another idea that we’re seeing is using relative metrics rather absolute. You see this a fair bit, but absolute measures have been upended and may it be very difficult to determine, you know, a relative measure, so for example, for a chief investment officer saying that bonus is based on how she does against the world worldwide MSCI metrics. So that if global markets are off 20%, she’s off 10%, she receives a bonus, rather than on the absolute measure, which may be impossible, is a great way to incentivize. Keep in mind, though, of course, that you want to manage performance with shareholder return. So in this case, folks say, well, I’m an investor. I lost money. I’m glad she did a great job, but I’m paying her money, even though, I, the investor am down. You’ve got to balance some of that. I want to reward good performance and I want to have a retention aspect with I didn’t get paid, you know, as the shareholder and the investor, why do you get paid? We’ve gotten a little bit of guidance, for those of you public companies, we’ve got a little bit of guidance from ISS on April 8th basically saying, look, if you want to make changes this year for a short-term performance targets for your 2020 bonuses, you can modify them. We usually say that’s problematic pay practice, but as long as you’re supporting a—supported by a significant record make disclosure to your, your shareholders now, we can live with that. But they’ve also said for longer-term targets, don’t make changes. Or, you know, or benchmark voting policies are generally not supportive to those in-flight awards because they cover multi-year periods. Of course, some of those multi-year periods may be pretty hard to change right now—hit right now anyway. But that’s kind of where you are on bonus plan targets, amending them, restating them, changing them. So let’s talk about, while we’re on the topic of bonuses, another question is well, I’ve got bonuses I’ve got to pay, and I don’t want to. I really just don’t want to pay that right now. I’m, I’m struggling. It’d be better if I didn’t have to. So, couple of things. First off, look at the employment agreement language, again, constant refrain you’re going to hear from me, some of them have some language that, and I highlighted it there, that has an absolute date as an outside date. So they’ll say you pay it when everyone else gets paid but with a kicker of—but it can’t be later than, you often see 75 days, to reflect internal revenue code 409A exempt language for short-term deferral. But for, for folks, you know, and most, so most 2019 bonuses have been paid. But for folks on a February, February or March, March fiscal, you’re asking questions about look, can we just not pay bonuses? Again, we look at that employment language, we may not have flexibility to delay. If you do want to delay, keep in mind 409A. We don’t want to go into a deep dive on that by any means, but, you know, the bottom line is 409A will apply an excise tax, above income tax, to a recipient who improperly defers nonqualified deferred comp, which bonuses can be. The shorthand here is if your bonus plan allows it, and we don’t allow the employee him or herself to set the deferrals, because the employee choosing the date of payment is not going to be acceptable. But if the bonus plan allows you to defer, the deferral doesn’t violate an agreement you have now and it doesn’t exceed the rest of the then current calendar year, you can, you have some flexibility to defer bonuses. Now, executives and employment, employees may not like it, but if they don’t have a contractual agreement that says no event later than means no event later than, you’ll have some flexibility to delay payments without triggering an excise tax under 409A.

So moving ahead. Let’s talk a little bit about terminations, furloughs. This is a common question, and it’s been touched on, Pankit touched upon it. But for employment agreement purposes, big question really is going to be, I’ve been furloughed and it’s not just for a short period of time. Is that a termination? And the interesting thing is, I’ve written hundreds, if not thousands, reviewed thousands of employment agreements, rarely, rarely does it mention, we may furlough you for some period of time. So you’re left looking at the agreement and trying to contemplate. And there’s, there’s some arguments on either side, obviously. From the employer’s side, you remain an employee, you’ll be reinstated to active employment quite quickly, or we expect in the near term, that’s not a termination. A termination is a termination. You’re not coming back. Course the employee is going to say I’m not making money. It’s an unpaid furlough in many cases. I’m not receiving wages. I’m not doing any work. That’s a de facto termination. And there’s not, you know, this, we’re in the infancy of determining, of course, what will be the end result. And the question could result in considerable liability. Much as we talked about with good reason clauses, severance is keyed off it. So, and so can be vesting of equity. So the question could be considerable. My personal opinion is that the open-ended furlough is likely to result in a claim. If you say we’ll talk to you in July, you know, August, we’ll see if we want to bring you back, you’re going to have a harder time arguing that you didn’t terminate this individual. In some cases, we can look to the WARN Act for a little bit of guidance, as Pankit talked about. In New York we’re allowed a six-month furlough before WARN Act notice is required so you could use that as a guide. But again, the employment agreements themselves are going to be pretty important here. And, and if there is no provision for a furlough, the employee has an argument to say, you put me out, you haven’t paid me. I have an opportunity for another job. I have to take that. I hadn’t quit. You fired me, in essence. And that’s going to be an argument that’s going to have to be delayed and— or have to be determined in the courts in many cases. This is not just relevant to pay, mind you, it’s relevant to restrictive covenants as well because some states do not permit enforcement of covenants in a termination without cause. Whereas if you resign, they will permit them. So, Massachusetts, just one by-statute passed in 2018 says, if you terminate someone without cause, you can’t enforce the non-compete, but if that person resigns, you can. And that could be pretty considerable, of considerable importance for an employer, for a very high-ranking executive. There’s obviously overlays as well with payment. I can’t pay someone if they’re on furlough. So again, just using Massachusetts as an example, that requires some consideration to be paid for a non-compete. If I’m not paying for that time, I can’t really enforce the contract. So this is going to be state law dependent, but we’re really at the infancy of seeing where that goes because we’ve never seen this many folks on unemployment agreements. High ranking execs being put on, on furloughs before. Final point on this one is benefits. Check the, check the plans. Question that employers have asked is, you know, I furloughed somebody. Do they still have health care coverage? Because I can’t pay them, but I’d hate for them to lose their coverage. And the answer is, talk to your plan provider before you do that. Your plans may have provisions that detail what active employment is for coverage, and if they’re not actively covered, then that kicks to COBRA. And, of course, COBRA is unpaid. So the executive who you’ve now put out on furlough may have to pay a larger amount to keep health insurance. And if you want to provide some pay to keep that insurance going, you’re run into the issue of this person’s not getting a paycheck, where am I deducting from? So a number of issues to talk about with regard to furlough. This just touches on a few of them. A couple more points before I quiet myself down here.

Big issue will be on the next one, on the next slide, section 4004 of the CARES Act. You guys have probably heard so much about the CARES Act. This refers to the $500 billion exchange Stabilization Fund under title IV that’s not the PPP. This is a $500 bucket, $500—$500 billion-dollar bucket for the airlines, national security businesses, and a number of midsize businesses that are going to enter loan agreements. There’s a compensation restriction in here, which I put on the screen, but it basically says if you earn for 425 or more in 2019, in any 12 month period between the date of a loan and for a year after that loan is repaid, you can’t receive comp in excess of what you received in 2019. Nor can you receive 2x severed. So you made, you know, $600,000 in 2019. During that loan time and for a year after, you can’t receive total comp more than $600,000 and you can’t receive severance in a total of $1.2. There’s also a highly compensated employee provisions that puts a formula to basically say if you received over $3 million, then you won’t receive more than the sum of $3million and 50% of that amount over $3 million. This leads, this has been really all we’ve gotten on this so far.

And if we flip to the next slide, we see there’s a lot of questions in place here. The biggest one related to what we’re talking about is what about employees with binding guarantees in employment agreements? We don’t know what that will look like quite yet. If somebody has a guaranteed bonus that is payable during what will, in essence, be a loan provision, how do you sign a loan agreement that says I won’t, I will abide by section 4004 if you know you’ve got an agreement that somebody has to be paid. So mandatory deferral is a possibility here. We don’t know yet. Total compensation has a definition there, but we don’t know how non-taxable benefits are included. We don’t know yet what awards of stock mean. Does that mean phantom awards? Those of you who remember back to 2009, remember that was a question an era. And the answer was, yeah, but they had to think about it and do that through regulation. What do, you know, how do we value the stock? And this is a, you know, a question for, is the stock value when it’s received or when it’s, when it’s granted? So we’ve got a lot of questions, but we have not gotten the guidance on that quite yet, so we’ll see where that goes.

Final slide that I’ll just talk about, leave you with is just an update on relevant recent guidance. The last—since the last time I think we did one of these, the only guidance of relevance has really been, or at least on the federal level, has been from the DOL Treasury and Health and Human Services regarding healthcare cost sharing. You may recall that the federal laws passed required group health plans and health insurance issuers to provide coverage for certain diagnostic testing for COVID 19. So the guidance clarified serological tests are included. That’s the test for antibodies, which is now, so much hope is being placed on. Other tests deemed necessary for the detection of COVID are covered. So if physicians have said I’d like to test for pneumonia first or the flu, but does, does that individual get covered? If not, I’m not going to, I’m not going to do it. Drive through testing is covered. Insurers usually can’t make midyear changes, but now they can, as long as they don’t raise non-related costs or cease covering other services to offset the cost sharing. So with that, I am going to quiet down and I’m going to turn it over to my colleague Steve Ryan.

Good afternoon. I’m hoping very much that your families are safe, and I bring some news from Washington today. It’s a very newsworthy day. First, there have been three major COVID bills. The three are listed on your screen there. The third one is obviously the most important. It was the largest stimulus bill that, I think in human history, for the US Economy, and that’s the CARES Act. And so there are many complex provisions of these bills. I’m going to concentrate today on the breaking news, which is that there are changes today in the PPP. We’ll go to the next slide.

The magical PPP. I call it magical because it’s not really a loan. It’s a loan that includes potentially 100% forgiveness. And so we should all get our loans this way. But the, the $350 billion that was originally put up for the PPP program was essentially taken off the map in the first wave of applications. And that wave of applications included most people who had an accountant and a lawyer who were associated with the banking institution that was already an SBA enabled lender. The people that are waiting now are the people who didn’t immediately get their loans in. And at four o’clock today, or soon thereafter, the Senate is going to pass a bill that will include a new $310billion award of money to this program. So the money that’s gone will be almost equal by the money that will be put in again. And there are going to be some restrictions on that. The PPP program that everybody understands today, had a particular carveout for the restaurant and hospitality industries. There’s going to be a lot of scrutiny on that. There’s already stories in the newspapers about larger entities there who have benefited from exactly what Congress wrote and who qualified. And now some shaming is going on of those institutions. But it’s really supposed to be employment that’s the issue. And hence, that was the rules that were made. I’m not sure if they’re going to change those rules in the legislation. The section by section analysis was ready as I went to print, but I couldn’t read the bill checks to see if they were making changes in the program. But if you were waiting on a PPP loan, the wait will be over. It would be good to move quickly to the exit for the PPP program so that you get your loan while they’re authorized.

Let me go forward and talk about a program that is less well understood and is for larger companies. The larger companies are 500 to 10,000. It’s called the Main Street Program. And then there are other programs. And I’m not going to give you all of the details of this because it’s a very complex program that isn’t fully explained yet by the Treasury Department or the Fed as to how it’s going to work. But needless to say, it won’t contain the provision that makes the PPP so attractive, which is loan forgiveness. It will always be a loan. It’ll be a below market loan. It will be a loan that’s favorable to the businesses and maybe a lifeline for businesses. But it comes at a price. Unlike the PPP program, where there was no collateral put up and where, you know, it was a relatively easy entry into the loan program with the exit being a little bit more scrutinized. This program contains a lot of restrictions. It contains restrictions on dividends during the time of the loan, at least the first year. It contains restrictions on executive compensation. It contains restrictions on who can qualify based on how heavily leveraged the business is. So anybody who’s looking at this slide and thinks that their business will be interested in one of these loans, you need to lawyer up. Unlike the PPP, which you could muddle through without a lawyer, you can’t muddle through this. It’s very complex stuff and it’s not yet complete as of this date. And there’s not much in the new bill that will address this.

Let me address what’s coming next. And what’s coming next is COVID IV. If we could move to that. Either CARE II to or COVID IV, there’s going to be one more massive stimulus bill, in all likelihood, that comes from this crisis. That last bill will be sometime in May, could be later, but sometime in May. Congress currently isn’t planning on being physically in Washington until May 4th at a minimum, and I think there’s some likelihood that that date will slip. But as we look at COVID IV, all the bets are off. Everything is on the table again in terms of benefits that might be available to different business segments. Rules in the other program might be altered in ways that make the programs differ than they do now. But, of course, you can’ retroactively change things with, with the same alacrity that you can change new things. So there will be winners and losers in C4. Just as there were really winners and losers in C3 and the CARES Act. And the lobbying has begun on, on what will be in that bill. It’s a hard time to lobby, and yet a very good time to lobby. The hard time is you have to have people’s private cell phones, or they have to be returning their emails to you, because you can’t physically go see them. And so it’s an intriguing time to be working on this and to see the difference in activity that’s going to occur. Now, let me give you the big picture. Let’s go to the next slide.

When you think about it, right now, in this period, the PPP Act that’s going to pass this afternoon and in the House on Thursday, there are very limited number of people who are actually the key players in this. In the executive branch, the president, of course, is always a key player. But Secretary Mnuchin has become, really, the singular person in the administration who is conducting very successful negotiations with the Senate and the House. There’s a new player at the White House, I believe, the fourth Chief of Staff to the President, Mr. Meadows, who’s a very experienced congressman and a very interesting person to have that role in this very difficult time period. Nancy Pelosi has become very important. I mean, she always was a speaker. But in this period, she’s become, perhaps, the vital person with Secretary Mnuchin and with the two Republican and Democratic leaders in the Senate in, in framing out the politics of things. Now, the way we’re working is unanimous consent right now. Unanimous consent means all 100 senators have to agree that a matter could be heard in the pro forma session where the Senate is barely in session physically, with a handful of people. It’s similar in the house but the House is going to likely pass a remote voting bill for the first time in its history on Thursday. There’s a new rule that’s going to address this issue. But at the end of the day, as we go forward, politics may overcome the feeling right now of desperation that we all have to pull together and we have to come up with bipartisan solutions. And so there will be people on the left, in the Democratic Party, and people on the right, in the Republican Party, who are in elected office in the Congress who may start to not allow the leadership to govern as they are by consensus, where a very large majority of the Congress wants that bipartisan result. And we can think about a future where that COVID IV bill may have a most interesting ride compared to the PPP bill that will probably slide through this week in a very easy fashion. So what’s driving this? What will allow this model to continue or will set it aside? Let me go to what really is underlying the congressional administration behavior. If we look ahead one slide.

What’s happened in America is we’ve gone to parliamentary elections. That is a lot of the elections sweepout an entire group of people, not just the presidency changing, but one or both of the Senate and the House changing. And if you notice here, I won’t go through all of the changes, but since 2000 we’ve had enormous wave elections and enormous levels of wave elections. And if you were to contrast it with the prior 20-year period from 19800-2000, which were eventful years in American politics, what you’re seeing is that parliamentary election. And I think that’s motivating a lot of the behavior of elected officials from the president to the Congress, is am I creating a wave for or against myself in this election? So if we look very quickly at how close the last election was.

If we progressed the slide, we would see that the presidential election last time was extraordinarily close. I’ll let you read the numbers, but let me, let me read you what it means to people. A few 100,000 people in a few states were the margin of victory for the president into the United States last time. There have been other times it’s been similarly close. And I think everybody expects that this election upcoming will be singularly close. But 10 days out from the election, the American electorate is going to break in favor of former Vice President Biden or current President Trump. Those are the two nominees that we’re going to have. And when we look at the states, we know which states are going to be in play again, in all likelihood. But what we can also see is the possibility that there could be a larger sweep. Had the President come up for reelection in 2018, it was a very bad year to be a Republican, as witnessed the very large number of house seats that turned and how that transformed the House of Representatives.

So let’s go forward for a minute. I’m going to show you, the administration has had an unprecedentedly high turnover and still has a number of positions open, not because the Senate’s failed to confirm them, but because the nominations are the second round or waiting, where you have actings in place. So it’s an unprecedented administration with regard to turn over. But let’s look at the turnover in Congress in the next slide.

The turnover in Congress is pretty amazing as well. We began Congress with 83 new members. So a very, very large number. We already know that there’s 20 something Republicans not running for reelection. In one state there’s a Texodus of six Republican members of incumbents in the House leaving. And so, the level of change that we’re seeing in an attenuated Republican caucus in the House, there’s still 12-15% of the members voluntarily leaving. And with the Democrats, you know, coming in, there are a lot of people who won very difficult purple or even red districts that are running for reelection for the first time and our highly vulnerable. So as we look at the bills that are coming, and at the activity, you can see why the stakes are such extraordinarily high stakes for the President and his administration, for the vice president, Biden, running, and for the members of Congress. All of the House members are up in 1/3 of the Senate. So I have some additional information, but we’ve run a little close on time. What I’d like to do is go all the way forward to my last slide, which tells a bit of poetry.

And so the congressman’s lament, you can read for yourself, but each congressman, as they come up against the C4 bill, will be trying to decide where to place their bets and how to act. Do I go along with what a bipartisan approach would be? Or do I try and stake out a position which might be very good in my district, but is not generally good for the people of the remaining districts that have to run in competitive races? With that, I’m very grateful that you’ve given us an opportunity to speak to you this afternoon. I’m going to turn it back over to Pankit. We don’t have a great deal of time for questions, but I wish you well.

Thanks, Steve. And thanks, Evan, as well. And thank you all for joining us this afternoon. We are mindful of the time and of your time and are very appreciative of you all joining us today. It seems we have a large volume of questions that have been sent to us. It might be record for webinar series here today, so unfortunately, we won’t be able to get through them right now, but we’ll follow up with you in the coming days. And you can, of course, reach out to any of us individually with any additional questions that you might have. CLE evaluation forms along with slides from today’s presentation will be emailed to you shortly. And the New York validation code that I promised earlier is APPLE21. So again, thank you for joining us today. We hope you found our webinar helpful. We hope that your families are safe and you’re staying safe and healthy. And our next webinar series will take place next Tuesday, again 2 PM Eastern, 11 AM Pacific. Thank you very much.


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