The Impact Of The 2021 Consolidated Appropriations Act On Employers In The Entertainment Industry

The Impact Of The 2021 Consolidated Appropriations Act On Employers In The Entertainment Industry

On December 27, 2020, the federal government enacted the Consolidated Appropriations Act, 2021 ("CAA 2021") – the government's latest legislative response to the COVID-19 pandemic. CAA 2021 includes a myriad of provisions that will continue to impact employers and employee benefits immediately upon enactment. Among other things, CAA 2021 (a) provides enriched and business-friendly employee retention credit (ERC) changes through June 30, 2021; (b) extends tax credits to employers that were covered by the Families First Coronavirus Response Act (FFCRA); (c) continues the Paycheck Protection Program (PPP); and (d) renews federal unemployment assistance through March 14, 2021.

Employee Retention Credit (ERC) Changes to Enrich Benefits for a Limited Additional Time Period

For context, the ERC, as originally enacted under the Coronavirus Aid, Relief, and Economic Security (CARES) Act in March 2020, operates as a refundable credit against an eligible employer’s employment tax liability equal to 50% of up to $10,000 in qualified wages paid from March 13, 2020 through December 31, 2020 per employee, meaning a $5,000 maximum per-employee 2020 tax credit.

Under the CARES Act, an employer becomes potentially eligible for the ERC if: (i) the employer’s operations are fully or partially suspended during a calendar quarter due to “orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes)” due to COVID-19; or (ii) the employer incurs a “significant decline in gross receipts” for the period beginning with the first calendar quarter in 2020 for which its gross receipts are less than fifty percent (50%) of gross receipts for the same 2019 calendar quarter. Qualified wages, which include W-2 wages paid to employees during the qualifying-event period, as well as associated qualified health care expenses, differ depending on whether the employer is a large or small employer. For a large employer (an employer averaging over 100 full-time employees in 2019), only those wages paid for the qualifying period during which an employee is not providing services qualify for the ERC. In contrast, for a small employer (an employer averaging up to 100 full-time employees in 2019), all wages paid during the qualifying period, regardless of whether the employee provides services, qualify for the ERC. For further details about the original ERC, please review our prior April 6, 2020 and May 6, 2020 alerts.

CAA 2021 includes several beneficial changes for businesses that are still suffering during the pandemic, including the following:

• Originally set to expire December 31, 2020, the ERC has been extended to cover qualifying wages paid from January 1, 2021 through June 30, 2021.
• The business-friendly amendments to the ERC in CAA 2021 are generally prospective starting January 1, 2021.
• The $10,000 per-employee annual qualified wage base under the CARES Act is extended under CAA 2021 to provide a per-employee quarterly cap for each of Q1 and Q2 2021. Hence, an eligible employer could qualify up to $10,000 in wages for an employee in Q1 2021 and qualify up to another $10,000 in wages for that same employee in Q2 2021, instead of being limited to $10,000 in total qualifying wages for this same period for the employee.
• Although the qualified wage base remains capped at $10,000 (for each of Q1 2021 and Q2 2021 instead of for the period ending June 30, 2021), the credit percentage rises to 70% from 50%, meaning the maximum credit per 2021 qualifying quarter would equal up to $7,000 instead of $5,000 for the period ending June 30, 2021. Therefore, the maximum credit for 2021 is $14,000.
• The gross receipts qualifying business distress event test for 2021 drops from a 50% decrease look-back comparison to the equivalent quarter in 2019 to a 20% decrease comparison. Also, an eligible employer has the option to either compare gross receipts reduction to the equivalent 2019 quarter (e.g., 2021 Q1 v. 2019 Q1) or the immediately preceding quarter (e.g., 2020 Q4 v. 2019 Q4).
• For 2021, the small versus large employer threshold increases from 100 employees to 500 employees, which expands the universe of employers entitled to more generous small employer treatment for purposes of counting qualified wages (i.e., all wages paid during the qualifying period, regardless of whether the employee provides services, qualify for the ERC for small employers).
• Though the IRS had issued guidance fixing the original CARES Act ERC gap on this point, the IRS’ interpretive guidance has now been codified in CAA 2021 to provide that group plan health care costs (i.e., employer contributions excluded from employee gross income and pre-tax employee contributions) count toward qualifying ERC wages, even if no wages for labor service are paid to the employee during the qualifying period.
• PPP loan participants were automatically disqualified from claiming any ERC under the CARES Act, even if the wages claimed for ERC were not paid with forgiven PPP loan funds. Now, a PPP participant can claim the ERC so long as the funds used to pay qualifying ERC wages did not originate from forgiven (i.e., government-waived repayment) PPP loan funds.

Employers Can Choose to Continue FFCRA’s Paid Leave Benefits that Expired on December 31, 2020

The FFCRA, the federal government’s initial legislative response to the COVID-19 pandemic in March 2020, offered paid-leave protections to employees of smaller employers in the form of both expanded family and medical leave and emergency paid sick leave. The FFCRA expanded family and medical leave by requiring employers of fewer than 500 employees to provide up to 12 weeks of job-protected leave (ten of which were required to be paid) to employees for a purpose relating to COVID-19. The FFCRA also required employers of fewer than 500 employees to provide emergency paid sick leave of up to 80 hours to employees also for purposes relating to COVID-19. Both paid leave obligations expired on December 31, 2020 and were not extended by CAA 2021. Even though the obligation to provide paid leave benefits under the FFCRA expired at the close of 2020, the CAA 2021 extends certain tax credits available to employers under the FFCRA to cover benefits paid through March 31, 2021.

Because FFCRA Sick Leave Benefits Expired on December 31, 2020, California’s COVID-19-Related Supplemental Paid Sick Leave Law Also Ended

In an effort to fill the gap left open by the FFCRA vis-à-vis large employers of 500 or more employees, California signed AB 1867 into law on September 9, 2020, which was expected to sunset on the later of December 31, 2020, or the expiration of any federal extension of the FFCRA. AB 1867 provided covered workers in California with a new source of supplemental paid sick leave (SPSL) of up to 80 hours that was over and above any other sick leave to which the worker already was entitled. It also imposed new paystub display requirements for covered employers. Because the paid leave benefits’ provisions of the FFCRA were not extended by CAA 2021, California’s COVID-19-related SPSL law necessarily expired on December 31, 2020.

Paycheck Protection Program Is Continued and Expanded through March 31, 2021

CAA 2021 injects an additional $284 billion available to eligible small businesses through the PPP, which was originally enacted under the CARES Act. CAA 2021 also expands eligibility for first-time borrowers and provides the opportunity for borrowers from the first funding round to seek a second round of funding subject to certain requirements (Second Draw Loans). Finally, the CAA provides that emphasis will be placed on making funds available to minority, underserved, veteran, and women-owned businesses.

Eligible borrowers will receive loans under the PPP that are fee-free, are fully backed by the federal government, and require no pledged collateral or personal guarantees. The entire loan amount may be forgiven if the funds are used to cover qualifying expenses, which now include expenses for worker protection and facility modifications to comply with COVID-19 health guidelines, certain qualifying supplier costs, specified software and cloud computing costs, and accounting payments, on top of payroll costs, rent, utilities, and mortgage interest, incurred within up to 24 weeks after loan origination. CAA 2021 also reverses the position taken by the IRS by allowing businesses to deduct business expenses that were paid with forgiven PPP loan proceeds. At least 60% of the amount forgiven must be used to cover payroll costs. Under CAA 2021, a borrower is eligible for a Second Draw Loan only if it has no more than 300 employees and experienced a revenue reduction in a single calendar quarter in 2020 relative to that same calendar quarter in 2019. Furthermore, Second Draw Loan borrowers must have used the full amount of their initial PPP loan.

Shortly after Congress’s passage of the CAA 2021, the Small Business Administration (SBA) released guidance on (i) the changes made to the PPP through the Economic Aid Act, (ii) Second Draw Loans, and (iii) accessing capital for minority, underserved, veteran, and women-owned businesses.

These new PPP loans will be made available until March 31, 2021. Production companies applying for a PPP loan that relied on EP for employee payroll needs at any point in time during 2019 through 2021 should contact EP at covid19@ep.com to receive certain payroll documentation that will be requested by their SBA-approved lenders, including the required payroll documentation sufficient to support a determination of their monthly average payroll costs for purposes of the PPP loan application.

CAA 2021 Extended Full Federal Funding of Extended Unemployment Compensation

CAA 2021 offers extended protections for those entitled to unemployment compensation benefits. More specifically, it restores the Federal Pandemic Unemployment Compensation supplement of $300 per week for weeks of unemployment beginning on or after December 26, 2020 and ending before March 14, 2021. CAA 2021 also increases the number of weeks of unemployment benefits an individual may claim from 39 to 50.

Employers are advised to consult with their labor and employment counsel to determine how CAA 2021 impacts their workforce.

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For any questions about this Alert, you may contact:

Joe Scudiero, Senior Vice President & Chief Labor Counsel | jscudiero@ep.com

Scott Bishop, Vice President, Employment Law | sbishop@ep.com

Edward Pak, Director, Lead Technology and Privacy Counsel | epak@ep.com

Pantea Lili Ahmadi, Senior Corporate & Employment Counsel | pahmadi@ep.com