Wage and Hour Considerations During Pandemic; Business Interruption Lawsuits on the Rise; and More PPP Funds Allotted

Note to Employers:  Wage and Hour Laws Must Be Followed Even During a Pandemic

Given the fact a lot of employees are working remotely, there are a number of wage and hour considerations employers must keep in mind.

Expense Reimbursements Under California Labor Code Section 2802 and California court decisions, employers are required to reimburse employees for all “necessary” and “reasonable” expenses.   The California appellate court held that when an employee must use a personal cell phone for work purposes, the employer must provide reimbursement for a “reasonable percentage of [the] cell phone bills.”  In theory, depending on the circumstances, an argument regarding the reasonable rate of reimbursement for expenses related to employee use of internet services, personal computers, or printers could be made.  To the extent employers are requiring employees to clock in/out using a cellphone app on their personal cellphones, reimbursement of a portion of the employee’s cellphone expense may be required.  The cost of office supplies such as pens, pads, lamps, and furniture are not reimbursable unless the employer requires the use of specific types of supplies.  However, printer ink and printer paper costs may be reimbursable when paperless work is not possible.  Employee expenses related to the costs of teleconferencing software and applications may be reimbursable if the employer has instituted specific requirements for teleconferencing.  If the employee is free to choose from among different teleconferencing software or applications—there are numerous free software and application programs available—reimbursement would not be necessary.  Finally, the costs of postage, mail delivery, and messengers are not reimbursable except when required if a reasonable alternative (such as scanning, faxing, and email) does not exist.  Determining the appropriate amount for a reasonable reimbursement is another issue.

Travel timeThe time spent commuting from home to work and from work to home is generally not considered “hours worked” and, thus, is not compensable.  However, any task during the day that requires a non-exempt employee who is working from home to drive (like depositing money at the bank) may be compensable.

Timekeeping at home:  With a non-exempt worker who typically clocks in and out at the worksite, it may be difficult to track time worked and meal and rest breaks.  Non-exempt employees must record all time worked and take all meal and rest breaks just as though they were at an office or other physical workspace.  “Rounding” clock in/out times, while potentially defensible, may invite class action litigation and is not advised.

Wage Statements and FFCRAThe federal Families First Coronavirus Relief Act applies to employers with under 500 employees (and local ordinances may apply to larger employers).  Employers should create a separate pay category for these paid sick leaves, to track for compliance and tax credit purposes.

Employers must compensate for hours worked unless de minimus:  The California Supreme Court ruled that employers are required to compensate hourly employees for off-the-clock work that occurs on a daily basis and generally takes four to ten minutes after the employee clocks out at the end of their shift.  The Supreme Court made clear that it was simply ensuring California law was in line with the modern technologies that have altered our daily lives.

Carriers Denying Business Interruption Claims Sparks Lawsuits

Lawsuits are being filed by insureds, as insureds are being denied business interruption insurance coverage.  The primary justifications for denials by carriers is the prevalent boilerplate language in most business interruption insurance policies which seems to exclude coverage of losses due to viruses.

This very issue is being fought in the court system by a number of insureds including Musso & Frank in Los Angeles.  As demanded in a lawsuit the restaurant filed Tuesday in Los Angeles federal court, insureds are taking a stand demanding that insurers cover shutdown losses.

The debate has escalated to Washington, D.C.  Insurance lobbyists have warned lawmakers on Capitol Hill that “insurance coverage works by spreading risk, but that model simply cannot account for a situation in which losses are catastrophic and nearly universal.”

Rep. Maxine Waters (D-Los Angeles), chair of the House Committee on Financial Services, has expressed support for a so-called Pandemic Risk Insurance Act, modeled on a measure passed after 9/11, that would create an industry-funded reinsurance pool to cap the exposure of individual carriers to pandemic claims.

Closure losses just for businesses with 100 employees or fewer are reaching as much as $431 billion a month, according to the American Property Casualty Insurance Assn.  That’s as much as 72 times the monthly premiums collected on commercial property policies, the group says.  “Pandemic outbreaks are uninsured because they are uninsurable,” its chief executive, David Sampson, said in a statement.

Given statements like this, business interruption claims have already generated a number of lawsuits, as so many businesses have been shut down by government orders aimed at stemming the spread of the virus.

Insurers have been reportedly discouraging pandemic business interruption claims at the source — telling policyholders not to even bother filing them because they’re certain to be denied under the virus exclusion.  Those reports prompted California Insurance Commissioner Ricardo Lara to issue a notice April 14 instructing insurers that they could not reject claims out of hand — every policyholder, he said, is entitled to file a claim, have it investigated and receive a detailed explanation for any denial.  That’s the issue underlying the Musso & Frank lawsuit, as coverage was denied without any investigation.

This is an evolving situation that will likely come to a head in the coming months.  Stay tuned.

More PPP Funds Allotted – The Race is On

The Small Business Administration (SBA) began taking applications for the second round of the Paycheck Protection Program (PPP) as of 10:30 a.m. Eastern Time today, Monday, April 27.

President Donald Trump signed the $484 billion COVID-19 rescue bill on Friday, April 24.  It includes $310 billion in new money for the latest bailout.  The first round of PPP funding ran out of cash within days of being released on April 3.

Some additional points to keep in mind regarding forgiveness under the PPP:

  • It is mathematically impossible to get the full 100% forgiveness simply by paying the same person/people the same wage that your original PPP calculation on your application was based on.  Why?  Because the PPP funds that are being dispersed are intended to be equal to a full 2.5 months of 2019 payroll, and the PPP forgiveness is to be calculated on a mere 8 weeks of payroll (counting from the day you received the PPP funding.)
  • Paying any employee more than $3,846.15 per 2-week pay period (annualized $100,000/yr -- $3,846.15 per 2 week pay period) will not count towards forgiveness.
  • Start these payments from the very date you receive the money, or as close to that as possible, and make sure all your pay periods fall within the 8 week window.  Unless and until further clarification is provided, forgiveness appears to be calculated on a cash basis, in which case, accrued payroll with a pay date after the 8-week period won’t count.

Though these considerations are helpful, the long term health of your business will always trump any attempts to maximize forgiveness under the PPP program, especially in light of the fact that clarifications are issued weekly/daily and have the ability to impact any of the foregoing.

PPP Program Issues That Await Further Clarification:

The covered period for loan forgiveness has already begun for a number of businesses and many questions remain unanswered, including:

  • Many small businesses will be closed at the time their loan is funded due to stay at home orders that have not been lifted or for other reasons.  Will the covered period be modified or extended?
  • It is unclear what the phrase “costs incurred and payments made” means.  Does a cost have to be incurred and paid during the covered period, or are costs that were incurred prior to and paid during the covered period or incurred during and paid after the covered period eligible for forgiveness?
  • The CARES Act and current guidance do not define rent.  Are items such as common area maintenance (CAM) charges, insurance and taxes that are often defined as “additional rent” in a lease agreement included?  Are lease agreements limited to leases of real property?  Are rent payments to related parties eligible (although the CARES Act and current guidance do not specifically distinguish between third parties and related parties)?
  • How is “full-time equivalent employees” defined?  Additionally, how will furloughed employees, employees on paid leave, employees on reduced schedules, or employees who have voluntarily terminated or refused to come back to work be treated?
  • How will SBA make a determination that a business is a “seasonal business?”
  • It may be necessary for businesses to lay off employees after April 26, 2020.  Further, it may not be possible for businesses to rehire employees or increase wages by June 30, 2020.  Will the time periods that determine whether a business has eliminated a reduction in employees or wages be adjusted?
  • The CARES Act requires that the lender make a decision on loan forgiveness not later than 60 days after the date the lender receives the application.  Will there be further guidance on the application and approval process for loan forgiveness?
  • The self-employment income of general active partners (e.g., partners’ K-1 distributions and LLC members’ guaranteed payments) can be reported as a payroll cost (up to $100,000 annualized) on a PPP application filed by the partnership, but does that also count as payroll costs to be forgiven?

It is anticipated that further guidance will be issued regarding the matters aforementioned.

If you have any questions, please do not hesitate to contact us.

ERICA M. SOROSKY
[email protected]
(949) 851-7271
ERIN K. OYAMA
[email protected]
(949) 851-7288