COVID-19: New DOL and IRS Guidance Interpreting the Families First Coronavirus Response Act

COVID-19: New DOL and IRS Guidance Interpreting the Families First Coronavirus Response Act

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On April 1, 2020, The U.S. Department of Labor issued temporary regulations interpreting the Families First Coronavirus Response Act (FFCRA).  As mentioned in a previous alert, the FFCRA provides certain employees who are unable to work due to the COVID-19 pandemic emergency paid sick leave and paid family and medical leave.  Although the rules largely track the guidance DOL has posted on the Questions and Answers page of its website, there are a few clarifications of which employers should be aware.

Employee Notice and Documentation of Leave

Employees are generally not required to provide employers with advance notice of their need to take FFCRA leave.  An employer may only require notice after the employee takes their first day of leave.  After that first missed workday, the employer may require that the employee provide notice as soon as practicable given the particular circumstances.  If, however, the employee is taking leave for childcare related reasons, the employee must provide advance notice where the need for leave is foreseeable.  Even if the employee fails to give such notice, the employer cannot deny the leave request without first giving the employee an opportunity to provide the necessary documentation.

Employees must provide employers with documentation sufficient to justify their need to take FFCRA leave.  This includes a signed statement containing the following information:  (1) the employee’s name; (2) the date(s) for which leave is requested; (3) the COVID-19 qualifying reason for leave; and (4) a statement representing that the employee is unable to work or telework because of the COVID-19 qualifying reason.

In addition to the above information, employees must provide certain certifications specific to the reason they are requesting FFCRA leave: 

  • If an employee requests paid sick leave due to government quarantine or isolation order, the employee must provide the name of the government entity that issued the order.
  • If an employee requests paid sick leave because a health care provider advised the employee to self-quarantine, the employee must provide the name of the health care provider.
  • If an employee requests paid sick leave to care for someone else under quarantine, the employee must provide either (1) the government entity that issued the quarantine or isolation order to which the individual is subject, or (2) the name of the health care provider who advised the individual to self-quarantine, whichever is applicable.
  • Finally, if an employee requests paid sick leave or expanded family and medical leave to care for their child, the employee must provide (1) the name of the child being care for,  (2) the name of the school, place of care, or child care provider that closed or became unavailable due to COVID-19, and (3) a statement representing that no other suitable person is available to care for the child during the period of requested leave.

Notably, an employer may not require documentation beyond what is provided for in the regulations.  Therefore, an employee does not need to provide a doctor’s note advising self-quarantine or official documentation that their child’s school or daycare center is closed. 

Employer Recordkeeping Obligations

An employer is required to retain all documentation related to leave requests for four years, regardless of whether leave was granted or denied.  If an employer denies an employee’s request for leave pursuant to the small business exemption, the employer must document its authorized officer’s determination that granting such leave would jeopardize the viability of the business and retain such documentation for four years.  The employer does not need any prior approval from the DOL to reject requested leave under the small business exemption.  For tax purposes, the employer should retain the IRS Forms 941 and 7200 (and any other applicable forms) filed with the IRS with respect to the tax credits claimed for qualified sick leave wages and qualified family leave wages.

Employer Coverage

An employer is deemed a “covered employer” under the FFCRA if at the time an employee requests leave, the employer has fewer than 500 employees.  For FFCRA purposes, an employer counts all employees based in the United States, including full-time and part-time employees, employees on leave, temporary employees who are jointly employed by another employer, and day laborers supplied by a temporary placement agency.  Independent contractors and employees on furlough do not count towards the 500-employee threshold.

Subject to Quarantine or Isolation Order

An employee is eligible to take paid sick leave if the employee is unable to work due to a Federal, State, or local COVID-19 quarantine or isolation order.  Quarantine or isolation orders include a broad range of governmental orders, even local and statewide “stay at home” orders.  

Limitations: Business Closures, Furloughs, Telework

Employees are not entitled to FFCRA leave benefits if their employer has no work for them to do.  If a non-essential business is required to shut down or employees are furloughed due to COVID-19, employees who are out of work will not be eligible for FFCRA paid sick leave or extended family and medical leave.  An employee in this situation may be eligible for expanded unemployment benefits under the CARES Act. 

Additionally, employees who are unable to report to work because, for example, they are required to self-isolate or their child’s school is closed, but can nonetheless telework, will not be eligible for paid FFCRA leave.  In a departure from the continuous work rule, employers must pay for telework only for hours actually worked.  If telework is impossible—the regulations provide the example of a person working from home during a stay at home directive who loses electricity—then the employee could receive paid FFCRA leave for those hours they were unable to work.

Coordination with Employer-Provided Paid Leave

FFCRA paid sick leave is an additional entitlement, not a substitute for other PTO an employee has already accrued.  Accordingly, an employer may not force an employee to use other PTO before using FFCRA leave.  However, if an employer voluntarily implemented an emergency paid leave program before FFCRA took effect, the employer may terminate that program as long as the employer pays employees for leave already taken pursuant to that offering.  The DOL has also clarified that the FFCRA does not apply retroactively, so employees are not entitled to be paid for COVID-19 related leave taken prior to April 1.

Refundable Tax Credits for Qualified Paid Sick Leave and Family and Medical Leave

On March 31, 2020, the Internal Revenue Service published a list of frequently asked questions (the “IRS FAQ”) to provide guidance to eligible employers on how to obtain the tax credit for qualified sick leave wages and qualified family leave wages paid pursuant to the FFCRA for leave during the period of April 1, 2020 through December 31, 2020 (“qualified wages”).  The FFCRA entitles covered employers to a fully refundable payroll tax credit for qualified wages (including the employer’s share of Medicare tax with respect to such wages) plus the “qualified health plan expenses” (described below) allocable to applicable employees during their leave period.  The tax credits may be used to offset the employer’s Social Security tax liability on non-qualified wages paid to employees and, to the extent the credits exceed such liability, the employer may obtain a refund of the excess amount.  The employer is not subject to the employer portion of Social Security taxes on qualified wages, but it must withhold income taxes and the employee’s share of Social Security and Medicare taxes.

For purposes of the tax credit, qualified health plan expenses generally include the employer portion of health plan expenses for an employee and the employee portion of such expenses paid with pre-tax salary reduction contributions.  Health plan expenses paid by the employee with after-tax dollars are not included.  The IRS FAQ explains how to determine qualified health plan expenses for employers who sponsor various types of health plans, including fully insured group health plans, self-insured group health plans, HSAs, and HRAs.

Eligible employers may claim the tax credits on their federal employment tax returns (e.g. IRS Form 941, Employer’s Quarterly Federal Tax Return), but they may also take advantage of the credits prior to filing.  Eligible employers may fund qualified wages (as well as the employers’ share of Medicare tax with respect to such wages and allocable qualified health plan expenses) by using federal employment taxes related to wages paid between April 1, 2020 and December 31, 2020 that they otherwise would have deposited with the IRS, including taxes withheld from employees.  To the extent such amounts are insufficient, eligible employers may request an advance of the credits by filing IRS Form 7200, Advance Payment of Employer Credits Due to COVID-19.  Providing certain conditions are met, eligible employers will not be subject to penalties under Section 6656 of the Internal Revenue Code (the “Code”) for failure to deposit federal employment taxes related to qualified wages.

Additional Considerations

Payments of qualified wages (as well as the employer’s share of Medicare tax with respect to such wages and allocable qualified health plan expenses) are generally deductible by the employer.  The IRS FAQ makes clear, however, that the full amount of the tax credit must be included in the employer’s gross income (thereby effectively offsetting the deduction).  In addition, any qualified wages taken into account in determining tax credits under the FFCRA are excluded when determining tax credits under Section 45S of the Code related to paid family and medical leave.  Similarly, qualified wages that give rise to a tax credit under the FFCRA are not eligible for the payroll tax credit provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

Employers that utilize a third-party payer, such as a PEO, to report and pay their federal employment taxes are entitled to the tax credit if they are otherwise eligible.  Such an employer may file its own IRS Form 7200 to request an advance refund of the tax credit but must provide a copy of the form to its third-party payer so the credit can be properly reported.

From an employee’s perspective, qualified wages are generally treated as any other wages the employee may receive.  Accordingly, qualified wages are subject to income and employment tax withholding, and any salary reduction agreements the employee has in place with the eligible employer are treated as ordinary wages for purposes of benefits the eligible employer provides, such as contributions to 401(k) plans.

WilmerHale’s employment and tax teams are available to answer developing questions related to the FFCRA and provide legal advice tailored to your company’s particular needs. 

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