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COVID-19 Client Alert: CARES Act and Implications for Government Contractors

President Trump signed the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") into law on March 27, 2020. P.L. 116-136. The CARES Act is the largest stimulus act in the history of the United States, amounting to a staggering $6.2 trillion. Although media coverage has focused on the direct cash payments to United States citizens, the majority of the stimulus package is aimed at assisting businesses weather COVID-19's economic fallout. Due to the unprecedented scope and impact of the Coronavirus pandemic, the government's response will change and develop rapidly over the coming months. Smith Pachter McWhorter will provide additional guidance and analysis as the CARES Act and other response legislation is implemented.

Paycheck Protection Program

One of the CARES Act's primary goals is to help businesses keep Americans at their current jobs while various "stay at home" orders and social distancing measures impact operations. P.L. 116-136, Division A. The Keeping American Workers Paid and Employed Act, contained in Division A, Title I, is designed to help small businesses - including government contractors and construction companies - and certain non-profit entities keep their employees on the payroll during the epidemic. See, P.L. 116-136 §§1101-1114.

Congress has charged the Small Business Administration ("SBA") with helping businesses with fewer than 500 employees keep their employees on payroll. P.L. 116-136 § 1102. If the for-profit entity has more than 500 employees, then the entity must meet SBA's size standards for that particular industry. Id. The eligibility rules for non-profit entities are similar, limiting qualification to § 501(c)(3) entities with fewer than 500 employees. Id. Entities should carefully evaluate their eligibility to participate in the program, including assessing whether the entity is small under the SBA affiliation rules in 13 C.F.R. Section 121. Id. Borrowers are required to certify that the applicant meets the requirements.

To accomplish these goals, the SBA will provide up to $10 million in loans to qualifying businesses. P.L. 116-136 § 1102. These loans automatically become grants if the business uses them for: payroll costs; maintaining group health care coverage; employee compensation; mortgage interest (but not principal); rent; utilities; or interest on debt obligations incurred before the emergency began.  P.L. 116-136 § 106. If the business lays off any employees during the emergency, however, the amount of that employee's compensation will revert back to a loan and must be repaid. Id. Businesses with more than 500 employees or small businesses that do not elect to take the SBA loans may qualify for certain tax benefits instead. See, P.L. 116-136 §§ 2301-2308.

Unique Federal Contractor Provision

The CARES Act includes a section dedicated exclusively to federal contractors.  P.L. 116-136 § 3610. Section 3610 allows agencies to issue contract modifications without further consideration to reimburse contractors when their employees cannot report to their physical work site due to coronavirus concerns and also cannot telework. Id. In these situations, agencies are permitted to use previously allocated funding to reimburse the contractor for up to 40 hours per week of the employee's minimum applicable billing rate for any paid time off due to precautionary measures. Id.

Defense Production Act Amendments

The CARES Act also removes several significant restrictions on the President's authority under the Defense Production Act ("DPA"). P.L. 116-136 § 4017. Congress preemptively waived the spending caps in 50 U.S.C. §§ 4532 and 4533. Id. The Act also allows the DPA Fund to exceed its statutory $750 million cap. Id.; see 50 U.S.C. 4534(e). Taken together, Congress has effectively created a bottomless pool of money to fund DPA orders.

Loans for Companies in Aviation and National Security

The CARES Act includes special loan and loan guarantee provisions for certain airlines, aviation, and companies involved in national security programs to promote liquidity during the pandemic. Sec. 4003 states that the Secretary of the Treasury is authorized to "make loans, loan guarantees, and other investments" in an amount not to exceed $500,000,000,000. Of this amount, not more than $17,000,000,000 shall be available to "businesses critical to maintaining national security" which could include defense contractors and aerospace companies. The CARES Act places limits on compensation for officers and employees of companies who receive such assistance. P.L. 116-136 § 4004.

Enhanced Oversight Authority

The surge in Federal money contained in the stimulus act comes with strings attached, in the form of powerful oversight provisions.  The most significant oversight function the Act establishes is the Pandemic Response Accountability Committee. P.L. 116-136 § 15010. This committee will be composed of the Inspectors General of the various agencies overseeing programs and have broad subpoena and investigative powers to review any action taken under any law enacted in response to the pandemic. Id. The law also establishes a Special Inspector General for Pandemic Recovery ("SIGPR") within the Department of the Treasury to audit and review the Treasury Department's actions in response to the coronavirus pandemic. P.L. 116-136 § 4018. Congress also created a special oversight commission to provide additional review and analysis of the Pandemic Response until 2025. P.L. 116-136 § 4020. The executive branch has also expressed its intent to police businesses and other entities seeking assistance from the Government; Attorney General Barr has issued express guidance to U.S. Attorneys nation-wide to crack down on fraud or related misconduct.

Accordingly, businesses that avail themselves of the CARES Act's various relief provisions or partner with the Government to address the crisis can be assured that their actions will be thoroughly scrutinized well after the fact and for years to come. Now more than ever, contractors should implement robust compliance and documentation policies to prevent future difficulties.

If you have any questions, please contact:

Stephen D. Knight
sknight@smithpachter.com

Edmund M. Amorosi
eamorosi@smithpachter.com 

Michael T. Gwinn
mgwinn@smithpachter.com  

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