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Force Majeure & Impossibility of Performance Resulting from COVID-19
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Almost everyone believes in the law. But when a jury summons shows up in the mail, excuses often take precedence over beliefs.
Small and midsize law firms have overwhelmingly pursued funding from the $660 billion Paycheck Protection Program (PPP), which provides forgivable loans to help businesses avoid laying off workers during the COVID-19 pandemic and ensuing economic downturn. It also presents some tricky questions for law firms that receive funding. Here are some basics on how this U.S. aid program works, the process for receiving the funds, what firms can spend their loans on and how to maximize the PPP’s loan forgiveness provisions.
Administered by the Small Business Administration, the PPP program was launched to offer loans to companies with fewer than 500 employees. Capped at $10 million, the loans are forgivable if the recipient business uses at least 75 percent of the funds to maintain its pre-pandemic workforce for eight weeks. The program is well suited for law firms seeking to retain higher-wage employees who can still work from home during a period of sharply declining revenue.
Accordingly, leaders at small and midsize law firms largely have opted to apply for PPP funding rather than furloughing or laying off workers. In fact, more than 90 percent of small and midsize law firms surveyed by the Remsen Group applied for the first PPP round. Firms that must reduce their workforces may find some solace in the fact that federal pandemic relief measures provide enhanced unemployment benefits of $600 per week on top of weekly assistance determined by the states in which workers reside. That U.S. aid program, however, might be better for businesses forced to shut down completely, including bars and restaurants that employ lower-wage earners who would be better off financially by receiving unemployment benefits.
The Remsen Group survey of 70 managing partners found that about half had been approved within 12 days. For firms that weren’t able to secure funding in the first $350 billion round, applications opened April 27 for a second round of $310 billion. As of May 16, the SBA had approved more than 4.3 million PPP loans totaling more than $513 billion. Future rounds of pandemic stimulus legislation could include additional PPP funding, possibly modified to reflect an extended economic collapse.
Firms must use 75 percent of their loan to cover payroll costs. The other 25 percent can go toward expenses such as rent, utilities and mortgage interest. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. It is reduced if the small business lays off employees or reduces their pay.
In response to banks and small-business advocates, federal officials are considering changes to the program to allow a larger allocation of the loan amount to go toward rent, mortgages and utilities—which would be meaningful for firms in high-cost areas such as New York City. To date, federal officials have declined to do so, maintaining that the program’s primary focus is to help companies retain employees. The government is also likely to expand the timeframe in which funds must be spent, since it’s unclear how long the economic crisis will continue.
Loan forgiveness isn’t all or nothing; it depends on how the firm spends the funds. The SBA’s application outlines how to calculate loan forgiveness. The main factors that will reduce the amount that the government forgives are:
SBA’s guidance outlines some exceptions, including if the small business can demonstrate that laid off or furloughed employees rejected a good-faith offer to rejoin the company.
As the pandemic-driven financial crisis continues to take its toll on small businesses, every dollar that a firm doesn’t need to repay to the government counts toward the bottom line. Firms should ensure compliance with their lenders’ guidance on loan forgiveness, if any, and make sure they’re able to fully document how they use their loans—particularly since the guidance on this U.S. aid program continues to evolve during the ongoing economic downturn.
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