The hidden risks of CARES Act reimbursements

Congress has taken aggressive action to help stabilize the economy through this crisis, including three major pieces of legislation: the Coronavirus Preparedness and Response Supplemental Appropriations Act, the Families First Coronavirus Response Act, and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Collectively, these bills provide trillions in relief to individuals and businesses, including direct payments, loans, tax credits, and deferrals on Social Security payments.

For federal contractors, a key provision is Section 3610 of the CARES Act. That section is intended to support the portion of the contracting workforce that is unable to work remotely during mandated social distancing policies, allowing for government agencies to modify the terms and conditions of a contract to reimburse companies through the end of the fiscal year for up to 40 hours per week of paid leave the contractor provides “to keep its employees or subcontractors in a ready state.” This assistance is essential, as it can prevent contracting companies from having to furlough or lay off workers who will be needed to support critical government missions once the world reopens.

But there is an important caveat. Reimbursement under this section may be reduced by the amount a business receives in other COVID relief benefits. That means that if a company makes use of other provisions – such as tax credits for paid sick and paid family and medical leave, the Paycheck Protection Program (PPP), the Employee Retention Tax Credit (ERTC), or a variety of government-subsidized business loans – it could limit or remove their ability to make use of Section 3610 funding. In other words, no double dipping.

A number of businesses, especially small ones, may be at risk of unknowingly disqualifying themselves from Section 3610 funding as they scramble to make use of the benefits available to them and meet the needs of this unexpected and chaotic moment. It is important that they look closely at the terms of all funding assistance they secure, and understand the tradeoffs that exist.

Complicating this effort is inconsistent guidance on the availability and use of 3610 funding. These dollars come from previously appropriated and limited pools of money, so agencies may understandably be reluctant to reimburse in accordance with the provisions of 3610 if the costs can be shifted elsewhere. But pushing companies to pursue loans or tax credits instead of reimbursing under 3610 may not be in the best interests of the contracting workforce, and may ultimately undermine the goal of maintaining a full and ready workforce.

As complicated an issue as this can be for large prime contractors, it is even more complicated when you consider either missing or inconsistent implementation guidance on rolling the requirement to subcontractors. Many small businesses acting as subcontractors have yet to realize that the PPP loans they are taking today will impact their invoicing under 3610 in the future. 

The federal government has acted admirably in providing relief for businesses in this difficult time. The expiration of 3610 funding on Sept. 30 is quickly approaching, but the implementation and effects of this provision will play out for some time to come. It is important that businesses work closely with their customers and partners to understand the full slate of options available to them, and the costs and benefits of each course of action. By working together closely with a shared goal of maintaining a robust and stable contracting base, we can ensure that our country is well-prepared to address major challenges now and into the future.