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Documentation and Recordkeeping: COVID-19 Paid Leave and Employer Paid Leave Tax Credits

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R. Douglas Taylor, Jr.
April 7, 2020

On March 18, 2020, President Trump signed into law the Families First Coronavirus Response Act (“FFCRA”), which creates two new emergency paid leave requirements in response to the COVID-19 global pandemic. The FFCRA covers private employers with fewer than 500 employees and certain public employers. You can access additional helpful information about the FFCRA’s paid leave requirements on Bean, Kinney & Korman’s COVID-19 Resource Center.

Overview of Paid Sick Leave Law

Division E of the FFCRA, “The Emergency Paid Sick Leave Act” (“EPSLA”), entitles certain employees to take up to two weeks of paid sick leave. The EPSLA requires covered employers to provide eligible employees up to two weeks of paid sick leave, at full pay, up to a specified cap, when the employee is unable to work because the employee: (1) is subject to a Federal, State, or local quarantine or isolation order related to COVID-19; (2) has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or (3) is experiencing COVID-19 symptoms and seeking a medical diagnosis, or at partial pay, up to a specified cap; (4) when an employee is unable to work because of a need to care for an individual subject to a Federal, State, or local quarantine or isolation order related to COVID-19; (5) has been advised by a health care provider to self-quarantine due to concerns related to COVID-19; or (6) has a need to care for the employee's son or daughter whose school or place of care is closed, or whose child care provider is unavailable, due to COVID-19 related reasons.

Overview of Extended Family and Medical Leave Law

Division C of the FFCRA, “The Emergency Family and Medical Leave Expansion Act” (“EFMLEA”), amends Title I of the Family and Medical Leave Act (FMLA), and permits certain employees to take up to twelve weeks of expanded family and medical leave, ten of which are paid, when an eligible employee is unable to work because of a need to care for the employee's son or daughter whose school or place of care is closed, or whose child care provider is unavailable, due to COVID-19 related reasons.

Employer Tax Credits Available for Paid Leave

The FFCRA provides small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19. My colleague Vikram Agarwal has provided an excellent summary of the FFCRA’s paid leave employer tax credits here.

For paid sick leave, the FFCRA provides small and midsize employers refundable tax credits that reimburse them, dollar-for-dollar, for the cost of providing paid sick and family leave wages to their employees for leave related to COVID-19.

For paid expanded family and medical leave, small and midsize employers are entitled to a fully refundable tax credit equal to the required paid family and medical leave (qualified family leave wages). This tax credit also includes the employer’s share of Medicare tax imposed on those wages and its cost of maintaining health insurance coverage for the employee during the family leave period (qualified health plan expenses), and employers are not subject to the employer portion of social security tax imposed on those wages.

Small Employer Exception to Paid Leave Requirements

The FFCRA also contains an exemption for “small employers,” i.e., those with fewer than 50 employees, under which such employers may qualify for an exemption from the requirement to provide paid leave due to school, place of care, or child care provider closings or unavailability, if the leave payments would jeopardize the viability of their business as a going concern.

In order to claim the available tax credit for paid sick leave or extended family and medical leave, employers must substantiate employee eligibility for paid leave by requiring such employees to provide certain written verification of eligibility. Employers are also required to maintain certain additional written records to substantiate the employer’s eligibility to receive the paid leave tax credit available under the FFCRA. Finally, a small employer claiming the statutory exemption from the paid leave requirements of the FFCRA is required to maintain documentation to show that its business viability would be in jeopardy by providing employee paid leave.

DOL and IRS Documentation and Recordkeeping Requirements for Paid Leave

Last week, the Department of Labor (“DOL”) issued temporary regulations applicable to paid sick leave under the EPSLA and EFMLEA, which spelled out the information required from employees requesting paid sick or family and medical leave, as well as recordkeeping requirements for employers. The DOL’s regulations also contain recordkeeping requirements for employers claiming a small business exemption from the FFCRA’s paid leave requirements. Concurrently, the Internal Revenue Service (“IRS”) published a set of FAQs providing guidance to employers on how to claim a paid leave tax credit. A summary of the documentation and recordkeeping requirements related to paid leave under the FFCRA, and the small business exemption from those paid leave requirements, follows.

Employee Paid Leave Documentation

(1) Employee’s name;

(2) Date(s) for which leave is requested;

(3) Qualifying reason for the leave; and

(4) Oral or written statement that the employee is unable to work because of the qualified reason for leave.

Employer Recordkeeping Requirements

(1) Documentation to show how the employer determined the amount of paid sick leave and expanded family and medical leave paid to employees that are eligible for the credit, including records of work, telework and paid sick leave and expanded family and medical leave;

(2) Documentation to show how the employer determined the amount of qualified health plan expenses that the employer allocated to wages;

(3) Copies of any completed IRS Forms 7200 that the employer submitted to the IRS;

(4) Copies of the completed IRS Forms 941 that the employer submitted to the IRS or, for employers that use third party payers to meet their employment tax obligations, records of information provided to the third party payer regarding the employer’s entitlement to the credit claimed on IRS Form 941, and

(5) Other documents needed to support its request for tax credits pursuant to IRS applicable forms, instructions, and information for the procedures that must be followed to claim a tax credit.

Small Business Exemption Definition and Recordkeeping

The DOL’s temporary regulations explain that a small employer (fewer than 50 employees) is exempt from the requirement to provide paid sick leave and extended family and medical leave when:

(1) Such leave would cause the small employer's expenses and financial obligations to exceed available business revenue and cause the small employer to cease operating at a minimal capacity;

(2) The absence of the employee or employees requesting such leave would pose a substantial risk to the financial health or operational capacity of the small employer because of their specialized skills, knowledge of the business, or responsibilities; or

(3) The small employer cannot find enough other workers who are able, willing, and qualified, and who will be available at the time and place needed, to perform the labor or services the employee or employees requesting leave provide, and these labor or services are needed for the small employer to operate at a minimal capacity.

For reasons (1), (2), and (3), the employer may deny paid sick leave or expanded family and medical leave only to those otherwise eligible employees whose absence would cause the small employer's expenses and financial obligations to exceed available business revenue, pose a substantial risk, or prevent the small employer from operating at minimum capacity, respectively.

The DOL explained that if a small employer decides to deny paid sick leave or expanded family and medical leave to an employee or employees whose child's school or place of care is closed, or whose child care provider is unavailable, the small employer must document the facts and circumstances that meet the criteria set forth above to justify such denial. The employer is not required to send such material or documentation to the DOL, but rather should retain such records for its own files.

Additional Questions about Paid Leave and Employer Tax Credits

We will be providing additional updates regarding the new paid leave laws and further relief measures that may be enacted as they are announced. If you need any assistance in this matter, please contact Doug Taylor at (703) 525-4000 or rdougtaylor@beankinney.com.

This article is for informational purposes only and does not contain or convey legal advice. Consult a lawyer. Any views or opinions expressed herein are those of the authors, and are not necessarily the views of any client.