March 30, 2020

Executive Compensation and the CARES Act

Holland & Knight Alert
John D. Martini | Cory A. Thomas | Victor Pazmino

Highlights

  • The $2.2 trillion Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was signed into law on March 27, 2020, as a response to the COVID-19 pandemic and the negative impact it has had on the economy.
  • The CARES Act provides many important forms of relief, including specific provisions related to assisting businesses and preserving jobs that we have described in more detail in other Holland & Knight alerts.
  • It is also important to be aware, however, that businesses who receive assistance under the CARES Act will be subject to certain limitations on executive compensation.

The Coronavirus Aid, Relief and Economic Security Act (the CARES Act) was signed into law on March 27, 2020, as a response to the COVID-19 pandemic and the negative impact it has had on the economy. The CARES Act, phase 3 of Congress' response to the COVID-19 crisis, is a $2.2 trillion stimulus package intended to assist both individuals and businesses during this uncertain time.

While the CARES Act provides many forms of relief, it also includes specific provisions related to assisting businesses and preserving jobs. Section 4003(b) of the CARES Act authorizes $500 billion to the U.S. Department of the Treasury's Economic Stabilization Fund in an effort to provide businesses, states and municipalities access to sources of liquidity in order to maintain solvency during the coronavirus (COVID-19). Additionally, Section 4112 of the CARES Act allows the Secretary of the Treasury to provide financial assistance to air carriers and contractors for continuation of payment of employee wages, salaries and benefits.

However, as detailed below, businesses who receive assistance under the CARES Act will be subject to certain limitations on executive compensation.

Limits on Compensation

Section 4004

Officers of an enumerated business, which includes passenger airlines, cargo air carriers, businesses critical to maintaining national security, and any other business that receives loans, loan guarantees or other investments under Section 4003(b), will have their compensation limited beginning on the date an agreement is executed and ending one year after the loan or loan guarantee is repaid. Compensation limitations are as follows.

  • Officers and employees whose total compensation (including salary, bonuses, equity awards and other financial benefits) exceeded $425,000 in 2019 may not receive:
    • total compensation during any consecutive 12-month period that exceeds the total compensation received in 2019, or
    • severance pay or other benefits upon termination that exceed twice the compensation received in 2019
  • Officers and employees whose total compensation exceeded $3 million in 2019 may not receive:
    • total compensation during any consecutive 12-month period that exceeds $3 million plus 50 percent of the excess over $3 million of total compensation received in 2019

The limitations do not apply to employees whose compensation is determined through an existing collective bargaining agreement entered into prior to March 1, 2020.

Section 4116

Officers of an air carrier or contractor that receive financial assistance under Section 4112 will have their compensation limited during a two-year period beginning on March 24, 2020, and ending on March 24, 2022. Compensation limitations are as follows.

  • Officers and employees whose total compensation (including salary, bonuses, equity awards and other financial benefits) exceeded $425,000 in 2019 may not receive:
    • total compensation during any consecutive 12 months during the two-year period that exceeds the total compensation received in 2019, or
    • severance pay or other benefits upon termination that exceed twice the compensation received in 2019
  • Officers and employees whose total compensation exceeded $3 million in 2019 may not receive:
    • total compensation during any consecutive 12-month period that exceeds $3 million plus 50 percent of the excess over $3 million of total compensation received in 2019

The limitations do not apply to employees whose compensation is determined through an existing collective bargaining agreement entered into prior to March 27, 2020.

Conclusion and Considerations

It is expected that detailed regulations will be released that will interpret these broad rules in the months to come in much the same way as rules were promulgated under the Troubled Asset Relief Program in the wake of the 2008 financial crisis. Accordingly, it is very important for any company that intends to seek financial assistance from the government under the CARES Act to carefully consider the impact on its compensation policies generally.

For more information on how the CARES Act could apply to you or your organization, please contact the authors or another member of Holland & Knight's Employee Benefits and Executive Compensation Group, including Bob Friedman, Ari Alvarez, Kelly Bley, Gregory Brown, Christopher Buch, Kerry Halpern, David Pardys, Rachel Shim and Victoria Zerjav.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact the author or your responsible Holland & Knight lawyer for timely advice.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.


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