Big News from the Office of Pennsylvania Governor Wolf today! While there does not yet seem to be an Order, the Governor’s Office issued a press release today outlining significant changes to targeted COVID-19 business restrictions in Pennsylvania.

On April 4, 2021, the following changes will be implemented:

  • Restaurants
    • May resume bar service for the first time since November 23, 2020.
    • Alcohol may be served without the purchase of food.
    • The 11 pm cut off for alcohol sales and the 12 midnight curfew for removing alcoholic drinks from tables will both end.
    • For restaurants that self-certify compliance with COVID-19 mitigation protocols, capacity will increase to “up to” 75%. (50% for restaurants that do not self-certify.)
    • Outdoor dining, curbside pickup, and takeout remain encouraged.
  • Other Businesses
    • Capacity for personal services facilities (hair salons, barbers, nail salons), gyms, and entertainment facilities (casinos, theaters and malls) will be increased to up to 75% capacity.
  • Events (including attendance at sporting events)
    • Indoor events capped at 25% of maximum capacity.
    • Outdoor events capped at 50% of maximum capacity.

NOT changing are Pennsylvania’s statewide mask mandate and social distancing (6 feet) rule. This latter requirement is very important here, as all of the above capacity limitations are further limited by social distancing. That is, if you can only accommodate for example 60% capacity with the required social distancing, then your establishment is limited to 60% capacity. Furthermore, the Governor’s plan does not replace local restrictions, which can be more restrictive. Right now, Philadelphia has stricter restrictions than the state as a whole. We will have to see if it relaxes its rules and/or if other counties impose more stringent rules.

Overall, though, the Governor’s Announcement is great news, as it means Pennsylvanians are one step closer to normalcy–and that the pandemic continues to subside in the Commonwealth.

The idea for this blog comes from Sahara Pynes. Sahara is a member of our Labor and Employment team and presented her own Tips for New Entrepreneurs in our California Employment Law blog. Thanks to Sahara for this idea, and please check out her post!

The pandemic has had a disproportionate effect on women, with nearly 3 million women having left the workforce since the start of the pandemic. However, there have been a record number of new business applications filed throughout the country, according to the U.S. Census Bureau.

In honor of International Women’s Day, we wanted to provide a few tips to women (and others!) looking to take that leap into entrepreneurship, potentially as a franchisee. Here are few top considerations for any prospective new franchisee:

  1. Learn Local Licensing Laws. Most states have various licensing laws and requirements that any new business must obtain. These could include food and beverage requirements, zoning concerns, and tax issues. It is critical to research these issues before signing your franchise agreement.  You don’t want to learn too late that you have to jump through various state and local regulatory hoops.

 

  1. Form a Business Entity and Obtain Insurance. Many franchisors may require you to form some type of business entity to operate your franchise. This could be a limited liability company, or corporation. By forming such an entity, you may be able to protect your personal assets from third-parties claims. Moreover, you will likely be required to obtain insurance to protect your business as well as the franchisor. Consult with a business advisor, accountant, and insurance agency to assist with these decisions.

 

  1. Review the Employment Laws in Your State. States may have differing standards and requirements for determining when an individual is considered a contractor versus an employee as well as guidance related to minimum wage, break times, healthcare, and other leave. Consult with an attorney to determine how to structure your employment relationships, particularly as the franchisor is unlikely to provide much guidance in this area.

 

  1. Research Possible Franchisors. If you are interested in being an entrepreneur, but also having the support of a larger entity, then franchising is likely a good option. People think of “fast food” when they think if franchises, but there are thousands of franchise systems offering all types of services and products all across the country. Before making a decision, carefully research different industries and franchisors to determine what is the right fit for your business dreams.

 

Joining a franchise system can be a great way for an entrepreneur to start their own business, while also having the support of a proven concept. While the pandemic may have forced many women to leave the workforce, starting their own franchise gives many women an opportunity for economic independence and growth. These tips can help prospective franchisees from falling into unnecessary, and potentially costly, traps before their business gets off the ground.

Contributed by Odia Kagan.

This blog has discussed the importance of ensuring and auditing your vendors’ data security practices. A recent enforcement action from the Federal Trade Commission (FTC) drives home the importance of being proactive about vendors and data security.

Specifically, the FTC recently entered into an enforcement action with an analytics company for breaching the FTC’s Safeguards Rule issued pursuant to the Gramm-Leach-Bliley Act (GLBA) by failing to properly vet a third-party vendor it engaged. The vendor stored personal information in cleartext in an unprotected cloud-based location that could be accessed by anyone with the relevant URL. The information was exposed for a year and was accessed by 52 unauthorized IP addresses.

The company, Ascension Data & Analytics, was ordered to:

  • Put in place a written data security program.
  • Designate a person responsible for managing the data security program.
  • Conduct an annual risk assessment.
  • Require every vendor in advance of engaging them to:
    • Provide documentation of their information security practices.
    • Describe how and where the personal information will be stored and the protections that will be applied to it.
    • Assess the risk to the information they receive including an annual vulnerability scanning and penetration test.
  • Contractually require vendors to implement and maintain safeguards for personal information.
  • Assess the sufficiency of the safeguards annually and after any incident.
  • Assess the data security program at least annually and after any incident.
  • Present for review initial and biennial data security assessments performed by a third party.
  • Provide an annual certification from a senior corporate manager re: compliance with this order.
  • Report to the FTC about any data breach incident.

Key Takeaways

  • It’s not enough to have a written program that requires vendors to fill out an information security questionnaire if you then don’t take steps laid out in your program to evaluate whether the vendor could reasonably protect the personal information.
  • It is NOT enough (by far) to say in your contract with the vendor that “any nonpublic personal information . . . shall be protected from disclosure with all the provisions of the GLBA.”
  • You should include contractual provisions that at least require compliance with the Safeguards Rule.
  • You should specify in your contract the actual safeguards that service providers must implement, or otherwise require them to take reasonable steps to secure personal information.
  • You need to conduct a risk assessment for all of your vendors.

Odia Kagan is a partner in Fox Rothschild’s Privacy & Data Security Practice and Chair of the firm’s GDPR Compliance & International Privacy Practice. For questions about this post or other data privacy compliance issues, she can be reached at 215.444.7313 or okagan@foxrothschild.com.

It was predictable – even inevitable – that the Biden administration would reverse much of Trump’s labor oeuvre. But no one could have predicted how quickly! In a little more than a month, the administration has:

  • Installed Department of Labor leadership widely viewed as labor-friendly
  •  Abruptly replaced the NLRB’s Chief Counsel
  • Euthanized Trump’s joint employment regulation
  • Added a $15 minimum wage provision to the latest round of COVID funding

Reading the favorable tea leaves, Democrats have reintroduced the PRO Act. That piece of legislation, among other things, would outlaw state right to work laws and establish a national ABC employment standard.

Will this mad rush continue?! Or will the train slow down long enough to consider the implications of these actions? Can the franchise industry find a safe path through the maelstrom?

This question emerged in sharp detail a couple of years ago when the California legislature was considering passage of AB-5, the bill that established the ABC employment test as law in that state. Franchisors, franchisees, and the International Franchise Association lobbied, ultimately unsuccessfully, for a franchise exemption from the law. The logic of such an exception is obvious: Thousands of entrepreneurial franchisees are business owners, employing hundreds of thousands of Californians. As I noted in a previous blog (reference to Unintended Consequences blog), the ABC test risks classifying the franchisor as the employer of all those franchisees and all their employees. Under a broad interpretation of the ABC test, franchisees are no longer business owners; they are de facto manager employees of the franchisor. Much of the value franchisees worked hard to build in their independent businesses could suddenly disappear.

The perilous winds now blow nationally, and the franchise industry is already actively lobbying for a safe harbor. But what could a safe harbor look like? And is it achievable?

The simplest safe harbor is to exempt the franchise industry from application of the ABC and joint employment test. Unfortunately, such a simple and straightforward safe harbor exempts an impossibly wide swath of the economy and failed in California. But in the Venn diagram of legislation, could an acceptably narrow (from the point of view of labor advocates) and acceptably broad (from the point of view of franchisors and franchisees) be defined? Consider, for instance, a safe harbor defined as:

  • Franchisors that comply with the Federal Trade Commission franchise disclosure rule, and their franchisees (to narrow the scope of any safe harbor); and/or
  • Franchise relationships with franchisees having a minimum net worth and meet a liquidity standard (a well-heeled franchisee should be able to bear the expense); and/or
  • Franchise relationships in which the franchisor guarantees the franchisees’ payment of employment-related taxes to governmental agencies (to ensure ultimate payment); and/or
  • Franchise relationships in which the franchisor sets and enforces contractual requirements for the franchisee to comply with governmental pay and labor standards (to reduce the instances of non-compliance).

The public arguments in favor of the ABC test complain of low employee wages, the absence of protective mechanisms for workers, and violation of some federal labor standards. The suggestions above would seem to answer those complaints.

But politics is the art of the possible. The union agenda is broader, seeking the ability to organize vast numbers of workers more conveniently. It’s the union view that encourages a fundamental mischaracterization of the franchise industry as a segmented unitary “business” rather than a licensor providing franchisees an opportunity to build their own business using the licensor’s model. Union proponents will not be satisfied with anything less than the ability to organize the employees (and franchisees) of a large franchisor entity as if it were a unitary body.

Franchising should find allies in the more than 20 states that have enacted right to work laws. But overcoming PRO Act supporters to protect an industry that has allowed so many individuals, most of the small business owners, to build wealth will not be easy – indeed, it’s already proven to be difficult. But it’s worth the effort. Keep the lobbying pot at a boil!

Wooden Blocks with the text: Claim Denied. Insurance Business concept
Wooden Blocks with the text: Claim Denied. Insurance Business concept.

Back at the beginning of the pandemic, there was a flurry of articles that maybe, just maybe, insurance would cover losses at businesses closed by the pandemic. I was skeptical. Now, as more cases roll in, it looks as if that skepticism was warranted.  In fact, a recent case from my lonely neck of the woods–Western Pennsylvania–continued that trend.

In the case, a tavern and restaurant business sought coverage under a policy of property insurance for lost business income relating to the bar and restaurant shutdown ordered by Pennsylvania Governor Tom Wolf in March 2020.  Specifically, on March 19, 2020, Governor Wolf ordered the closure of all “non-life sustaining” businesses.  Even now, taverns and restaurants in Pennsylvania, while re-opened, are under emergency disaster orders for limited capacity–50% if self-certifying compliance with certain protocols and 25% if not.

The tavern and restaurant argued that policy language requiring “direct physical loss of or damage to” the business included losses caused by governmental orders limiting use of the property, as the occassional court has found. The U.S. District Court, however, rejected that contention, stating that such an interpretation of the policy “would stretch the language beyond the plan meaning of its terms and beyond the interpretive authority of the Court”.  It continued that coverage “unrelated to physical impact” would lead to a “contrived” interpretation of the policy language.

The Court also rejected an argument based on the “physical presence” of the virus at the insured premises.  Again, the Court decided that, even if the coronavirus was present on the premises, the plaintiff could not show it was so “physically ubiquitous as to prevent access to or operations at the property.”  Additionally the Court briefly addressed the the Civil Authority clause, concluding that the Governor’s order did not implicate it due to, again, a lack of physical damage.  Consequently, the Court granted the insurer’s motion to dismiss.

As a–maybe to me only–interesting side note, the judge who decided this case is the same federal judge who concluded that Governor Wolf’s decision to order the closure of “non-life sustaining” businesses was unconstitutional. To me, this shows that even those jurists most sympathetic to the plight of businesses impacted by pandemic closure orders remain likely to enforce insurance contracts strictly.

little bird tit flies up to growing out of the snow bright yello
little bird tit flies up to growing out of the snow bright yellow snowdrops in the spring Park

Charles Dicken’s A Tale  of Two Cities famously opens with “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness … .”

This opening could be applied to the results of the last political election, the public health of our nation, or even the strains of work and family under the current challenges. The words also fit the dichotomy exhibited in the restaurant and franchise commercial environment today.

We miss our restaurants and they miss us. Before COVID-19, off-premises dining was a cutting edge concept being investigated as a supplemental income stream. Now curbside and delivery, as well as architectural changes, are a necessity and a matter of survival. Let’s see how this is playing out now, and will in the future.

First, dine in restaurants had to learn about new architecture. Plexiglas counter windows, masks and expedited ordering required additional investment in infrastructure. In the meanwhile, cooks and servers had to fight the virus and dwindling customers. Labor lawyers were called as often as physicians to address the difficult issues of compliance with public health initiatives as applied to labor issues. Restaurants had to go to curbside pick-up and reinvest in delivery options, often sacrificing margins and profitability to survive.

The Winter of Despair

Even before Covid, many restaurants were financially challenged. Older chains were under pressure from changing demographics, increased competition and rising costs for years. Even those restaurants which began reconfiguration in 2019 found their progress stymied by the impact of COVID-19, resulting in accelerated closure of both franchised and company operated locations. The coronavirus broke the back of iconic chains such as Chuck E Cheese, Sizzler, Toojay’s Deli, Il Mulino, Le Pain Quotidian, California Pizza Kitchen, Cosi, and Friendly’s Restaurants. The companies were forced to file Chapter 11, close underperforming locations, reject overpriced leases and sell to strategic buyers with the wherewithal to continue the best practices of the brand. Experts predict somewhere between 40-60 % of restaurants nationally will close permanently. For these restaurants, this is the season of despair.

Many of these franchised chains have huge franchisees which also had to reorganize in Chapter 11. The largest franchisee of Golden Coral, 1069 Restaurant Group LLC almost took the chain down by itself. NPC International Inc., the nation’s largest franchisee of Pizza Hut and Wendy’s restaurants, filed bankruptcy and wants to sell its entire company to the Flynn Restaurant Group LLC.

The Season of Hope

The bankruptcy of NPC International also shows that the death of restaurants has been somewhat overstated. With reduced competition, bidding wars and increased merger and acquisition activity of restaurant chains have developed.

As of December 1, 2020, Wendy’s has opposed NPC’s the sale to Flynn, the largest restaurant franchisee in the U.S.  Wendy’s instead has made its own offer with a consortium of regional franchisees. Wendy’s is in talks with NPC to drop its opposition in return for an agreement by Flynn to invest tens of millions of dollars in NPC’s Wendy’s restaurants. San Francisco-based Flynn owns more than 1,200 restaurants, including Applebee’s (452), Arby’s (639), Taco Bell (282) and Panera Bread (136) brands across 33 states. Some of those brands compete with Wendy’s. as defined in some of the Wendy’s franchise agreements, but not in others.

Dunkin’ Brands, operator of both Dunkin’ Donuts and Baskin-Robbins, has agreed to be acquired by Inspire Brands for $11 billion. Inspire Brands is backed by private equity firm Roark Capital. Inspire Brands is also the owner of Arby’s.  Zaxby’s, the 900 unit chicken restaurant chain founded by two partners 30 years ago, is selling a significant stake to Goldman Sachs to allow it to go national. Merger and acquisition is alive and well.

Overheard at the Restaurant Finance and Development Conference in November 2020 was the report that franchise and restaurant investment capital is plentiful, but not at traditional banks. Some banks are open to it, but most of the bankers interested are in those non-traditional banks, who have little competition, and charge accordingly. Private equity and private placement money is available as well at reasonable costs.

Some chains are going public. Burger Fi, an approximately 125 unit Florida based “better burger” franchise chain went public in December 2020, via use of a special purpose acquisition company (a “SPAC”). A SPAC is sometimes referred to as a blank check company, because the investors’ money is collected first and then an acquisition is targeted. In this case, the acquiring SPAC is Opes Acquisition Corp. The acquisition has allowed Burger Fi to have additional cash to saturate markets outside of its core market in Florida and be nationally competitive with a high quality meat burger.

Companies positioned for increased delivery, drive thru efficiencies and home delivery have prospered. Pizza restaurants have reported steady 20% increases, and some brands have even quadrupled their sales. Yum Brands, a publicly held owner of various brands reports same store sales increases for its US operations, including KFC up 9%, Pizza Hut up 6% and Taco Bell up 3%.

As we move forward in 2021, more restaurant shakeouts and consolidation will occur. Independent chefs will move into the former space of aged out restaurants, and continue the cycle of rejuvenation. All the more reason to visit your favorite eateries now, and to look forward to the innovations which will adopt to changing customer needs and values.

Buried deep in the roughly 5,500 pages of the most recent COVID relief legislation are two unexpected gifts for trademark owners. One of those gifts, the Trademark Modernization Act:

(a) Essentially overrules eBay v. MercExchange and creates a rebuttable presumption of irreparable harm on a finding of trademark infringement, including in instances of cybersquatting; and,

(b) Allows petitions to expunge or reexamine registered marks that are not or have never been used in commerce in connection with the goods and services listed in the registration. This process is available for marks less than 10 years old, but during the first 3 years of enactment, the process can be used with older marks.

Trademarks and service marks are hugely valuable assets in many businesses, especially franchises; and every mark owner is obligated by law to protect its marks. Too often, however, the legal path to protection is studded with speed bumps. Even if an infringement action succeeds, courts are too often reluctant to issue permanent injunctive relief, and meeting the eBay v. MercExchange standard for that relief is daunting. After spending thousands of dollars, a trademark owner may end up with only partial relief – not enough bang for the bucks!

Happily for trademark owners, the Trademark Modernization Act changes the injunction calculus. Injunctive relief will be a presumptive remedy for infringement; the defendant must rebut the presumption. This provides a real opportunity for owners to achieve meaningful and permanent relief.

The second gift in the Modernization Act would have been helpful to me  years ago. I was an associate, helping a franchise client with a new concept. The client wanted to find the owner of a registered, uncontestable, but long-unused mark, to clear the way for the client’s chosen mark. I learned two things from the episode: (a) it’s difficult to challenge a long-standing but unused mark, and (b) if you don’t want to be found, the hills in northern Greenville (South Carolina) county are a good hiding place. (The latter situation has changed in the last 40 years.) Had the Modernization Act been law at the time, I might not have burned shoe leather trying to locate the owner. We could have filed a petition to expunge or reexamine the registration, rather than initiate a more burdensome cancellation proceeding.

While less important than reversing the injunctive relief standard for marks, this second change may be the basis for sweeping unused marks from registration, at least for classes in which the mark is not or has never been used.

And we all thought that that the bill was just 5,000 pages of COVID relief!

The one-two punch of state and federal employment standards activity poses an existential threat to franchising; many commentators, including this one, have acknowledged that fact. But why? Did the California legislature or the Obama Department of Labor intend to deliver a knock-out punch to a very popular business structure that creates tens of thousands of independent franchisee business owners, who in turn employ hundreds of thousands of workers?

I recently had an interesting conversation on this topic with Erik Sherman, who contributed “Trump Labor Department Pushes Quick-Boiling Independent Contractor Rule that the White House has Left of Simmer” to a recent issue of Forbes. The current “mess” that I referred to in the Forbes article seems to be the product of union anger with the gig economy and ineptitude on the part of the Trump Department of Labor.

Briefly, the Obama DOL issued new standards for determining joint employment, often referred to as the “economic reality” test. In the franchise context, the standard was applied to determine the relationship between the franchisor and the franchisees’ employees: specifically, whether the franchisor is the joint employer of the franchisees’ employees. Startling to the franchise industry, the test focused not on issues of control but a bevy of other factors of which control was only one. It was likely that many, if not most, franchisors would be deemed joint employers of their franchisees’ employees. After initially moving to enforce the new standard, the DOL paused, apparently to consider the effects of those actions on the franchise industry.

As I’ve explained in a prior post, the Trump administration issued new joint employment standards, reverting to the former control-based tests. That effort was judicially rejected as procedurally and substantively defective. The DOL intends to publish a new control-based joint employment standard on January 6th, theoretically effective 60 days later. But a Biden DOL can delay effectiveness to allow time for a reversal, thus dooming the Trump DOL’s eleventh hour action. Bottom line: The currently effective DOL joint employment standard remains the Obama economic reality test.

At cross-purposes with the Trump DOL action, the California legislature enacted the infamous AB-5 legislation which adopted three factor test for employment that virtually assures that most franchisors would be deemed the employers of both their franchisees and their franchisees’ employees. Many states have enacted similar legislation.

As the Forbes article argues, Uber and Lyft were the primary target of California’s AB-5 legislation, which was actively and aggressively promoted by unions, and the DOL’s economic reality standards eyed the same targets. Uber and Lyft heavily financed a successful California ballot initiative, Proposition 22, to nullify the effects of AB-5 on app-based businesses. The initiative was worded narrowly, to benefit only its investors; Uber and Lyft thus dodged the AB-5 bullet. Meanwhile, time will run out on the Trump’s attempts to short circuit the usual regulatory process and reissue the control-based joint employer standards.

The franchise industry, collateral damage in the fight against Uber and Lyft, has suffered a severe injury. We start 2021 with federal regulations and, in many states, laws that could render the franchise business model untenable.

19705623 - lighthouse

Congress passed a wide-ranging COVID-19 relief package on December 22, 2020, that provides over $900 billion in aid to individuals and businesses. President Trump has now signed the relief bill, called the Bipartisan-Bicameral Omnibus COVID Relief Deal, into law. The law addresses four areas of importance to franchising: the Families First Coronavirus Response Act (FFCRA), the Paycheck Protection Program (PPP), the Economic Injury Disaster Loan (EIDL) program and SBA Emergency Grants for shuttered live venue operators or promoters.

Families First Coronavirus Response Act Partially Extended

Congress declined to extend the mandatory leave requirements of the FFCRA in the relief package but did allow companies to continue to receive payroll tax credits if they voluntarily provide paid leave to their employees for reasons that are covered by the law. The FFCRA requires employers to provide up to 12 weeks of paid leave to employees who are unable to work for a variety of reasons related to COVID-19.

The FFCRA is scheduled to expire on December 31, 2020. If employers voluntarily decide to provide leave to employees that would have been available under the FFCRA through March 31, 2021, employers may still receive a payroll tax credit for any such paid leave provided to employees.

PPP Loan Changes

The relief package also makes significant changes to PPP loans available to small businesses. The bill (1) expands the ways in which businesses may use PPP loan funds; (2) provides for a second wave of PPP loans in certain circumstances; and (3) allows borrowers to request an increase to their initial PPP loan amounts.

Expanded Use of PPP Funds

There new ways in which borrowers can use PPP funds. Under the initial program, PPP loans could only be used for the following purposes: (1) payroll costs; (2) costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave as well as insurance premiums; (3) employee salaries, commissions or similar compensation; (4) payments of interest on any mortgage obligations (which did not include any prepayment or payment of principal on a mortgage obligation); (5) rent (including rent under a lease agreement); (6) utilities; and (7) interest on any other debt obligations that were incurred before the covered period.

In addition to the above-noted uses for PPP funds, the new law also allows PPP loan recipients to use the funds for the following reasons:

  • Covered operations expenditures: a payment for any business software or cloud computing service that facilitates business operations, product service or delivery, the processing, payment or tracking of payroll expenses, human resources, sales and billing functions, or accounting or tracking of supplies, inventory, records and expenses;
  • Covered property damage costs: a cost related to property damage and vandalism or looting due to public disturbances that occurred during 2020 if such costs were not covered by insurance or other compensation;
  • Covered supplier costs: an expenditure made by an entity to a supplier of goods for the supply of goods that (1) are essential to the operations of the entity at the time the expenditure is made; and (2) is made pursuant to a contract, order, or purchase order (i) in effect at any time before the covered period with respect to the applicable covered loan; or (ii) with respect to perishable goods, in effect before or at any time during the covered period with respect to the applicable covered loan.
  • Covered worker protection expenditures: an operating or capital expenditure to facilitate the adaptation of the business activities of an entity to comply with requirements established or guidance issued by the Department of Health and Human Services, the Centers for Disease Control, or the Occupational Safety and Health Administration, or any equivalent requirements established or guidance issued by a State or local government, during the period beginning on March 1, 2020 and ending on the date when the national emergency declared because of COVID-19 expires (related to the maintenance of standards for sanitation, social distancing or any other worker or customer safety requirement related to COVID-19). Covered worker protection expenditures may include (1) a drive-through window facility; (2) an indoor, outdoor, or combined air or air pressure ventilation or filtration system; (3) a physical barrier such as a sneeze guard; (4) an expansion of additional indoor, outdoor or combined business space; (5) an onsite or offsite health screening capability; or (6) other assets relating to compliance with the government requirements or guidance established for COVID-19 as determined by the Small Business Administration (SBA). Also included are expenditures for PPE masks, gloves and respirators.

These new categories apply to PPP loans made before, on or after the enactment of the latest bill, unless the borrower has already had their PPP loan forgiven. Furthermore, the law has expanded the period during which PPP funds maybe used until March 31, 2021.

PPP Second Draw Loans

Borrowers may now also be eligible to receive a second PPP loan, called a Second Draw Loan. To be eligible to receive a Second Draw Loan, a business must:

  • Employ not more than 300 employees;
  • Have used or will use the full amount of their first PPP loan; and
  • Demonstrate at least a 25 percent reduction in gross receipts in the first, second or third quarter of 2020 relative to the same 2019 quarter. Applications submitted on or after January 1, 2021, are eligible to utilize the gross receipts from the fourth quarter of 2020.

Borrowers may obtain a Second Draw Loan of up to a maximum of the lesser of $2 million or 2.5 times the borrower’s average monthly payroll costs. Businesses classified as Accommodation and Food Services under code 72 of the North American Industry Classification System (which includes restaurants, bars, and hotels) may receive a loan up to the lesser of 3.5 times their average monthly payroll costs or $2 million. Businesses with multiple locations that were eligible to receive a PPP loan under the initial PPP requirements must have 300 or fewer employees per physical location to receive a Second Draw Loan.

Requesting a PPP Loan Increase

The latest relief package requires that the SBA issue guidance to lenders within 17 days of enactment of the law that would allow borrowers who returned all or part of their PPP loan to reapply for the maximum amount applicable so long as they have not yet received forgiveness. Borrowers also would be allowed to work with their lenders to modify the value of their loan if their initial loan calculations would have increased due to changes in the PPP’s final rules.

Economic Injury Disaster Loans (EIDLs)

The new relief law further enhances and clarifies the EIDL program. First, additional funding was added for EIDL advances to be made to businesses located in low-income communities and on an emergency basis. Unfortunately, the law at the same time extends the time for the SBA Administrator to approve applications for Emergency EIDL grants and disburse funds from 3 to 21 days. That is balanced somewhat by the fact that the covered period has been extended until December 31, 2021. Perhaps most importantly, the law repeals the provision of the CARES Act requiring PPP borrowers to deduct the amount of an EIDL advance from their PPP forgiveness amount.

Grants for Shuttered Venue Operators

The law authorizes $15 billion for the SBA to make grants to live venue operators or promoters, theatrical producers, live performing arts organization operators, museum operators and motion picture theater operators who demonstrate a 25 percent reduction in revenue.  The SBA may make an initial grant of up to $10 million and a supplemental grant of up to 50 percent of any initial grant. Grants must be used to certain specified expenses such as payroll costs, rent, utilities and PPE. Finally, the law authorizes SBA increased oversight of recipients.

We will of course continue to monitor developments as the new relief law is put into practice.

Thank you to my colleague Alexander Bogdan, who helped compile this summary of the Bipartisan-Bicameral Omnibus COVID Relief Deal.