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Client Alert: Compensation Limits For CARES Act Economic Stabilization Fund Loans

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Companies should be prepared to evaluate and respond to the impact of significant employee compensation limits on existing compensation arrangements which will apply to companies receiving assistance through the Treasury Department’s Economic Stabilization Fund.

Employee Compensation Limitations

Section 4003 of the CARES Act provides $500 billion to the Treasury Department’s Economic Stabilization Fund (ESF), from which eligible businesses may receive loans or loan guarantees. As a condition of ESF assistance, companies must comply with several employee compensation limits set forth in Section 4004 of the CARES Act, including caps on total compensation and severance pay during specified periods. These restrictions will be incorporated into applicable ESF loan agreements.

For avoidance of any doubt, these restrictions do not apply to SBA loans under the Paycheck Protection Program or in connection with Employee Retention Credits.

Other Restrictions May Impact Compensation

In connection with obtaining an ESF Loan under Section 4003 of the CARES Act, companies must also agree not to purchase their own stock during the restricted period described above. This may impact the ability of companies to allow for net settlement of awards to cover a participant’s taxes or exercise payments under equity incentive plans. This restriction may not apply to existing equity awards, but it could impact future grants.

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We have been on the forefront of dealing with COVID-19 for our clients. Please contact us if you would like to discuss any of these issues, or if we can otherwise be of assistance.

COVID-19 Resources

We recommend you evaluate the following pandemic-related business and legal considerations that we have been discussing with our clients:

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