Where it concerns the vast majority of restaurants, there’s one element of the historic $2 trillion stimulus package everybody runs a highlighter through—the small business lending program.

Let’s start with what it looks like on paper:

Restaurants, like other small businesses, will be forgiven parts of loans used for employee compensations and other maintenance items. Importantly, this includes money spent on payroll, mortgage and rent, and utilities. The figure will be prorated based on how payroll changed year-over-year. Employees rehired will be classified as workers who never exited. (Update as of Wednesday, and more on this toward the bottom: Funds are provided in the form of loans that will be fully forgiven when used for payroll costs, interest on mortgages, rent, and utilities. Due to likely high subscription, at least 75 percent of the forgiven amount must have been used for payroll).

Dressed down, restaurants can get a loan that becomes fully forgivable as long as it’s used to retain and continue to pay employees.

On the surface, this appears a much-needed lifeboat for restaurants. But the reality could draw a different picture.

A Chicago-based fast casual, which asked to remain anonymous for this story, shared some thoughts with QSR on what’s undeniably a critical element of the stimulus package, and where the roadblocks lie.

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Firstly, the problem off the bat, the source said, is when it comes to tracking “forgivable” expenses. The clock starts when you get the loan, and it cannot be used on expenses retroactively.

Why is this a problem for restaurants? As the fast casual explained: If they, or any restaurant owner, could snap their fingers and get a loan, they would be able to immediately keep employees on payroll and off unemployment. In that case, the government would be the true “payers” of the program. There are issues with restaurants getting the loans, too, as this article explores.

For background, here’s some more language from the stimulus plan: Restaurants that have continued to pay employees will be rewarded by getting back payroll taxes paid on half of wages. This provision is limited to restaurants that have closed due to COVID-19 or seen revenue drop 50 percent from last year. Restaurants with 100 or more employees are eligible for the break on wages paid while stores were closed. Smaller shops receive credit on all wages paid. Fees for paid sick leave are also capped at $200 per day and $100 for each worker. Paid family leave stops at $200 a day or $2,000 for employees taking care of children or family members affected by the crisis.

The issue, naturally, is that restaurants can’t snap their fingers and get relief. And so a clear problem emerges:

Do you, a. take the risk that getting the loan will happen quickly, and, in turn, keep employees retained?

The fast-casual source called it “a serious gamble for restaurants.” Note: This only applies to brands that have already termed employees, although that’s a massive—and growing—pool.

To start, the government, typically, is not as quick as businesses need them to be. More notable, restaurants are simply cash-strapped right now and don’t have the funds.

The other option is to not take the risk. Say as an operator, essentially, we’re laying off/furloughing employees. But as soon as the loan comes in, we’ll bring them back.

This is clearly a “safer” bet from a cash-flow perspective, the source said. Officials pegged loan timing from as little as a week to as much as three to four. “And there’s a lot of potential,” the source said, “non-reimbursable cost to cover in that period.”

That leaves restaurants with a difficult decision. “That in itself is not the end of the world,” the source said, “though it is sad that the stimulus that is designed to keep employees on their restaurants’ payroll will in fact be rolled out too slowly and is written in a way so as not to protect the very businesses that do exactly that.”

Unfortunately, though, it’s really only the tip of the problem.

Let’s imagine a restaurant took the “safe” bet the source noted, which is term employees until you get the loan with the intention of then bringing them back. Also keep in mind, they said, this isn’t just the nice thing to do—it’s an incentive built into the law: Loan forgiveness is contingent on bringing employees back.

If a restaurant does this, as many will, employees head to unemployment. For how long, nobody can say. And this is where another branch of the stimulus package kicks in—the expanded unemployment benefits.

An explanation: An increase in unemployment payments by $600 per week for four months on top of what states provide as a base unemployment compensation (also, the extension of the benefit to 13 weeks for people already collecting unemployment insurance). A new Pandemic Unemployment Assistance program includes independent contractors, self-employed individuals, people with limited worker history, and others. There’s a provision in the bill called the Paycheck Protection Program that incentivizes small- and medium-sized businesses to continue paying workers and providing benefits through partially forgivable loans to cover salaries, insurance, rent, and other costs.

Employers with fewer than 500 workers would be forgiven the amounts they put into payroll costs and mortgage payments and interests for eight weeks after loan origination, with some limitations. Additionally, the forgiveness is available to businesses that rehire workers who have already been laid off.

Also, people receiving paid sick leave or other paid leave benefits are not able to receive unemployment insurance. It applies to those who quit their job as a “direct result of COVID-19” as well. People who quit their jobs don’t normally qualify for unemployment. Here’s more on who is eligible and who is not.

The crux of this provision stirs concerns, the fast casual source said. They provided an example of what it would look like for their business. Consider an employee working 35 hours per week at $14 per hour, or $490 per week.

Typical UI benefits in Illinois would pay out 47 percent of that ($230). Now, under the stimulus package, the same employee is going to make $830 per week on unemployment—an increase of 70 percent of what they were making working full-time. Also worth remembering, this benefit extends to part-time employees as well now.

So, in the case of this restaurant brand, someone working half those hours, normally making $245 per week and able to make $115 on unemployment, is now bringing in $715—just about triple what they had been earning.

In four months, that employee is going to bank their normal annual salary.

Where this is really going to show up for restaurants is in areas of the country with low minimum wages. This dynamic came up over the relief bill’s final few days. Senator Lindsey Graham and three other GOP senators, Rick Scott of Florida, Tim Scott of South Carolina, and Nebraska’s Ben Sassee, called for an amendment that would cap benefits for the jobless at 100 percent of a worker’s pay before they were out of a job. Graham contended the bill would pay unemployed people roughly $24 per hour, “more not to work than if you were working,” he said, as reported by ABC News.

It was determined, however, not at fault enough to be scrapped or to put limits on it. Treasury Secretary Steven T. Mnuchin said most people would elect to stay employed, and the provision was necessary to streamline and quicken the process of delivering aid to workers laid off by COVID-19’s effect on businesses.

Per the source, though, break-even in a state like Illinois, which mirrors other markets in UI benefits, is that anyone making less than roughly $59,000 will make more money on UI than they were in their job. “That’s the vast majority of [quick-service restaurant] workers and even some salaried managers,” they said.

Let’s return to the restaurant that decided to furlough employees. After getting the loan a few weeks later, the brand needs to rehire their employees in order to get loan forgiveness.

That sounds easier in theory than reality. Those workers are now making 70-percent-plus what they were before—on unemployment. And they’re eligible to keep that up for four months.

It presents a daunting timeline, the source said. Because even if restaurants are ready to reopen as normal in two months, their workers are supposed to decide between coming back to work for 35 hours per week making $490, or remain not working for two more months bringing in $830 per week.

“Some will come back for long-term job security,” the source said. “Many will not.”

The issue: If they don’t come back, the small business could be out of luck, and suddenly saddled with unforgivable debt.

Picturing the other side for a moment, where a restaurant does decide to gamble and not furlough workers; in doing so, they hope to cash in on the small business loan as quickly as possible, incurring as little cost in the interim, and then keep all their employees using the loan.

“This is, after all, the intention of the program,” the source said.

And here’s the setback: in addition to the cash-flow issue of just paying employees when revenue has dropped significantly due to a loss in dine-in operations, “You’re basically holding your employees hostage,” the source said. “They can’t go to UI because they weren’t termed. But, they’d be better off by far doing that for their own welfare.”

Suddenly, it feels like a double-edged sword that pricks twice for operators. Restaurant employees at brands that furloughed them will tell those still on payroll how they’re making significantly more money. In the other scenario, they have to share the upsetting news with friends and family members that they got furloughed or laid off by the company they invested in.

“It’s not going to be long before the employee who thought their company was heroic in keeping their job realizes that they would be much better off if their company had termed them,” the source said.

It’s difficult to guess how that plays out, but it definitely puts restaurants in a tough spot.

There remains some uncertainty over how this measures against traditional unemployment. Typically, many states require people to prove they’re actively looking for work to receive benefits. Michele Evermore, senior researcher and policy Analyst with the National Employment Law Project, told Money, “If you say you applied to Walmart, they will actually go back and do a spot-check by calling them,” she said of the original model. “You want to help keep people afloat without giving them an incentive to stay home.”

However, the pandemic poses different goals. “Right now we don’t want people out looking for a job, and many states are now waiving work search as a result of the bill,” Evermore said.

The fast-casual source said the bigger issue is the idea of “forcing” employees back to work. Anyone who gets their first unemployment check, or simply does the math on what they get, would not want to be forced back to the company. Thus, the situation referenced above, of “holding employees hostage.”

“I’ll tell you, as someone trying to think about how to balance the welfare of our teams and welfare of the company, this is a lose-lose in the short term,” the source said.

Sarah Kuehnel, a shareholder in the Tampa, Florida, and St. Louis offices of Ogletree Deakins, told QSR via email Tuesday there are key changes to consider, but it’s going to take some time to sort out.

“Based on the CARES Act’s text, we know the expansion of unemployment benefits will cover workers for longer periods of time at higher weekly rates than before the passing of the CARES Act. In addition, most states have loosened or eliminated job search requirements in relation to eligibility relating to COVID-19,” she said.

“Whether states subsequently tighten or reinstate those requirements in the intervening months between now and expiration of unemployment eligibility will impact whether the norm is altered after [and possibly during] the pandemic,” Kuehnel added. “In other words, several factors come into play from a legal perspective, including: states’ pre-existing eligibility requirements, states’ pandemic eligibility requirements, the length of each state’s pandemic eligibility requirements, and the length of the pandemic, among others. While we can expect a temporary shift in the near term favoring eligibility for unemployment, the myriad of external factors shaping the long-term norm will continue to develop over the next several months. Long-term, though, the norm will likely ebb back toward pre-pandemic eligibility, as the CARES Act conditions eligibility on specified COVID-19 related reasons.”

Overall, the the main takeaway is the stimulus was intended to help restaurants. Hopefully, it will long-term. “But, man, in the short term, the failures in logic between various parts of the bill put operators and their people in a serious Catch-22,” the fast-casual source said.

Their fast casual went with the option of furloughing and hoping to hire back versus taking the gamble on loan timing. They said they’re fairly optimistic the loan can show up in the next week or two. Yet it’s still a fair amount of cost to incur and “too large a gamble to take if we are wrong and it takes longer.”

The result will be a sizable fraction of the brand’s workforce hitting the unemployment line this week, most likely. “Then we’ll have to see when rubber hits the road about how we go about hiring back,” they said.

The chain kept benefits intact, which the source said is not enough. Only a small percentage of employees are on health insurance in the first place (as is the case with most restaurants, even when offered) and even those who are would be better off from a cash standpoint just going on COBRA or switching to another provider. That’s especially true for young employees with relatively inexpensive health care options (another huge swath of the restaurant workforce). “At the end of the day, culture and long-term job security are probably the most important selling points of rehiring people,” the source said. And to their point, it’s a pretty intense notion to have to sell people on the idea of returning to work and coming off unemployment.

It’s a truly unique time to be a restaurant owner.

Daniel H. Handman, partner at Hirschfeld Kraemer LL, based in Santa Monica, California, added in an email to QSR that long-term job security should sway the majority of displaced employees. (Here’s a map that breaks down minimum wage by state)

“There was a group of four Republican senators from the South who delayed passage of the bill by raising the concern that minimum wage workers in states with low minimum wages [largely in the south] would choose to continue to receive unemployment for a short period of time rather than return to work when it is available,” he said. “In theory, unemployed persons living in low minimum wage states could see a very brief increase in their compensation by remaining on unemployment rather than returning to work.

“However, at the end of this crisis, the reality is that unemployment will likely be extremely high: Steve Mnuchin, the Treasury Secretary predicted it could be up to 20 percent,” he added. “Typically, with high unemployment, low-wage workers are disproportionately affected, so these same individuals will be facing an extremely uncertain job market with very few available jobs. As a result, it seems very unlikely that they would voluntarily choose to take a few months of slightly higher pay in exchange for losing an actual job in a market with few available. Ultimately, this dynamic is why the four dissenting senators caved on their last-minute demand for a change in the law.”

TALKING SOLUTIONS

The source laid out some “common-sense” measures in the spirit of trying to address these issues.

One, allow small businesses to include expenses incurred before receiving the loan as part of their forgivable total. This is not to say that the total amount forgives changes, it doesn’t. But by allowing small businesses to immediately know that the clock starts now for covered expenses, we would all be able to not run the gamble of wondering how long this will all take.

Common sense measure: UI benefits should not surpass 100 percent of normal weekly pay. “I am in 1,000 percent support of extended UI benefits, but I don’t see how it makes sense to pay people so much in excess of typical pay,” the source said. Solutions: Perhaps extend the cap at 110 or 120 percent if the government would argue that it is seeking to spur spending and provide for longer-term safety. “… 150 percent-plus gets the incentives so misaligned, particularly for the workers of the very same businesses the stimulus is seeking to assist,” they said.

THE LATEST

More details were shared Tuesday about the $349 billion set aside for a new small-business loan program. If small businesses, like restaurants, maintain payroll during the economic crisis, some of the money borrowed through the freshly created “Paycheck Protection Program,” can be forgiven. The Paycheck Protection Program is a massive effort—its larger than the GDP of Arizona, according to Fortune.

Treasury Secretary Steven Mnuchin and the SBA revealed additional details Tuesday, with a senior government official adding it could be possible that millions of loan applications roll in Friday when these loans become available. Mnuchin added they are setting up a system for same-day loan approvals in which borrowers are able to receive funds on the same day they submit an application. Since the approval process will be handled entirely by the lender, there is no separate review being conducted by the SBA. But per The Washington Post, businesses shouldn’t bank on this, noting it would be difficult for most banks to meet that target without increasing the risk of fraud. Most small businesses will take days just gathering the documents needed to apply.

Who’s eligible? Small businesses (this applies to many, many restaurants. Read to the end.) with fewer than 500 employees can apply for the Paycheck Protection Program. These include nonprofit firms, sole proprietorships, self-employed individuals, independent contractors, and veteran organizations. The borrowers must certify that their business was affected by COVID-19 and were in operation as of February 15. The program said it will evaluate business owners’ credit scores, but not require collateral or a personal guarantee. The loans apply to costs incurred from February 15 through June 30. The loan rates are initially being set at 0.5 percent.

Notable for restaurants, the 500-employee cap applies on a per-physical location basis.

A key thing to consider, too: The program includes loan forgiveness covering costs for the first eight weeks of the loan for companies able to keep employees on payroll or continue paying bills throughout the COVID-19 pandemic. The amount of loan forgiveness will include payroll costs for individuals below $100,000 in annual income, mortgage and rent obligations, including interest and utility payments. The total amount will be reduced if your company’s workforce is drawn down through attrition or if wages are reduced. If the company was forced to lay off employees because of economic conditions, they might be able to preserve some of your loan guarantee by hiring them back (this is the point to circle for a lot of restaurants). It is expected that at least 75 percent of the costs forgiven come from payroll.

“The loans will be forgiven as long as the funds are used to keep employees on the payroll and for certain other expenses,” Mnuchin said. A decision on forgiveness of the Paycheck Protection Program loan will be made within 60 days of forgiveness submission.

The forgiven money will be reduced for employers that lay off employees or reduce wages by more than 25 percent, Fortune reported. Laid-off employees must be rehired by June 30 for companies to recoup their wages through loan forgiveness, a senior SBA official told the publication.

Eligibility for loan forgiveness starts eight weeks after the loan origination date. This is a maximum 10-year maturity after application for loan forgiveness.

What costs do the loans cover? The new loans will cover payroll costs and employee benefits, mortgage interest incurred before February 15, rent and utilities under lease agreements in force before February 15, and utilities for which the service began before February 2020.

Payroll costs include salary wages, commissions and tips capped at $100,000 for each employee. Also, benefits for vacation, parental leave, sick leave, medical leave, and some additional, limited benefit categories. In some cases, they can also cover interest on other debts.

How much money? The Paycheck Protection Program offers small business loans of up to $10 million to cover payroll and certain other expenses, or 2.5 times the company’s total payroll expenses for the loan period. The first payment will be due after six months and the fill loan after two years.

Disqualifying factors: Paycheck Protection Program loans are not available to businesses whose owners (or the company itself) have previously been suspended, debarred, proposed for debarment, declared ineligible, or were voluntarily excluded from the loan program by a federal agency, or are presently involved in any bankruptcy. Also, companies that have taken a loan from the SBA that subsequently caused a loss to the government, is currently delinquent, or resulted in default, are excluded. It also keeps out businesses in which any 20 percent owner is someone currently subject to criminal charges, or who has previously been convicted or otherwise punished for a crime against a minor.

What to prepare, where to apply. The Washington Post said the program will ask for basic identifying information for the business, the company’s TIN number, average monthly payroll, number of jobs supported by the business, and what specifically you want to use the loan money for. The company will also be asked to list all owners who hold at least a 20 percent ownership stake in the company and affirm they are not party to federal crimes. They will be asked to provide documentation regarding employee headcount over time as well as payroll costs, too. Borrowers can apply at the more than 1,800 banks that already offer Small Business Administration loans (contact your current bank first). There is no cost to apply.

APPLY: Find the application and other information here. More details about the Paycheck Protection Program itself can be found here, and click here for a more in-depth breakdown from The Washington Post.

MAKING MORE SENSE OF THIS FOR RESTAURANTS

Here’s another breakdown of where restaurants fit in, from Alden Parker and Andria Ryan of law firm Fisher Phillips.

Businesses with a NAICS Code 72 (hospitality industry) that employ not more than 500 employees “per physical location” are eligible for a loan. In other words, a franchisee with 2,000 employees, but no more than 500 at one location, could qualify for the loans.

The Small Business Administration has eligibility guidelines (“affiliation rules”) to determine whether a business qualifies as “small.” Presently, these affiliation rules have been waived for:

• the hospitality/restaurant industry with a NAICS Code 72 (hospitality industry) that employs not more than 500 employees;
• franchises (assigned a franchise identifier code); or
• those who receive financial assistance from a small venture investment company licensed under the Small Business Investment Act.

This is good news for the restaurant and hotel industry. You should contact your local banks to discuss options. Lenders will determine eligibility for the loans based on whether the business was operational as of February 15, 2020, had employees on payroll, and paid wages and payroll taxes.

The loans may be used for payroll costs, healthcare, rent, utilities, and other debts incurred by the business. Notably, the definition of “payroll” costs excludes leave payments made pursuant to the new Families First Coronavirus Response Act (FFCRA). Reimbursement for those leave payments is made through the tax credit process enacted as part of that legislation. These “paycheck protection” loans are available for other payroll expenses and other costs.

Loan amounts will be available based on a formula. The amounts available will be the lesser of:

• Average monthly payroll costs during the prior year x 2.5; or
• $10 million, whichever is less.

The federal government will forgive the loans in an amount equal to the amount of qualifying costs spent during an eight-week period after the origination of the loan. These qualifying costs include payroll costs (except of wages above $100,000 per employee), interest on secured debt obligations, and rent and utilities in place prior to February 2020.

The amount of the forgiveness for the loans will be reduced if the employer:

• Reduces its workforce during the eight-week period compared to prior periods; or
• Reduces the salary or wages paid to an employee by more than 25 percent during the 8-week period (compared to the most recent quarter).

In addition, any reduction in the amount of loan forgiveness will be completely avoided if the employer re-hires all employees laid off (going back to February 15, 2020), or increases their previously reduced wages, no later than June 20. These provisions are designed to provide an incentive to employers to not lay off workers (or rehire them) and instead utilize the loan amounts to pay payroll and other expenses.