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March 17, 2020

Coronavirus: Important Issues for Hospitality Industry Owners, Operators and Lenders

Coronavirus: Hospitality Industry Advisory

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Introduction

The coronavirus pandemic is affecting every corner of commerce as consumers cancel their travel plans and start to limit their day-to-day activities. With the US hotel industry facing group business cancellation rates of 40 percent in the next 90 to 120 days,1 the hospitality industry is at the forefront of the pandemic's economic effects. As the US federal government starts enacting measures to mitigate the pandemic's economic impact, we highlight important issues under discussion that may affect the hospitality industry in the short- and medium-term.

Active and Recent Changes

Federal Disaster Declaration: On Friday, March 13, President Trump declared a federal state of emergency under the Stafford Act and the National Emergencies Act, opening a range of policy responses that include federal aid to individuals as well as to state and local governments. The administration is now able to utilize a roughly $40 billion fund for this response, providing federal matching funds to state and local emergency efforts.

Sick/Family Leave: The second stimulus package includes two different provisions addressing paid benefits to employees affected by the coronavirus. The first creates a new emergency paid sick leave benefit, which requires employers with fewer than 500 employees to provide up to two weeks' paid leave for coronavirus-related reasons, including: (1) self-quarantine; (2) obtaining medical care if an employee is experiencing symptoms; (3) complying with a recommendation that the employee's physical presence on the job would risk exposing coronavirus to others; (4) caring for a sick family member who may have been exposed or exhibits symptoms; and (5) caring for a child whose school or child-care facility has been closed or whose childcare provider is unavailable.

The family and medical leave provision amends the existing Family Medical Leave Act (FMLA) to provide up to 12 weeks of job-protected leave for the following coronavirus related reasons: (1) to follow a requirement or recommendation to quarantine because of exposure to or symptoms of coronavirus; (2) to care for a family member who may have been exposed to the coronavirus or exhibits coronavirus symptoms; or (3) to care for a child younger than 18 whose school is closed or whose child-care provider is unavailable. The family and sick leave is unpaid for the first 14 days. Employers must allow the employee to substitute paid time off, but may not require the employee to do so. Following the 14-day period, workers would receive a benefit from their employers that is at least two-thirds of their normal pay rate. The Department of Labor is authorized to issue regulations to (1) exclude certain health-care providers and emergency responders from paid leave benefits and (2) exempt small businesses with fewer than 50 employees from the paid leave requirements.

Employers can receive a refundable tax credit for a portion of the expenses related to these provisions. Both provisions apply only to private-sector employers—and are set to expire at the end of 2020.

The second stimulus package, which the House passed early on the morning of March 14, includes paid sick and family leave provisions.2 The House also passed a technical corrections bill on March 16 to address a few drafting errors that negatively affect small businesses.3 The Senate will consider the Families First Coronavirus Response Act early this week. Since the bill passed the House with strong bipartisan support,4 after President Trump tweeted his support for it late Friday night, we expect a strong bipartisan vote in the Senate. However, there are concerns that the exemption for companies with more than 500 employees would still leave millions of workers without emergency paid sick and family leave. President Trump has also said that he could consider expanding these provisions in future coronavirus relief bills.

Payroll Tax: President Trump is calling for an immediate suspension of the payroll tax, which would be an extremely expensive part of any stimulus package. Congressional reaction to the proposal from both political parties was largely negative last week, though on Monday the US Chamber of Commerce strongly backed the idea as a top policy change to help the recovery. Given the opposition in Congress, we believe various administration officials are trying to determine if there are administrative powers the president can invoke to suspend a portion of the payroll tax for an extended period of time.

Small Business Administration Disaster Loans: The Trump Administration announced last week that Small Business Administration disaster loans are available to eligible businesses to weather coronavirus impact. Economic injury disaster loans are available to small businesses that suffered "substantial economic injury" as a direct result of a declared disaster.5 For SBA purposes, hotels are considered small businesses if they have under $35 million in annual receipts.6 Economic injury disaster loans can provide working capital until normal operations resume. President Trump also called on Congress to approve an additional $50 billion in SBA lending authority, which we expect Congress to consider in a future stimulus package. The Senate Small Business Committee is also working on ways to streamline the SBA's disaster loan process.

Federal Reserve Actions: On Sunday, March 15, the Fed announced it would cut interest rates to zero—following on a prior emergency cut earlier this month—in a dramatic intervention to protect the economy. The central bank has also increased support to overnight lending markets to ensure liquidity in the banking system, and has now announced it will be buying at least $700 billion in government and mortgage-related bonds, in a restart of the financial crisis-era program of "quantitative easing." These steps suggest the Fed may turn to other emergency lending facilities and tools it used to provide liquidity during the 2007–2009 financial crisis. Congress may also expand the central bank's authority in a future stimulus package. For example, on March 15, Treasury Secretary Mnuchin suggested he may ask Congress to reinstate certain emergency lending powers that Treasury and the Fed had prior to the enactment of Dodd-Frank, though it remains to be seen whether Congressional support for such authority will materialize.

On March 15, several of the nation's largest banks announced a freeze on buybacks of their own shares through the end of the second quarter, in order to free up capital to deploy elsewhere to help the economy. The move was voluntary by the banks but had been encouraged by lawmakers including Sen. Sherrod Brown (D-OH), who is the ranking Democrat on the Senate Banking Committee.

Changes on the Horizon

We think financial regulators are likely to take additional actions to mitigate the pandemic's impact on the hospitality industry. Last week, senators from states that rely heavily on tourism and business travel urged the Federal Reserve, the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the National Credit Union Administration and the Conference of State Bank Supervisors to enact guidance to help the hospitality industry weather the ongoing coronavirus health crisis.7 The recommendations include enabling loan work-outs and allowing borrowers to defer payments without penalties, make interest-only payments, and refinance without fees. We would expect financial regulators to enact some combination of these recommendations in the near future.

In addition to financial regulators taking steps to help market liquidity and the administration taking executive action, we expect Congress to continue working to mitigate the pandemic's economic impact. The first stimulus package focused on funding for disaster relief, and the second package focused on funding for workers and families directly affected by the virus. We anticipate the third package will be even larger, with a broader focus on helping various sectors of the economy recover from the effects of the virus, while also addressing additional remaining issues for families and individuals directly affected by the virus. It is possible that the third package will be the largest in scope and impact since Congress passed the $700 billion Emergency Economic Stabilization Act in October 2008 to deal with the global financial meltdown.

While we expect individual representatives and senators to offer a myriad of bills aimed at various recovery elements, we see the third comprehensive coronavirus package as the most likely place for the hospitality industry to secure specific financial assistance from the government for its unprecedented losses. While it is too early to tell what specific provisions may be included, we expect further consideration of a payroll tax cut and potentially a fix for the so-called "retail glitch," which precludes taxpayers from taking advantage of the 2017 Tax Cuts and Jobs Act 100 percent bonus depreciation provision for interior improvements. There are also preliminary discussions of broader investments in the economy, such as infrastructure investments.

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© Arnold & Porter Kaye Scholer LLP 2020 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.

  1. See Knowland Insights: Coronavirus Pandemic—Hotel Group Impact and Actions (March 12, 2020).

  2. The Families First Coronavirus Response Act (HR 6201). HR 6201 passed the House on a vote of 363–40. All 40 "No" votes were Republicans. A usually high number of Representatives—26—did not vote on the bill, and this group includes several members of Congress who are already quarantined.

  3. H. Res. 904 passed out of the House by unanimous consent.

  4. 363–40 in the House. All 40 "No" votes were Republicans. An usually high number of Representatives—26—did not vote on the bill, and this group includes several members of Congress who are already quarantined.

  5. See 13 CFR 123.300.

  6. See 13 CFR 121.201.

  7. See Van Hollen, Cardin, Warner, Kaine Urge Financial Regulators to Take Measures to Protect Hospitality and Tourism Industry Workers During Coronavirus Outbreak (March 13, 2020).

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