News and Insights
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UPDATE ON THE FAMILIES FIRST CORONAVIRUS RESPONSE ACT: REVISIONS TO PAID LEAVE BENEFITS, INCLUDING HEALTHCARE PROVIDER EXEMPTION
The United States Department of Labor’s (DOL) Wage and Hour Division has issued revisions to the regulations implementing the paid leave provisions of the “Families First Coronavirus Response Act” (FFCRA). Responding to a recent federal court decision striking down key provisions of the DOL’s previously-issued regulations, the DOL has reaffirmed certain regulations, amended other regulations, and further explained the rationale behind its positions. The revised regulations went into effect on September 16, 2020.
FFCRA PAID LEAVE BASICS
Signed into law on March 18, 2020, the FFCRA authorized an emergency relief package providing support for individuals impacted by the COVID-19 public health emergency, including temporary paid sick and emergency family leave for eligible employees. The law applies to private sector employers with fewer than 500 employees as well as government entities, though certain exceptions may apply.
The FFCRA became effective on April 1, 2020 and is designated to expire on December 31, 2020.
Paid Sick Leave
The FFCRA provides paid sick leave to employees who are unable to work (or telework) due to the following COVID-19-related reasons:
1) The employee is subject to a federal, state, or local quarantine or isolation order related to COVID-19.
2) The employee has been advised by a healthcare provider to self-quarantine due to concerns related to COVID-19.
3) The employee is experiencing symptoms of COVID-19 and seeking a medical diagnosis.
4) The employee is caring for an individual who is subject to an order as described in subparagraph (1) or has been advised as described in subparagraph (2).
5) The employee is caring for their son or daughter if the school or place of care of the son or daughter has been closed, or the childcare provider of the son or daughter is unavailable, due to COVID-19 precautions.
6) The employee is experiencing any other substantially similar condition specified by the Secretary of Health and Human Services, in consultation with the Secretary of the Treasury and the Secretary of Labor.
Under the law, full-time employees are entitled to 80 hours of immediately-available paid sick leave. Part-time employees are entitled to paid sick leave in an amount that is equivalent to their normal work hours in a two-week period.
Employees must be paid their normal rate of pay or minimum wage – whichever is greater. With respect to self-care, paid sick leave is capped at $511/day and $5,110 in the aggregate. In cases in which an employee uses paid sick leave to care for others, the cap is $200/day and $2,000 in the aggregate.
Emergency Family Leave
The FFCRA (as an expansion of the Family Medical Leave Act or “FMLA”) provides up to 12 weeks of emergency family leave (or ten weeks of emergency family leave and two weeks of paid sick leave) to eligible employees who are unable to work (or telework) due to a need to care for a minor child whose school/daycare is closed or because the child’s childcare provider is unavailable due to COVID-19.
Eligible employees are any part-time or full-time employee who has been on the job for at least 30 days.
An employer is permitted to designate the first ten days of emergency family leave as unpaid (although an employee can opt to use vacation time or other paid time off, including paid sick leave provided under the FFCRA, to cover the unpaid time).
Beyond the first ten days, emergency family leave is paid at two-thirds the employee’s normal rate of pay with a cap of $200/day and $10,000 in the aggregate.
Emergency family leave does not change the overall amount of FMLA leave available to employees during an applicable FMLA 12-month period.
THE REVISED REGULATIONS
Narrowing the definition of “healthcare provider”
Under the FFCRA, employers of “healthcare providers” may elect to exclude such employees from taking paid leave. While the initial regulations broadly defined “healthcare provider” to include nearly any person employed in a doctor’s office, hospital, or clinic, the revised regulations significantly narrow this definition to the following:
1) A “healthcare provider” as defined by the FMLA. The definition includes doctors (M.D.s and D.O.s), podiatrists, dentists, clinical psychologists, optometrists, chiropractors, nurse practitioners, nurse-midwives, clinical social workers, physician assistants, certain Christian Science Practitioners, and other limited health care providers; or
2) Any other employee of a covered employer who is capable of providing health care services, “meaning he or she is employed to provide diagnostic services, preventive services, treatment services or other services that are integrated with and necessary to the provision of patient care and, if not provided, would adversely impact patient care.” This category of “healthcare providers” includes nurses, nurse assistants, medical technicians, and laboratory technicians.
The revised regulations provide examples of employees who will not be considered a “healthcare provider” for purposes of the FFCRA, including IT professionals, maintenance staff, human resources personnel, records managers, billers, and consultants.
Relaxing the requirement for providing notice and supporting documentation
The initial regulations required employees to provide employers with notice and documentation establishing the need for paid leave prior to taking the leave.
The revised regulations relax that standard. Rather than dictating that employees provide notice and documentation before taking leave, the revised regulations clarify that employees may provide documentation “as soon as practicable.”
In cases in which the need for leave is foreseeable, e.g., an employee knows that his or her child’s school is closed in advance, the DOL anticipates that the employee generally will provide notice before taking leave.
Reiterating paid leave is only available to employees “unable” to work/telework
An employee’s reason for taking paid leave must be the sole reason the employee is unable to work/telework (i.e., “but-for” the employee’s need to take leave, the employee would otherwise be working).
This means that an employee cannot use paid leave if his or her employer closes its worksite or otherwise does not have work available for the employee for reasons other than the employee’s need to take leave (i.e., paid leave is not available to employees who are furloughed, laid off, or on a reduced schedule due to lack of work or business).
With that said, the revised regulations underscore that employers may not arbitrarily withhold work or reduce an employee’s hours to prevent the employee from taking paid leave. An unavailability of work must be due to legitimate, non-discriminatory business reasons and not simply that an employer is attempting to thwart an employee’s ability to take paid leave.
Clarifying when an employee can take intermittent leave
For employees who are teleworking or working onsite, the revised regulations reiterate that employees may take intermittent emergency family leave or paid sick leave only with the consent of their employer.
With respect to employees who work onsite, the revised regulations also reaffirm that employees can only take intermittent paid sick leave because of a need to care for a minor child whose school/daycare is closed or because the child’s childcare provider is unavailable due to COVID-19 (i.e., employees who work onsite cannot take intermittent paid sick leave for any other qualifying reasons).
The revised regulations also elaborate on the meaning of “intermittent.” The DOL provides an example of an employee’s child who is participating in hybrid learning in which the child attends school only certain days during the week and is at home the remaining days. In this case, the DOL clarifies that an employee who takes emergency family leave, for example, Mondays and Wednesdays (when the employee’s child is not in school) and then works Tuesdays, Thursdays, and Fridays (when the employee’s child is in school) is not considered to be taking intermittent leave (and therefore does not require consent of his or her employer).
TAKEAWAYS FOR EMPLOYERS
Employers should make necessary adjustments to their FFCRA paid leave policies and procedures to ensure compliance with the revised regulations. Importantly, healthcare employers should take note of the DOL’s updated (and much narrower) definition of “healthcare provider” when determining which employees can be exempted from the FFCRA’s paid leave benefits.
The attorneys at Milligan Lawless will continue to update employers on various workplace issues arising from the COVID-19 public health emergency.
If you have any questions regarding how the FFCRA’s paid sick leave or emergency leave requirements affect your workplace, please contact John Conley or Kylie Mote at (602) 792-3500.
10 Milligan Lawless Attorneys Recognized in
The Best Lawyers in America© 2021
The Best Lawyers in America© is the longest-running, peer-review publication in the legal profession. Every year, Best Lawyers conducts comprehensive surveys of tens of thousands of lawyers who confidentially evaluate their professional peers. Based on the results of these surveys, the publication designates the year’s leading lawyers in all 50 states and the District of Columbia.
The Milligan Lawless attorneys recognized in the 2021 edition are:
2021 Best Lawyers
- Bryan S. Bailey: Health Care Law
- John A. Conley: Administrative/Regulatory Law
- Robert J. Itri: Commercial Litigation; Copyright Law; Litigation – Intellectual Property; and Trademark Law
- Steven T. Lawrence: Corporate Law
- Thomas A. Maraz: Construction Law
- Robert J. Milligan: Health Care Law
- James R. Taylor: Health Care Law
2021 Best Lawyers: Ones To Watch
- Lauren A. Crawford: Commercial Litigation
- Kylie E. Mote: Health Care Law
- Miranda Preston: Health Care Law
COVID-19 and M&A
Important Considerations for Sellers
Part Two of a Two-Part Series
Part 1 of this series explained the changed landscape of M&A due to the COVID-19 pandemic, and discussed five areas where the pandemic has affected the terms of M&A transactions. In this segment, we will discuss practical considerations for entities who are contemplating a sale, whether during or after the pandemic.
- Attend to the Details. The operations of many healthcare practices impacted by the pandemic have rightly turned to focus on the delivery services. But, now is the time to make sure that the details of business are in order. As compliance is frequently a starting place for buyers, sellers should thoroughly review the company’s compliance efforts and systems, and update such compliance programs as needed. Intellectual property is sometimes an afterthought, but the pandemic may present unique opportunities for the pursuit of intellectual property protection or the development of new intellectual property. This is also a good time to ensure that corporate formalities are observed and the company’s books and records are in order. Prospective sellers should examine their existing organization and operations and make adjustments as needed in an effort to be ready for sale. Prioritizing the details of the business in advance of a sale pays dividends during the due diligence process.
- Consider CARES Act Relief. From the outset of any potential transaction, sellers should consider the impact that the acquisition may have on any CARES Act[1] relief the seller has received or is seeking. Buyers will be paying particular attention to these issues, and both parties should take care to structure any transaction in a way that does not inadvertently alter the seller’s eligibility status or violate any program requirements.[2] There are a number of certifications borrowers must make during the application and forgiveness process, including certifications related to the use of funds, the borrower’s organizational structure, and the information provided to support the forgiveness application. Inaccurate certifications are subject to criminal and civil fraud claims. Sellers who have received PPP loans should consider how a potential transaction effects the Seller’s ability to participate in PPP loan forgiveness. Sellers should thoroughly review their loan documents for provisions related to changes of ownership or control, which provisions are usually broadly defined. Typically, the seller will need to obtain the consent of the lender before entering into any transaction that results in a change of control.
- Be Creative. Many businesses that have been successful in the pandemic have pivoted using existing products or service offerings in a new way. From an M&A perspective, those new lines of business may become spin-off candidates and the source of joint ventures in the future. Buyers will be looking for sellers that are creative and have sought new markets even in the face of the pandemic.
- Ready Your Team. The pandemic has unfortunately seen a massive loss of employment. While the rate of unemployment claims is slowing, there are still significant opportunities to bring on new talent to your organization to lead the way in the post-pandemic landscape. Sellers should retain knowledgeable consultants and advisors, such as legal counsel and accounts.
The COVID-19 pandemic has dramatically changed the M&A market. However, the pandemic also presents an opportunity for prospective sellers to improve their position for a future M&A sale. If you have any questions regarding any M&A issues, the business transactions team at Milligan Lawless is here to assist. Please contact Steve Lawrence at 602-792-3635 or steve@milliganlawless.com or Miranda Preston at 602-792-3511 or miranda@milliganlawless.com.
[1] The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted on March 27, 2020 and created the Paycheck Protection Program (“PPP”), a forgivable small business loan program; and authorized additional funding for the Small Business Administration (SBA) Economic Injury Disaster Loan (EIDL) program, among other features.
[2] Additional information from Milligan Lawless on the CARES Act and PPP is available here: The CARES Act – Paycheck Protection Program Loan (Mar. 28, 2020); Paycheck Protection Program Loan Forgiveness (Mar. 29, 2020); Update on CARES Act: SBA Implements Interim Final Rule for Paycheck Protection Program Loans (Apr. 3, 2020); CARES Act Provider Relief Fund Distributions (Apr. 14, 2020); Update on CARES Act Provider Relief Fund General Distributions (Apr. 30, 2020); and Congress Passes Favorable Amendments to the Payroll Protection Program (Jun. 5, 2020).
COVID-19 and M&A
The Pandemic’s Impact on M&A Transactions
Part One of a Two-Part Series
Milligan Lawless, P.C
The COVID-19 pandemic has impacted all aspects of business in the United States, M&A transactions in particular. The global IPO market ground to a halt in March of 2020, and corresponding developments in the M&A market were felt almost immediately.[1] By the end of March 2020, M&A levels for the first quarter of 2020 had fallen by more than 50% compared to levels for the first quarter of 2019.[2] Many companies and private equity buyers moved away from the deal market in an effort to preserve jobs, customers and resources. For example, Xerox ceased its $35 billion takeover bid for HP, SoftBank terminated a $3 billion tender offer for WeWork stock and Hexcel and Woodward ceased discussions on a $6.4 billion merger of equals.[3]
Private company transactions were also impacted – a recent study of private company deals valued at less than $2 million found that 46% of deals were delayed and 11% were cancelled as a result of the pandemic.[4] Some transactions involving the acquisition of physician practices that primarily perform elective procedures were delayed or cancelled altogether following the suspension of the performance of elective procedures. The pandemic caused the re-evaluation of the terms of M&A transactions. Transactions are still occurring, but in many cases the pandemic has caused the parties to agree to modified terms and conditions. This article highlights five areas where the pandemic has affected the terms of M&A transactions. The second part of this two-part series will discuss actions prospective sellers can take in the face of the pandemic to optimize their position as targets for acquisition.
- Purchase Price. One of the most noticeable effects of the pandemic has been the reassessment of target company valuations. M&A transactions in 2020 have seen a greater prevalence of contingent forms of consideration, such as earn-outs or increased percentages of escrowed purchase price. In the health care context, earn-outs and other post-closing adjustments can have regulatory implications.[5] These contingencies add complexity to the transaction and increase the potential for disputes between the buyer and seller. Post-closing adjustments have a new level of importance as day-to-day uncertainties of operations have made the ability to anticipate performance more difficult.
- Due Diligence. While the diligence effort is always an important aspect of any transaction, the pandemic has caused a heightened emphasis on the buyer’s diligence of the seller. Buyers are now taking an even deeper dive into the pandemic’s impact on the target company’s sales, regulatory compliance, contract obligations, internal controls, among many other aspects. A significant portion of due diligence occurs electronically over remote technologies, but not everything can be done virtually (e.g. site visits, surveys). As in-person diligence remains limited, sellers should expect a longer and more rigorous due diligence process.
- Representations and Warranties. There has already been a shift in the negotiations of representations and warranties to address COVID-19. Some buyers are now requiring that sellers represent and warrant regarding: (1) the seller’s compliance with all local laws, rules and regulations regarding the pandemic, including any restrictions regarding the opening and closing of businesses; (2) the impact of the pandemic on the seller’s workforce and the ability of the seller to continue to operate in the face of “shut-down” orders; (3) whether the seller has obtained any CARES Act related relief, the seller’s eligibility for relief, and the seller’s compliance with CARES Act program requirements; and (4) the internal controls, policies and procedures of the seller regarding a safe workplace, including compliance with U.S. Centers for Disease Control guidance regarding re-opening. Given the depth of these new representations and warranties, representations and warranties insurance (“RWI”) has become a consideration for many sellers who would have not previously considered it, or who may have determined the cost of RWI premiums outweighed its benefits. This has led to new negotiations between sellers and insurers over the terms of such insurance and whether the policy contains COVID-19-related exclusions (which may result in coverage gaps during the pandemic).
- Operating Covenants. Buyers are demanding tighter controls on the target company between the signing of a purchase agreement and the closing of the transaction. This tighter control is typically evidenced by covenants that obligate the selling company to operate in a certain way or with certain limitations, typically based on the “ordinary course” of the business. Operating a business “in the ordinary course” may not be applicable (or as applicable) in a time of a worldwide pandemic. What is the “ordinary course” today? Does “ordinary course” mean pre-pandemic? Historically, these provisions have been somewhat loose and allowed the selling company a level of room to continue to operate the business as it had historically operated. However, in the pandemic era, buyers are demanding much greater controls and tighter restrictions on the selling company’s pre-closing operations.
- Material Adverse Effect. Material adverse change or Material Adverse Effect (“MAE”) clauses generally allow a buyer to walk away from the deal if the seller’s business and operations suffer a material adverse change between the signing of the purchase agreement the and closing of the transaction. For transactions that were entered into before the onset of the pandemic, or for those contracts of the selling company that are under review, a question may arise whether the pandemic constitutes a MAE. The party invoking a MAE faces a high standard in demonstrating that there has been an adverse change to the selling company’s business that qualifies as a MAE that would excuse the buyer’s performance.[1] In evaluating whether there has been a MAE, the courts will likely consider: (1) the express language of the agreement; (2) whether a pandemic or epidemic is an anticipated (or reasonably anticipated) event; and (3) the depth of the impact on the business and length and scope of the downturn. Given the fact that the long-term effects of COVID-19 are still unknown, and the high standard for demonstrating a MAE, it will likely be difficult for buyers to successfully argue that the disruptions caused by the pandemic constitute a MAE.
The COVID-19 pandemic has wreaked havoc on the U.S. economy; the M&A market is not immune to the pandemic’s negative impact. That said, some M&A activity has continued unabated, though the terms of such deals and the associated risks look markedly different than they did pre-pandemic. For information about the steps that prospective sellers can take to better position themselves when the time comes for a sale, stay tuned for part two of this series. If you have any questions regarding any M&A issues, the business transactions team at Milligan Lawless is here to assist. Please contact Steve Lawrence at 602-792-3635 or steve@milliganlawless.com or Miranda Preston at 602-792-3511 or miranda@milliganlawless.com.
[1] Jens Kengelbach, Jeff Gell, Georg Keienburg, Dominik Degen and Daniel Kim, COVID-19’s Impact on Global M&A, Boston Consulting Group, March 26, 2020.
[2] Richard Harroch, The Impact of the Coronavirus on Mergers and Acquisitions, Forbes, April 17, 2020.
[3] Cara Lombardo, Xerox Is Ending Hostile Takeover Bid for HP, The Wall Street Journal, April 1, 2020; Peter Eavis, SoftBank Won’t Buy $3 Billion in WeWork Stock, New York Times, April 1, 2020; Reuters, Aero Suppliers Hexcel and Woodward Scrap Deal as Coronavirus Pummels Industry, April 6, 2020.
[4] Market Pulse Report, Pepperdine Graziadio Business School, April 29, 2020.
[5] For example, in the context of the sale of a physician practice, where a portion of the purchase price is paid as an earn-out, if the owners of the seller will refer any patients to the buyer post-closing, the Stark Law and the Anti-Kickback Statute may be implicated.
[6] See Akorn, Inc. v. Fresenius Kabi AG, No. CV 2018-0300-JTL, 2018 WL 4719347, at *53 (Del. Ch. Oct. 1, 2018), aff’d, 198 A.3d 724 (Del. 2018) (citing Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008) at 738 (stating “A buyer faces a heavy burden when it attempts to invoke a material adverse effect clause in order to avoid its obligation to close”).
U.S. District Court Strikes Down Portions of the Department of Labor’s FFCRA Implementing Regulations
On August 3, 2020, a federal court in New York state struck down portions of the regulations implementing the Families First Coronavirus Response Act (“FFCRA”). In litigation brought by the state of New York against the United States Department of Labor (“DOL”), a U.S. District Court, among other things, substantially narrowed the “health care provider” exception to the FFCRA.
The FFCRA requires employers to provide employees paid leave benefits in connection with certain COVID-19-related absences. The health care provider exception allows employers to deny FFCRA’s leave benefits to employee health care providers. The court rejected as too broad DOL’s regulatory definition of “health care provider” which included:
“[A]nyone employed at any doctor’s office, hospital, health care center, clinic, post-secondary educational institution offering health care instruction, medical school, local health department or agency, nursing facility, retirement facility, nursing home, home health care provider, any facility that performs laboratory or medical testing, pharmacy, or any similar institution, Employer, or entity. This includes any permanent or temporary institution, facility, location, or site where medical services are provided that are similar to such institutions, as well as any individual employed by an entity that contracts with any of these institution . . . .”
DOL Final Rule at 19,351 (§ 826.25). Instead, after recognizing its applicability to the FFCRA, the court applied the narrower Family Medical Leave Act “health care provider” definition:
“(A) a doctor of medicine or osteopathy who is authorized to practice medicine or surgery (as appropriate) by the State in which the doctor practices; or (B) any other person determined by the Secretary to be capable of providing health care services.”
29 U.S.C. § 2611(6); State of New York v. U.S. Department of Labor, et al., No. 1:20-cv-03020 (S.D. N.Y. Aug. 3, 2020).
In that same decision, the court also: rejected a DOL rule which denied FFRCA leave to employees in the absence of available work for the employee to perform (e.g. during a furlough); vacated a DOL rule requiring employer consent to intermittent use of FFCRA leave; and struck down a DOL requirement that employees provide FFCRA documentation in advance of taking leave.
The court’s decision substantially affects key components of the FFCRA. Significantly, for healthcare sector employers, it may reduce the ability to exempt most employees from FFCRA leave benefits. It also raises the question of potential liability for employers who denied employees FFCRA leave based upon DOL’s now-vacated regulations. Finally, the impact of the court’s decision outside the state of New York is currently unclear. Employers are encouraged to speak with an attorney if they have questions about FFCRA compliance or other employee leave-related matters.
For more information regarding the implications of the court’s decision, the FFCRA or other employment-related matters, please contact attorney John Conley at (602) 792-3500.