Breaking today, the IRS finally released targeted advice concerning whether an employer may qualify as an “eligible employer” for purposes of the Employee Retention Credit (ERC) by relying on “communications”1 from the Occupational Safety and Health Administration (OSHA) intended to mitigate and prevent COVID-19’s spread in the workplace. According to the IRS in its Generic Legal Advice Memorandum (GLAM):
Generally, communications from OSHA are not considered “orders from an appropriate governmental authority that limit commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID-19)” for purposes of section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(A)(ii)(I) of the Code.2 [Emphasis added].
Without a doubt, this topic has generated some of the highest levels of uncertainty for parties trying to navigate the already complex ERC process. The reality is that a careful ERC evaluation must be conducted by someone who is acutely aware of the fact that there are varying levels of government “orders” and guidelines out there but not all of them qualify a business for the ERC. It’s important that we review the GLAM here and encourage those with questions and concerns to review it with their trusted professional.
Similar in structure and analysis to other advice memorandums, the GLAM explores fact patterns and takes the reader through its analysis and application of the law to those facts. Let’s frame the discussion here with those fact patterns in mind:
Scenario 1. Employer A is located in a state and a local jurisdiction that lifted all COVID-19 related health orders and restrictions in the first calendar quarter of 2021. At that time, Employer A ceased any mitigation measures other than encouraging employees to wear masks and practice routine hygienic practices such as frequent handwashing. Employer A claimed the employee retention credit in the second and third calendar quarters of 2021 on the basis that the operation of Employer A’s business was partially suspended under section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(A)(ii)(I) of the Code by the communications from OSHA.
Scenario 2. Same facts as Scenario 1, except that prior to 2020, Employer A’s employees teleworked between two to three times a week. In March 2020, Employer A allowed employees to telework or work remotely full-time and continued this policy through the end of the third calendar quarter of 2021.
It's fair to say, these fact patterns, or variations thereof, are frequently encountered in ERC evaluations in the healthcare industry.
After outlining the relevant ERC and OSHA statutory language, provisions in the IRS notices, and relevant OSHA communications and guidance, the IRS issued its advice as follows:
According the to the IRS, since neither the CARES Act, nor the Internal Revenue Code (IRC), explicitly define the term “orders,” the meaning of that term is generally decipherable upon application of accepted principles of statutory construction. The court gave weight to the definition of order in Black’s Law Dictionary, which states that an order is “A command, direction, or instruction.” The IRS then noted that:
The OSHA communications explicitly do not command or mandate any employer to take any specific action, leaving it outside the ordinary meaning of the term “orders.” Both the instructions to OSHA compliance officers as well as the guidance on the OSHA website contain disclaimers that they do not impose new obligations on employers. Nothing in section 2301 of the CARES Act or section 3134 of the Code expands the definition of a government order to include guidelines that do not place mandatory obligations on employers. As explained above, the language of section 2301 of the CARES Act and section 3134 of the Code requires orders.3 [Emphasis added].
Next the IRS considered how OSHA itself defines the term “orders.” The IRS pointed out that “general, nonbinding guidance” falls short of what’s required to be an “order” under OSHA’s authority. According to the IRS, “the term ‘order’ is used in the OSH Act as an action directed at a particular employer or applicable to an order permitting a variance from a standard or a final order after OSHA has identified a violation and issued a citation." 4
Moreover, explained the IRS, recommendations from OSHA during the pandemic described how employers could make their workplaces more employee-safe or instructed employers about how to actually comply with pre-existing standards. The IRS declined to consider those communications as “orders” under the OSH Act’s standard.
Additionally, the IRS addressed the fact that for ERC purposes, an order must: (1) be from an appropriate governmental authority, and (2) limit commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19. Here, the IRS noted that “All standards referenced in OSHA communications discussed in this document (whether or not they are orders) applied to occupational exposure to infectious diseases prior to the emergence of COVID-19.”5 [Emphasis added]. After specifically listing some of these pre-existing standards, the IRS stated:
An employer cannot simply reference pre-existing OSHA standards to claim entitlement to the credit due to a full or partial suspension of operations. Assuming, for the sake of argument, that the above pre-existing standards referenced in the OSHA memo are “orders” for purposes of applying for the credit, an employer must still demonstrate how the pre-existing standard, as applied to its particular circumstances due to COVID-19, was implemented to limit commerce, travel, or group meetings. In this context, “commerce” is generally understood to mean the exchange of goods and services. See, e.g., Black's Law Dictionary (11th ed. 2019) (“commerce n. (16c) 1. The exchange of goods and services, esp. on a large scale involving transportation between cities, states, and countries”). These determinations will depend on the specific facts and circumstances in each case.6
Note: Interestingly, the IRS includes two footnotes in this part of its analysis. The IRS expressly limits the scope of its own analysis in Footnotes 8 and 9.
Footnote 8: A violation of pre-existing OSHA standards or the General Duty Clause that results in a citation and then an order under section 659 of the OSH Act may constitute an order for purposes of the employee retention credit. This analysis is outside the scope of this memorandum.
Footnote 9: This memorandum does not address whether the pre-existing standards referenced in the OSHA memorandum as applied to Employer A’s particular circumstances limit commerce, travel, or group meetings due to the lack of specific facts relating to the operation of Employer A’s trade or business. Thus, a conclusion on this issue is outside the scope of this memorandum.
Finally, the IRS discusses how an employer must be able to substantiate causality between orders appropriate governmental orders and a full or partial suspension of business operations. Here, the IRS indicates that:
The relevant inquiry is whether an employer could continue operating its trade or business (even if the employer ceased operations) despite there being an order from an appropriate governmental authority in place. If an employer can operate its trade or business under the governmental order, then the employer’s operations are not fully or partially suspended.7
This, in turn, led the IRS to consideration of the nominal portion and effects parts of the analysis. While acknowledging that such determinations evaluate the specific facts and circumstances of each case, the IRS maintained that:
The recommendations set forth in OSHA guidance related to modifications, such as requiring masks, providing sanitization supplies, and encouraging social distancing, are not considered orders from an appropriate governmental authority described in section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(A)(ii)(I) of the Code. Moreover, even assuming, for the sake of argument, that the recommendations were orders described in section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(A)(ii)(I) of the Code, they were not likely to impact an employer’s ability to operate their trade or business. If an employer maintains that modifications had more than a nominal effect on the employer’s trade or business operations, the employer needs to substantiate that the modifications resulted in a reduction in an employer’s ability to provide goods or services in the normal course of the employer’s business of not less than 10 percent to fall within the provisions of Notice 2021-20.8
Note: A potential “hook” may still exist to pull in an OSHA communication for ERC purposes. As the IRS expressed:
If the implementation of OSHA recommendations and guidance became mandatory due to orders from an appropriate governmental authority (e.g., an executive order from a Governor), an employer may be eligible to claim the employee retention credit. To fall within the provisions of Notice 2021-20, employers must be able to demonstrate that implementation of the recommendations suspended more than a nominal portion of the employer’s trade or business operations or had more than a nominal effect on the employer’s trade or business. Modifications must have had more than a nominal effect on the employer’s business operations. Modifications that required minor alterations to customer behavior or employee behavior (for example, masking or making store aisles one way to enforce social distancing) most likely did not result in more than a nominal effect on business operations because generally employers could continue operation of their trade or business without a reduction of their ability to provide goods or services in the normal course of the employer’s business.
As we expected after years of assisting clients with ERC: generally, OSHA communications are not considered “orders” for purposes of ERC. As the IRS observed, OSHA produced a wealth of interpretive guidance for pre-existing standards and its General Duty clause, as well as non-binding recommendations on its official website. However, “OSHA did not adopt and enforce any widely applicable standards that limited commerce, travel, or group meetings due to COVID-19.”9
So, the GLAM fact patterns both failed to measure up:
This newly released GLAM highlights, yet again, the importance of seeking trustworthy guidance in the ERC process—this includes reviewing claims already filed and any claim you may be considering filing. And if you believe that you were misled by promoters, or have any other uncertainties about your ERC claims, we urge you to contact a trusted tax professional as soon as possible. Remember, last month the IRS also release details for an ERC withdrawal initiative. You can read the details about that initiative in full in our article: IRS Releases ERC Withdrawal Process Details. It’s a decision that requires confidence and commitment: if you withdraw your request you are asking the IRS not to process the complete adjusted employment tax return for the ERC claim tax period in exchange for being able to avoid both penalties and interest.
If you believe you have been misled by promoters or have any other uncertainties about your ERC claims, we urge you to contact a trusted tax professional as soon as possible. You can contact us via our website or by calling our tax attorneys at (410) 497-5947.