Non-Compete Agreements to be Banned

By Andrea Coit

The Biden administration issued an executive order in 2021 directing the Federal Trade Commission (FTC) to curtail non-competes in some fashion. The administration’s belief is that non-compete agreements stifle competition and depress wages for U.S. workers. Banning non-compete agreements is intended to encourage competition, innovation, and increased wages. Taking heed of that direction, on April 23, 2024, the FTC announced its Final Non-Compete Clause Rule (Final Rule) which bans post-employment non-compete clauses between employers and their workers. The ban becomes effective on September 4, 2024.  According to the FTC, the ban will impact one in every five U.S. workers.

What is a Non-Compete Clause?
A “non-compete clause” is defined as “a term or condition of employment that prohibits a worker from, penalizes a worker for, or functions to prevent a worker from (1) seeking or accepting work in the United States with a different person where such work would begin after the conclusion of the employment that includes the term or condition; or (2) operating a business in the United States after the conclusion of the employment that includes the term or condition.” The Final Rule prohibits an employer from entering into, or even attempting to enter into, a non-compete clause with a person defined as a “worker.” For purposes of the ban, a “worker” includes not just employees, but also independent contractors. 

Exceptions to The Final Rule
The Final Rule is not just prospective, but also invalidates all existing non-compete agreements with all workers other than “senior executives.” A senior executive is a worker who has more than $151,164 in annual compensation and is in a policy making position for the employer.  The Final Rule also does not apply to non-competes entered into by a person pursuant to a bona fide sale of a business entity or to any non-profit, banking or savings and loan organization. 

How Does the Final Rule Impact My Business?
By the date the ban becomes effective, employers must have sent clear and conspicuous notice to all workers, current and former, who were previously subject to non-compete clauses, letting them know that the non-compete is invalid and cannot be legally enforced. This notice must be hand-delivered, mailed to the worker’s last known address, or sent by email or text. 

The Final Rule does not explicitly ban non-disclosure agreements, customer non-solicitation agreements, or employee non-solicit agreements.  However, it makes clear that it bans any restrictive covenant, regardless of what it is called, if it has the same effect as a non-compete clauses. For example, the Final Rule provides that non-disclosure clauses operate as non-compete clauses for purposes of the ban “where they span such a large scope of information that they function to prevent workers from seeking or accepting other work or starting a business after they leave their job.” If a restrictive clause is so broadly written that, for practical purposes, it prevents a worker from working for another employer in the same field, starting their own business, or seeking or accepting other work, the restrictive clause, whatever its title, will be considered a non-compete agreement and will be unenforceable. 

The Final Rule will supersede all state laws to the extent that a state’s laws permit or authorize conduct prohibited under the Final Rule or conflict with the Final Rule’s notice requirements.

As would be expected, there are several lawsuits pending that challenge the validity of the ban.  All of the lawsuits seek in interim stay of the Final Rule, asking that it not become effective until the challenges are fully litigated.  The challenges being made to the Final Rule are largely focused on the lack of statutory authority for the FTC to enact a sweeping rule that affects millions of agreements nationwide.

How Should My Business Prepare?
In the meantime, employers should prepare to send notices to impacted current and former workers should the rule become effective on September 4, 2024, and determine whether any of the impacted employees qualify for the “senior executive” exception.  It is also permissible to ask any “senior executives” who are not yet subject to a non-compete to sign one before the effective date of the ban.  From there, and assuming the ban takes effect, employers should remove all non-competes from their employment agreements and employment policies and take a careful look at their non-solicitation and non-disclosure agreements to make sure they are not so broad and restrictive as to also qualify as non-compete agreements under the Final Rule.

If you have any questions about how the FTC rule will impact your business, our employment lawyers are here to help. Book a consultation with us today!

The information provided here does not constitute legal advice. Hutchinson Cox makes neither express nor implied warranties regarding the use of this material. The reader should always seek competent legal advice as the facts of every case vary.

Corporate Transparency Act: 2024 Guide

By the Business Law Centre at Hutchinson Cox

If you talked to a business attorney or CPA recently, you might have heard about the Corporate Transparency Act (“CTA”). In this article, we’ll provide comprehensive information to help you wade through the legal jargon and hype.

What is the Corporate Transparency Act?

The United States Legislature passed the Corporate Transparency Act in 2020 to combat financial crimes (like money laundering and terrorist financing), by requiring companies to report personal information for the individuals who benefit from the company (otherwise known as “Beneficial Owners”) to FinCEN, which is a bureau of the U.S. Department of the Treasury.

Even though the CTA was passed in 2020, the requirements only became effective as of January 1, 2024. The CTA’s goal is to reduce the number of shell entities operating in the United States. Previously, there had been no easy way for law enforcement to verify the identities of the individuals who actually benefit from an entity’s activities. Under the CTA, most kinds of businesses and other legal entities must report information about their Beneficial Owners to the Financial Crimes Enforcement Network (“FinCEN”), a branch of the U.S. Department of Treasury.

Legal entities now regulated by the CTA must disclose accurate, up-to-date information for their Beneficial Owners such as full legal names, dates of birth, residential addresses, and unique identification numbers (like a driver’s license number). Information reported to FinCEN will be kept confidential for use only by authorized law enforcement agencies or the financial institutions granted permission directly from a reporting company. Corporate Transparency Act reporting obligations vary for existing and new companies, and the CTA includes harsh penalties for non-compliance ranging from fines to imprisonment. 

Compliance with the CTA is straightforward, but because the penalties can be severe, it is crucial for any business owner to understand their obligations.

Reporting Companies that already existed before January 1, 2024, have until January 1, 2025, to report their Beneficial Owner information to FinCEN. New Reporting Companies formed between January 1, 2024, and January 1, 2025, have 90 days to report Beneficial Owner information. Reporting Companies formed after January 1, 2025, only have 30 days to report. 

Don’t delay getting in touch with us to find out how this new legislation pertains to you, as you may have a limited time to comply. Book a consultation with us today!

To make it easier for you to see when your business needs to file its CTA report, we’ve created a downloadable chart.

To access more information, continue reading and visit the FinCEN’s website FAQs. And if you would like a more in-depth explanation of the CTA, continue reading below.

Corporate Transparency Act Covered Entities

The CTA targets corporations, limited liability companies (LLCs), and similar entities that are created by registering the entity with a state’s secretary of state. Those entities are considered “Reporting Companies” under the CTA.

The CTA requires all Reporting Companies to report information about the companies themselves and each Beneficial Owner of the Reporting Company. If a Reporting Company gets created after January 1, 2024, the Reporting Company must also report information about the Reporting Company’s “company applicants.”

Corporate Transparency Act Exemptions

The CTA has exemptions for certain types of entities, such as publicly traded companies, financial institutions, and certain regulated entities that are already required to disclose significant amounts of information to the government.

Corporate Transparency Act Penalties

Failure to comply with the reporting requirements of the CTA may result in civil and criminal penalties, including fines of up to $500 a day and imprisonment. Deliberate or willful misrepresentation of beneficial ownership information can lead to additional penalties.

Corporate Transparency Act Reporting Requirements

The CTA requires all Reporting Companies to disclose personal information to FinCEN on each of its Beneficial Owners. Required information includes each Beneficial Owner’s full legal name, date of birth, current residential address, and a unique identifying number (such as a driver's license or passport number). The information provided must be accurate and up to date.

The CTA defines a Beneficial Owner as an individual who meets one or more of the following criteria:

1. Ownership Interest: Any individual who directly or indirectly owns 25% or more of the equity or other ownership interests in a business entity. The CTA is intended to capture a broad range of individuals, and it defines “ownership interest” broadly to achieve that goal. Ownership interests can be through shares, voting rights, or any other ownership structure.

2. Substantial Control: Any individual who exercises substantial control over the business entity. Again, because the CTA is meant to be a broad law, “substantial control” goes beyond the traditional leadership roles in a company. Substantial control refers to the power to direct or influence the management or policies of the entity through ownership interests, voting rights, agreements, or any other means of exercising authority over a Reporting Company.

3. Management Authority: Any individual who holds significant managerial responsibility in the business entity is also likely a Beneficial Owner of a Reporting Company. This includes individuals such as CEOs, CFOs, presidents, or other similar positions responsible for the day-to-day operations and decision-making of the entity. These individuals must report as Beneficial Owners because they have “substantial control” over a Reporting Company.

It is worth noting that the CTA focuses on identifying individuals who have significant control or ownership interests in a business, with the aim of increasing transparency and preventing the misuse of corporate structures for illicit purposes. The definition of Beneficial Owner provided above helps determine which individuals need to be reported to FinCEN as part of the CTA's reporting requirements.

Many companies are controlled by other companies instead of individuals, but individuals cannot escape the CTA’s reporting requirements just by using several companies. Instead, the CTA requires the company who controls the other company to report their own Beneficial Owners.

This can be confusing, and an example can help illustrate. Let’s say Company A is just a holding company owned by Company B. Company B has one Beneficial Owner, Polly President. If Company A is a Reporting Company, it can’t get away with only disclosing “Company B” as the beneficial owner. Instead, Company A has to report Polly President’s information as Company A’s Beneficial Owner, because Polly President exercises “substantial control” over Company A by owning Company B.

If a Reporting Company was created after January 1, 2024, the Reporting Company must also report information about the Reporting Company’s “Company Applicants.”

Here's what the CTA requires Beneficial Owners, Reporting Companies, and company applicants to report:

Beneficial Owners (for each Beneficial Owner):

1. Full Legal Name.

2. Date of Birth.

3. Current Residential Address.

4. Unique Identifying Number, such as a driver's license or passport number, and an image of the identification document (like a passport) itself. This helps establish the identity of the individuals involved.

It's important to ensure that the information provided is accurate and up-to-date. The purpose of collecting this information is to increase transparency and prevent individuals from using companies to engage in illicit activities such as money laundering, terrorist financing, or other financial crimes. Reporting Companies have to update information reported to FinCEN within 30 days of the information changing.

Reporting Companies: 

1. Legal Name: The complete legal name of the business entity as shown in the secretary of state’s records.

2. Any Trade Names (for example, a “d.b.a.”).

3. Business Address. The current street address of the business entity's principal place of business or primary U.S. address if the principal place of business is outside of the U.S.

4. The jurisdiction of formation or registration (for example, the state of Oregon).

5. Taxpayer Identification Number or foreign equivalent with the name of the foreign jurisdiction.
   

Reporting Trustees:

If a trustee represents a trust that qualifies as a beneficial owner by directly or indirectly owning or controlling 25% or more of the equity interests in a Reporting Company, the reporting requirements include:

1. Legal Names: The full legal name of the trustee and any other individuals who have control over distribution or withdrawal of the assets in the trust.  

2. Beneficiaries: Beneficiaries also need to be reported if the beneficiary is the sole permissible recipient of income and principal of the trust or if a beneficiary has the power to direct the distribution or withdrawal of substantially all of the assets.  

3. Settlor: A Settlor also must be reported if the Settlor has the right to revoke the trust or withdraw the assets of the trust (this includes the authority to swap assets with the trust).

4. Address: The address where the reporting individuals can be contacted.

5. Unique Identifying Number: A unique identifying number for the trustee, such as a Social Security number or other applicable identification. 

Company Applicants:

A “company applicant” is the individual who files the document creating the Reporting Company. If a second person is primarily responsible for directing the first person to file the document creating the Reporting Company, the second person is also a “Company Applicant” under the CTA. For example, if an attorney helps a client organize a limited liability company by directing their legal assistant to file articles of organization with the secretary of state, both the attorney and the legal assistant are “company applicants.”

Companies formed after January 1, 2024 (or foreign entities registering in the U.S. for the first time after that date), must report “Company Applicant” information to FinCEN. The information required is the following, for each company applicant:

1. Full Legal Name.

2. Date of Birth.

3. Address, which can be a residential or business address.

4. Unique Identifying Number, such as a driver's license or passport number, and an image of the identification document (like a passport) itself. This helps establish the identity of the individuals involved.

Corporate Transparency Act Privacy

Rest assured, the information reported to FinCEN will be confidential and accessible only to authorized government agencies for law enforcement and national security purposes. The information will not be publicly available, protecting individuals' privacy. FinCEN is still developing rules (as of December 2023) for how FinCEN will allow access to the information reported under the CTA to government and foreign law enforcement officials. It is likely Reporting Companies will be able to voluntarily authorize certain financial institutions to view their Beneficial Ownership information, as well.

What is a FinCEN ID? 

FinCEN will allow individuals to request a “FinCEN ID” that individuals can use instead of reporting the beneficial owner information described above. The application for a FinCEN ID can be found on the FinCEN website. Getting a FinCEN ID makes the most sense for individuals who must report information to FinCEN on a regular basis. For example, a business attorney who has to repeatedly report as a “Company Applicant” may wish to obtain a FinCEN ID to speed up the process.

How to File Your Corporate Transparency Act Report

The reporting process is done exclusively via digital platforms. FinCEN’s electronic filing system is currently available on the FinCEN website. There is no indication that paper applications will be allowed, so Reporting Companies should familiarize themselves with the electronic system

The Corporate Transparency Act can seem complicated and even a bit scary. Fortunately, the business attorneys at Hutchinson Cox are prepared to assist you every step of the way. Don’t delay getting in touch with us, as you may have a limited time to comply. Book a consultation with us today!

The information provided here does not constitute legal advice. Hutchinson Cox makes neither express nor implied warranties regarding the use of this material. The reader should always seek competent legal advice as the facts of every case vary.

Meet Our New Law School Fellow

We are pleased to welcome Alex Shadle (AS) to our firm as our 2024 summer law fellow. In partnership with the Lane County Bar Association and the University of Oregon, this highly selective program is designed to help diversify Oregon’s legal community. The program provides a scholarship throughout law school, a paid internship for recipients’ first summer in law school (that's where we come in), and many more benefits designed to support the fellows’ success in law school and in their Oregon legal career. Learn more about the newest face at our office…

HC: What made you decide to go to law school?
AS: I wanted to give back to the community. There is a need in the legal profession for people who are passionate about helping those in need, and I wanted to help fill that role.

HC: Why did you choose the University of Oregon School of Law?
AS: I chose UO School of Law for two reasons. First, I already knew that I wanted to practice law in Oregon, and the UO offered a wealth of different opportunities to make connections and build a solid foundation for my career. Second, I was already living in Eugene, having attended the UO for my undergraduate degree (where I majored in history and religious studies). I knew that trying to move and getting to know a new city would be an added layer of stress to an already very stressful time. Since I was already living near the best law school in the state, I decided to make it my priority to get into UO.

HC: How did it feel to get the fellowship at Hutchinson Cox?
AS: Like a massive weight had been taken off my shoulders. One of the most stressful experiences during the first year of law school is trying to navigate finding a summer job while simultaneously learning how to be a law student. Not needing to worry about what I was going to do in the summer allowed me to focus on my studies and help make the most of my first year in law school..

HC: What are you most looking forward to with this fellowship?
AS: The opportunity to learn what being a lawyer is really like. I am excited to dive in, learn, and grow. I am excited for the mentoring opportunities and getting to learn from people from different backgrounds, interests, and experiences.

HC: What do you like to do for fun when you’re not studying for law school or interning at Hutchinson Cox?

AS: When I’m not studying or interning at Hutchinson Cox, I am usually either practicing my archery at Junction City ponds or baking. It’s hard to say what my favorite thing to bake is, but if I had to choose, it would be my cinnamon roll stuffed apples. They aren’t the most complex thing I bake and they’re not my favorite dessert, but there are a lot of good memories I associate with it.

What To Do Before Buying Rural Residential Property in Oregon

By Liam Sherlock

Living on rural residential property is a dream for many. Whether for investment, lifestyle, or even retirement, rural residential property can be serene and relaxing or exciting and industrious, and everything in between. If you are new to the process of purchasing rural property, or have been looking for a while, there are many unique considerations to be aware of. It can be stressful if you are not aware of essential steps, and can be especially nerve wracking if it is a substantial investment. Here are tips to guide your process, and to assist you in accomplishing your goals.

When buying a residential property in a city or town, you can fairly easily establish the allowed uses of the property, the lot boundaries, and the availability of city water, sewer, and utility services.  Purchasing a rural residential property, however, requires a you to look into issues you may have never considered or encountered before, particularly if you are coming from out-of-state or are a first-time purchaser. Oregon’s land use and zoning laws, especially with respect to rural resource lands are generally more restrictive than other states. The overarching land use policy in Oregon is to preserve rural lands for resource use, such as agriculture or forestry, and to curtail urban sprawl or other conflicting uses. It is important to understand what to expect and how to avoid unpleasant surprises so you can more fully enjoy the benefits of country living.

6 Red Flags When Purchasing Rural Real Estate

1. Sale Listings

When you are first looking at a rural property, you may be drawn to it via a property listing that describes the property’s location, acreage, accessibility, and features of the home (if there is one) or other structures on the property. These descriptions generally point out the positive features of the property in an effort to attract buyers. However, sometimes these descriptions, either intentionally or inadvertently, omit essential information regarding the legal or approved uses of the property. The bottom-line is, don’t take everything in the listing description at face value, do your due diligence, and ask lots of questions.

2. Preliminary Title Reports

Once you make an offer on a property, the title company that will likely handle the title insurance and often the escrow/closing will issue a preliminary title report (sometime referred to as the “prelim”). This document provides you with a legal description of the property, the encumbrances that might affect the property, such as easements, unpaid taxes, judgment liens, contractor liens, or other matters. Most are standard reservations and can be resolved through the escrow process, but some, such as a pending lawsuit involving the property, or lack of legal access, can be deal breakers absent the seller’s agreement to remedy the issue prior to closing.

3. Seller’s Disclosure Statement

Under state law, sales of real property that include a dwelling must be accompanied by a Seller’s Disclosure Statement. This document is incorporated into the purchase and sale agreement and is enforceable. It requires the seller to either check “No” or “Yes” or “Unknown” to multiple questions that span everything from leaking roofs, to valid title, to zoning, to septic systems, and boundary disputes. Unfortunately, sellers sometimes fail to fill out the form accurately. Whether deliberate or unintended, this misrepresentation can have significant consequences. Of particular importance is following through whenever an “unknown” box is checked. For example, where the disclosure form asks if the composite siding of the home has been subject to a recall by the manufacturer, or if there is an underground heating oil tank and the owner checks the “unknown” box, it will serve you well to have the siding analyzed by a siding expert and the property inspected by a reputable environmental consultant. Otherwise (and assuming the seller really did not know), if it turns out there is a problem, your remedies for seeking compensation from the owner after you buy the property effectively disappear.

4. Property Boundaries

Many property quarrels and lawsuits revolve around disputed property lines. In order to avoid getting into such a conflict, it is highly advisable to do the following prior to closing and as a condition to allow closing:

• Obtain a copy of the last recorded survey of the property from the county planning or surveyor’s office and review it carefully. If no survey exists, and depending on the size or complexity of the property, hire a surveyor to, at minimum, locate the property’s corner points. This is particularly important if any red flags appear such as a fence that does not follow a straight line, or there is a meandering river or creek bank that purportedly describes the property boundary.

• Talk to prospective neighbors about where they believe the boundary lines are located and the accuracy of fence locations.

5. Easements

Disputes over access easements constitute a large percentage of real property disputes and litigation, perhaps even more so than property line disagreements. While most easements are recorded with the county deeds and records office, that’s not always the case. Accordingly:

• Make sure all easements of record noted in a preliminary title report that benefit or burden the property are located and understood.

• If there is a visible roadway, path, or shared driveway that leads across the property to a neighboring property that is not identified or described the preliminary title report, it is critical that you make inquiries either directly or through your realtor to the adjacent property owner to establish whether they use the roadway/driveway, and if so, under what authority. They may pull out a written (“express”) easement that was never recorded. Alternatively, the neighbor may acknowledge their use of the roadway is based on permission by the seller, which can be withdrawn.  However, as soon as the prospective buyer is made aware of the unrecorded easement prior to closing, then they are likely going to be bound by its terms. Therefore, you need to know the scope of the use. For example, is the roadway at issue the primary access for the neighboring property or is it only used for less intensive incidental use, such as occasional access for farm equipment or hunting? Then decide whether you can live with that intrusion or not.

• If there is an easement, establish who is responsible for easement maintenance. Under Oregon law, if there is no written maintenance agreement, the parties are obliged to contribute to maintenance and repair proportionate to the amount they use or degrade the roadway. But it is preferable to tailor a maintenance agreement to fit your specific situation whenever possible.

6. Property & House Inspections

It is almost always in your best interest to have the dwelling inspected by a qualified home inspector. A listing description for a property might say it is served by a domestic well, but neglects to mention the water has low output, or has high iron or arsenic levels, or is shared with a neighboring property. Such issues can usually be resolved, for example, using a treatment system or entering into joint use agreement, but need to be recognized and addressed up front. Likewise, septic systems are by definition underground and thus hard to assess their functionality. Therefore:

• Obtain qualified pest/dry rot and whole house inspections for all significant structures.

• Ensure well water is tested for nitrates, bacteria, salt, and arsenic.

• Ensure the well produces at least five gallons per minute for four hours during the summer.

• Have the septic system inspected to ensure it is properly functioning and there is a replacement drain field or sufficient room on the property for a replacement drain field.

7. Land Use

Many prospective buyers assume that whatever structures or uses of the property that are present when they look at a property are permitted and legal. For example, a property may be advertised as including a house and an accessory dwelling unit.  But sometimes the additional dwelling is simply a converted outbuilding that was never permitted for residential use. More times than I can count, I have been asked to remedy a compliance order from the county sent to a new property owner who has moved a relative or tenant into an accessory dwelling unit that is not permitted under state or local land use laws.  While there are exceptions, there is often little that can be done to fix that particular problem.

Moreover, don’t assume that you can legally operate any type of business on the rural property. While most counties have fairly lenient rules for running low profile home occupation businesses, such as bookkeeping, pottery, firearm repair, or other low intensive uses, larger scale operations that employ more than five persons and are not primarily contained in the home or an adjacent permitted accessory structure are difficult to get permitted. It pays to discuss any prospective use with a land use attorney or county planner before buying or initiating such a business on the property.

Land Use Compliance Checklist

1.     Confer with the county land planning department that all existing or proposed uses and structures on property are allowed for that zoning.

2.     Understand that adjacent farm or forest uses are generally insulated from nuisance or trespass claims as a matter of state law.

3.     Contact the county Sheriff’s office and county land use enforcement officer to see if adjacent properties have been cited or reported for any non-conforming or illegal activities (such as non-conforming land uses, unpermitted dog kennels, illegal cannabis farms, wildlife poaching, etc.).

4.     Establish that the property is within a defined rural fire protection district.

The recommendations provided may seem burdensome, but they can save you money and time, as well as help avoid unnecessary litigation and risk. The key to a successful purchase is to ask lots of questions, carefully review relevant documents, retain a knowledgeable and proactive real estate broker, obtain a survey and property inspections, confer with county land use planning staff, and seek the advice of a land use or real estate attorney if necessary.

If you have concerns or questions regarding purchasing real property or dealing with land use and property related issues once you are an owner, including consultation, litigation, and negotiation, Liam would love to meet with you. Our firm regularly assists clients in such matters. Book a consultation with us today!

The information provided here does not constitute legal advice. Hutchinson Cox makes neither express nor implied warranties regarding the use of this material. The reader should always seek competent legal advice as the facts of every case vary.

Complete Guide: Employee Retention Tax Credit

By Jonathan M. Hood

A number of clients and businesses have reached out to us with questions about the ERTC, so we compiled this guide to answer the most frequently asked questions.

What is the Employee Retention Tax Credit? 

The Employee Retention Tax Credit (ERTC) is a program passed by Congress as part of the CARES act to provide struggling companies with financial assistance. The program allowed eligible employers to receive payroll tax credits up to 50% of qualifying wages, including eligible health insurance expenses, paid to employees as an incentive to keep employees on payroll during the pandemic. The credit is applied against the employer’s share of Social Security taxes and is refundable. Congress later extended the ERTC program through 2021 and revised the employer eligibility requirements and increased the amount of the credit for 2021.

If you are an employer and wondering whether you missed your opportunity to claim a tax credit, the good news is that there is still time to claim the credit. Eligible employers are allowed up to three years to claim the tax credit. To help employers better determine whether they may be eligible for the ERTC, the following is a summary of the program’s eligibility requirements and the amount of potential tax credits available.

Who Qualifies for the Employee Retention Tax Credit? 

Generally, only employers who suffered a financial hardship during the first two years of the pandemic are eligible for the ERTC. Eligibility is determined on a quarterly basis. If an employer is eligible for a particular calendar quarter or multiple quarters, the employer may receive a tax credit based on the qualified wages for that quarter or quarters.

To qualify for the ERTC, employers must meet one of the following requirements:

• The employer’s business was fully or partially suspended during a calendar quarter by a government order due to COVID-19, or

• The employer had a significant decline in gross receipts

The credit applies to qualified wages paid during the calendar quarter or quarters during which either of those criteria is met.[1]

When determining whether an employer had a significant decline in gross receipts for 2020, the period of significant decline begins during the first quarter that the employer’s gross receipts are less than 50% of the gross receipts for the same calendar quarter in 2019. The period of significant decline continues until the quarter where the employer’s gross receipts are more than 80% of the gross receipts for the same calendar quarter in 2019. An employer is eligible for any quarter in 2021 where the gross receipts are less than 80% of the gross receipts for the same quarter in 2019 (or in 2020 if the employer was not in business during 2019).

Businesses that started after February 15, 2020 (referred to as “Recovery Startup Businesses”), may be eligible for ERTC, but only for the third and fourth quarters of 2021. Annual gross receipts must be $1 million or less, and the business must not otherwise be eligible for the ERTC. The business must also not share common ownership with a company that was in business prior to February 15, 2020.

Also, please note that employers who received a Paycheck Protection Program (PPP) loan were previously ineligible for the ERTC. This is no longer the case; these employers are now eligible for the credit. However, other loans may disqualify the employer from receiving the credit and other exclusions may apply.

What Wages Qualify for the ERTC?

Qualified wages are those wages and health care costs paid to any employee during the period in which operations were suspended or there was a significant decline in gross receipts. For large employers, only wages paid to employees who were not providing services for the employer are eligible for the credit; wages paid to employees who were performing services for the employer were not eligible. For 2020, a large employer was an employer with more than 100 employees in 2019. For 2021, a large employer was an employer with more than 500 employees in 2019. For employers with fewer employees than those thresholds, the employer could receive the credit regardless of whether or not the employees were working.

For the third and fourth quarters of 2021, Congress added a category of employers called a “Severely Financially Distressed Employer.” This employer is one where an employer’s gross receipts for the quarter were less than 10% of gross receipts for the same quarter in 2019. These employers may receive a credit regardless of the number of employees, even if the employees were performing services. The election to use a prior quarter’s gross receipts applies to this situation.

What Tax Credit Amount Can Employers Expect?

For qualified wages paid between March 13, 2020, and December 31, 2020, the employer is entitled to a credit of 50% of the qualified wages, up to a maximum of $5,000 credit. For qualified wages paid between January 1, 2021, and December 31, 2021, the employer is entitled to a credit of 70% of the qualified wages up to a maximum of $7,000 per quarter. Recovery Startup Businesses may receive a separate $50,000 maximum aggregate credit for the third and fourth quarters of 2021.

[1] Subsequent changes to the ERTC allowed employers to use a prior quarter’s gross receipts for any quarter of 2021.

If you have additional questions regarding the ERTC and how it may apply to your business, we would love to serve you. Book a consultation with us today!

The information provided here does not constitute legal advice. Hutchinson Cox makes neither express nor implied warranties regarding the use of this material. The reader should always seek competent legal advice as the facts of every case vary.

A Reimagined Law Firm

Hutchinson Cox recently acquired Business Law Centre, another Eugene-based law firm. The two firms have joined forces to deliver exceptional legal counsel and seamless service to the Lane County and greater Oregon business community.

Business Law Centre was founded by Jill R. Fetherstonhaugh in 1999. Since its inception, Business Law Centre has offered innovative fee options to its small business clients including an upfront price for business entity formations. The upfront price model will now be an option for all Hutchinson Cox clients seeking to form a business entity, allowing us to assist even more entrepreneurs and start-up businesses. Now, as a Hutchinson Cox/Business Law Centre client, you will now have access to the skilled team of attorneys in a broad range of practice areas and an upfront price alternative for your business formation and other start-up needs.

We are proud to welcome Jill and the Business Law Centre team to Hutchinson Cox! To book a consultation with one of our attorneys, fill out the form below, and a member of our team will be in touch with you to schedule an initial phone call.

Book a Consultation