The compliance requirements for airlines participating in the payroll support and loan programs initially instituted under the CARES Act in the United States continue to increase in volume and complexity with the passage of the American Rescue Plan Act of 2021. Like previous emergency funding packages, the $14 billion of direct aid for payroll support comes with many restrictions, and airlines should invest ample time and resources to understand the complex requirements and their potential impacts.
Managing complex regulatory requirements is no easy task even in ordinary times, but when airlines already face significant operational and financial challenges, the compliance requirements are a particularly weighty load. Most notably, the latest rescue package, which President Biden signed into law in March 2021, extends the reporting timelines for aid recipients for a second time, lengthening the monitoring period and further complicating data collection and reporting to the U.S. Department of the Treasury. Airlines that do not have effective systems, automated processes, segregated funds, or sufficient documentation and audit trails may struggle to demonstrate compliance with the requirements.
The Compliance Workload
The first Payroll Support Program (PSP1), which was passed in March 2020, provided $32 billion in grants and loans to assist passenger air carriers, cargo air carriers, and certain contractors with payment of employee wages, salaries and benefits. PSP1 was accompanied by extensive requirements, including quarterly reporting obligations. The due dates for submitting the reports were extended following passage of the PSP Extension Law (PSP2) in December 2020.
PSP2 provided an additional $15 billion in payroll funding to airlines, with the requirement that recipients rehire furloughed workers through March 2021. Amid national lockdowns, airlines reinstated those employees, even though many said their schedules and networks could accommodate just a fraction of them. The airlines were not only required to bring back thousands of workers who were furloughed or terminated, but also recalculate and issue backpay and benefits for each employee.
Similarly, under the latest rescue package, PSP3, aid recipients cannot carry out involuntary terminations or furloughs, or reduce pay rates and benefits of employees through the later of September 30, 2021 or when PSP3 funds are exhausted. Airlines must provide certifications to confirm compliance with a number of terms and conditions regarding their use of funds, including:
- Using payments exclusively for the continuation of employee wages, salaries and benefits
- Refraining from conducting involuntary layoffs or furloughs, or reducing pay rates and benefits, of employees
- Desisting from purchasing their own equity securities
- Desisting from paying dividends or making other capital distributions with respect to the common stock
The evidence of compliance must be documented and included in the required quarterly reports. Specifically, funding recipients must submit details regarding the expenditure of the payroll support funds, financial statements, and employee headcount and compensation. Airlines must collect, submit and maintain support for this information. This obligation will grow and become more complex as additional payroll support funds are received and employees are reinstated on the payroll. Also, as the reporting deadlines are extended and the monitoring period stretches on, required data will increase in volume, and airlines will need dedicated resources to handle this workload.
Another requirement that was introduced via PSP1 and extended with PSP2 and PSP3 relates to executive compensation. The requirement states that compensation must be capped through April 1, 2023, extended from earlier dates in PSP1 and PSP2. Under this provision, airlines must monitor changes in total compensation, severance pay or other benefits to employees and corporate officers as part of their reporting obligations. Further complexities related to headcount, payroll, benefits and executive compensation will likely exist for airlines receiving loans in addition to PSP support; however, these details have yet to be fully disclosed.
The recall provision requirement for PSP2 recipients also may create headaches for some airlines as it requires funding recipients to recall employees who were involuntarily terminated or furloughed between September 30, 2020 and the effective date of their PSP2 agreement, and have those employees return to work within 30 days. Those employees also need to be compensated for lost salary, wages and benefits no later than 30 days after their return. To accommodate the onboarding of recalled employees, aid recipients will need to process benefit enrollments and data entry updates within their systems – activities requiring coordination spanning multiple departments such as payroll, benefits and human resources as well as third-party benefit providers.
Key Considerations and What Airlines Can Do Now
Airlines should take great care in applying for and managing PSP funding, reporting on fund usage, and maintaining compliance with the various Treasury Department agreements. The Treasury Department’s inspector general has authority to audit certifications that airlines make in their PSP applications – and it’s not a stretch to predict, given the growing concern around fraud and accountability for recipients of relief funds, that certifications will be scrutinized.
As such, airlines should ensure that certifications are prudently completed and documented, and be prepared for potential audits. In many cases, they should consider bringing in their internal audit department to assist in validating their submissions as the PSP requirements are top of mind for boards of directors.
Additionally, fund recipients should stay on top of the extended reporting deadlines and monitor for potential impacts of the evolving reporting requirements. Given the varying start and end dates for each returning employee, what population of employees and data should be included in each reporting period will require careful consideration.
As more details around funding requirements are disclosed, airline teams should consider the following key questions:
- Are roles and responsibilities for performing and monitoring required compliance activities clearly documented and understood by all stakeholders?
- Have funds received from the Treasury Department been segregated to demonstrate that they are only being used for authorized purposes?
- Is the underlying data utilized throughout the compliance process complete and accurate? Is the company able to provide evidence of the completeness and accuracy of data?
- Have sufficient processes been established for reviewing certifications prior to submission?
- Are the certifications accompanied by supporting documentation in event of an audit?
- Are there processes in place to inform executive management and the board about issues of non-compliance prior to submission?
Overall, it is important for all recipients to monitor and build action plans to facilitate compliance with PSP rules and documentation requirements. Airlines may consider bringing expert help to ensure the above questions are addressed, and they will want to harness any process tools they have available, including robotic process automation, to better manage the time-intensive process and volume and to avoid manual processing errors.