Surviving COVID-19: The Small Business Perspective

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Dean Reuter:  Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at fedsoc.org.

 

 

Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon’s topic is titled, “Surviving COVID-19: The Small Business Perspective.” My name is Micah Wallen, and I'm the Assistant Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion are those of the expert on today's call.

 

      Today we are fortunate to have with us Karen Harned, who is the Executive Director of the National Federation of Independent Business at the Small Business Legal Center. After our speaker gives her opening remarks, we will then go to an audience Q&A. Thank you for sharing with us today. Karen, the floor is yours.

 

Karen Harned:  Great. Thanks for having me, Micah. And thanks for those on the call that are joining us. So yes, I decided when I was trying to think about the best way to prepare for this call to just take, as I told Micah, a trip down memory lane and go all the way back in the time machine to March 9th of this year. Which was just a completely different outlook than the one we are seeing right now for America’s job creators.

 

      On March 10th, the NFIB’s Research Center released its latest monthly data. If you don’t follow this, I really do encourage you to follow it. Every month, the legal -- I’m sorry, the Research Center at NFIB has issued its Optimistic Index for Small Business Owners. And this is something that we’ve been doing since the ‘70s, and, in fact, has been shown over the decades now to be one of the best indicators of how the economy is doing and how the prediction of the future of the economy is likely to be.

 

      And so with that as background, this reading for February, which was released at the beginning of March, we were in the top 10 percent of readings in the 46-year history of this survey. It was up 2 points to 104.5, which, again, that reading just for context is among the top 10 percent readings in the history of the Index. And, importantly, the biggest issue facing small business owners, and it had been one that had been facing them as their number one issue for months if not the last couple years, was finding qualified workers.

 

      So then, as you know, COVID was already in the news, but it was still not on our shores, or at least at the time we didn’t really think it was, in any meaningful way, in the States. But the very next day, March 11th, we are on the hill as the COVID crisis is starting to become more of a thing, if you will. This is just two days or three days before the creation of the task force at the White House and bringing in Dr. Birx. Or maybe the task force was created but Dr. Birx came that Saturday, I recall it.

 

      But anyway, the House held a hearing trying to move legislation that would require all businesses to provide paid sick leave for their employees. And a lot of conversation, obviously, at that hearing was talked about the COVID virus and the importance for that. And NFIB has for literally, at least, two decades in our member ballot questions where we survey all of our members and ask about different legislative proposals, their opinions, overwhelmingly our members have said that kind of a paid-leave, one-size-fits-all band aid is just bad for small business, even in the best of times, because it’s one-size-fits-all. It doesn’t account for flexibility. A lot of our small business owners do PTO type of arrangements with their employees so that it’s sick and vacation are clumped together. By just singling out paid sick leave, that can mess with your vacation time. Over 70 percent of small business owners—72 percent I think it was—already offer paid leave. So the ones that aren’t offering it are not offering it because they can’t afford it.

 

      So the next thing you know -- so that next week on March 13th, we did our survey on coronavirus impact on small businesses. And so this, again, was at the very early stages of the virus, and it was just not really as prominent at all as it is now in the U.S. as far as an issue. So not surprisingly, the vast majority, 74 percent of small business owners, in that report were not currently impacted by the outbreak. But 23 percent were.

 

      Then three days later we’re writing a letter to the House of Representatives as their doing their first response to coronavirus. And that is the Families First Coronavirus Response Act. And in that, lo and behold, we see a new requirement, not just for paid sick leave, but paid family leave. If you have to go take care of a child and no real exemption for any business, except, interestingly, for those that had more than 500 employees. So if you had more than 500 employees, you did not have to comply with this new paid sick leave, paid family leave mandate. But if you had under 500 employees, you did.

 

      So this is the footing on which small business owners are going into the COVID crisis, knowing that now they have a new leave requirement on their backs that they’re going to have to negotiate and learn about and implement for their business, as you're to see as the crisis is heating up.

 

      So then NFIB really was the only one during the House consideration of this legislation that stood up and said “This is not good. This is not good for America’s business owners. This is particularly not good for America’s small business owners.” We were joined the following week by 104 other groups, or 105 business groups saying what we had said that Friday before. But at that point, the House bill had already been passed. The Senate was already out of session, and the die was cast, so to speak, that this legislation was going to go through. To its credit, the Senate did make some changes on the edges that made that paid leave requirement a little more palatable. But this was when we’re also seeing the COVID crisis completely hit our small business community Main Street. Because on March 23 we see that 76 percent of small businesses are reporting that they are negatively impacted by the virus, up from, as you can remember, just 23 percent a couple weeks earlier.

 

      And so this was now -- we are getting calls at this point, at NFIB’s Small Business Legal Center, and at NFIB with small business owners really starting to, for a lack of a better word, flip out. They were “How am I going to survive this?” What I find interesting at this period of time is these business owners just had a new mandate put on them, one that they have overwhelmingly said for decades that they cannot afford, and honestly, a lot of them would raise it in our calls but most were just trying to figure out what they were going to do about the fact that their business is going to be -- they were seeing the writing on the walls. Even if their business wasn’t shut down, they were not going to have customers. Business as they knew it was not going to be the same.

 

      I just feel like the first lesson learned from this is -- and it’s not necessary a surprise to many of us that have a cynical view of Congress, but they really were not helpful here. They were the opposite of helpful. Their first act to this crisis was to put a new mandate on America’s small business owners and carve out the big businesses to boot. But none of that really got a lot of attention in the media because of all of the closings that were starting. And so the next thing you know, small business owners, which looking at a poll—now this is obviously dated but I don't think it would’ve been much different if you’d taken it at the end of last year, 2019—really only seven percent of small business owners, prior to this crisis, reported that they had engaged with some SBA or SBA-sponsored activity, the Small Business Administration. And not surprisingly if they had, it was, in two-thirds of the cases, finance related.

 

      So small business owners really never accessed -- at least the ones that we represent, which is true Main Street, not publicly traded, average employee size is 10, 20 employees at most. They just had never really engaged with SBA. They’d never gone to the government looking for a loan or any bailout, so to speak. And here we are getting call, after call, after call that have continued to this day—we have 300 in the inbox when I woke up this morning—“How do I get a loan? How do I get financial aid? I need help. My business is dying, and if I do not get financial support, I will not survive this.”

 

      So in the positive category, Congress did create a loan program that was outside of SBA that was issued by -- that was going to be administered by private lenders, private banks. And that’s now what we know as the Payment Protection Program, which the House passed new legislation yesterday, or the day before -- or no, the Senate the day before, Tuesday, funding -- giving more funding to it because it had already run out of money after two weeks. And the House is expected to vote on that today.

 

      That program is good because -- the positives of it are you get the money; it’s a forgivable loan if certain requirements are met; and it’s administered by the banks. And the reason that’s positive is because, quite frankly, the banks were better positioned to get the money out the door fast.

 

      SBA has never seen, as I just mentioned with my data there—7 percent of small business owners saying they never even engaged the Administration, Small Business Administration, prior to this crisis. Now we’ve got everybody pounding at their doors. Well, SBA had another loan that was not reported that much in the news, the Economic Injury Disaster Loan that it was also offering during the COVID crisis. But it ran out of money before it even got started. The site for SBA reportedly was down for a whole day—I think it was April 5th or 6th—and it took a while, quite frankly, for SBA to even known up to that fact and say, “Okay, we can’t accept any more applications because we don’t have any money.”

 

      But meanwhile, on the [Payment] Protection side, the private lenders got up and running quicker but not as fast -- it did still take a little bit of time to get up and running because this was a brand new program. But we were seeing issues that first weekend after it opened on April 3rd, that Friday, with banks if you didn’t bank at that bank, you were not getting a loan through them. It did not matter. They just were not going to serve anybody that was not their customer. Even the larger banks—Bank of America, all of those—having a credit card with them was not enough. You had to have had an actual lending relationship with them, traditional lending relationship with them to be able to get these loans. So we saw that a lot of small business owners were being -- they had their application filled out but they had nowhere to send it. Or they’d send it to their local bank and they were just on a list but it wasn’t being processed. Meanwhile, they're trying to survive for their lives.

 

      After about -- and so we did do a little survey shortly after that and learned that -- well, first, we did part three of our COVID survey and looked at what was happening with the small businesses. At this point now on April 2nd, we’re up to 92 percent of small businesses owners being negatively impacted by this virus. And then we learned that a lot of them were laying off. A lot them were just -- if they could furlough and keep the benefits for employees, they were trying to do that. But some just had to completely terminate.

 

      And then about -- well, I guess it was just last week -- I’m sorry. What was that? Oh, I’m sorry. So then on April 7th, not surprisingly, Optimism for Small Business ends its historic 39-month run. We fell 8.1 percent in March. I can’t imagine that this next one is going to be anything other than completely disastrous. We found that 70 percent of small businesses had applied for these PPP loans. That was as of April 9th. Nearly half had applied for the SBA-administered loan that really didn’t ever get any money.

 

      So not surprisingly, small business owners -- we don’t really know anybody I don't think, or if we do, it’s like a handful of members that have ever gotten one of those EIDL loans. But the PPP loans are coming in. Members are starting to get that. But my thing on that is what we’ve learned now that we’re two, three weeks into this program, the Payment Protection Program, it’s very counterintuitive for small business owners. It’s very counterintuitive.

 

      And that’s my other big lesson from this is. It was -- so much was counterintuitive about how Congress and the administration responded to this crisis in that you're adding a mandate on small business owners at the worst time to possibly do that, right? That’s number one. But number two, with the Payment Protection Program, that was trying to incentivize businesses of all sizes—well, particularly small businesses—to keep their employees on payroll, even though they had literally nothing for them to do. So they were getting a loan and you only get it paid back—it’s more of a grant, if you will—if you -- if 75 percent of that goes to payroll. So 75 percent of that loan has to go to payroll for you to get grant forgiveness there.

 

      And my point in telling this is that we have received a number of calls where we are having to explain to small business owners, no, it’s fine. If you pay Joe with that money, even though Joe is sitting at home doing nothing, absolutely nothing for you -- in fact, that is what the program was created for. And that is counterintuitive too. So against all of these crosswinds, it seems like many of the political, quote/unquote, solutions are counterintuitive. I’m not saying they're all bad because I do think in the end the PPP loan program is a good program. I just wish more of the money was going to actual small business owners instead of some of the bigger restaurant chains, which is what we have been seeing, and I think you’ve probably been seeing in the press.

 

      And so all we have been doing since the first set of funding came through is ask for this new set of funding, which has either happen or will happen today. And honestly, I don't know if the new set of funding is going to get us across the finish line because we had so many small business owners really waiting in the queue with their PPP loan application already processed but not funded prior to today. So does that mean that most, if not all, the money that will get approved today is already accounted for? That’s the question we’re going to be learning the answer to over the next few weeks.

 

      Bright spots that I will say are, again, I did appreciate -- I think we appreciated, although it’s had its foibles, when you're bringing in the private sector to help solve some of these problems, it’s just more efficient because they just have the capacity. We learned through the EIDL process that SBA just couldn’t ramp up as quickly as needed to do a traditional SBA loan that you would see after, for example, a hurricane or other type of disaster like that where small business owners will go and try to access these SBA loans.

 

      But the other thing that we have, and the other bright spot I will say, is on the paid leave side, and even really on the PPPL side, maybe I don't like all the answers, but what I do like is we’re getting answers. What I do like -- and by that I mean Department of Treasury and the Department of Labor have been tireless in trying to get guidance out to people immediately that’s straightforward, that a small business owner can read the question, read the answer and understand what their supposed to do with regards to the Paid Leave Program and the PPPL programs.

 

      Now for those of us who have been arguing against guidance for how many decades now, this is going to be an interesting retrospective. But for right now when people are just in survival mode, having this quick turnaround on guidance has been really good. And I’m hopeful that as we unwind this and people move forward, relying on it will be a safe harbor, so to speak, for small business owners if challenged by employees or others.

 

      And the other thing I would say is another shout out to the Department of Labor’s Wage and Hour Division in particular. Because with that paid sick leave and paid family leave requirement, that’s normally a regulatory process that you're going to see roll out over a period of at least a year, if not two. And they did it in a couple of weeks. Again, we hated it. Not a fan. But they got what they got from Congress. But they did go in and had a really important meeting on March 20th in which they asked all stakeholders to call in. They literally went for an hour and half to two hours answering every question that was in the queue on what people’s questions were then before any ink was even on the paper that I could tell as to what the final regulation would be. This is just working with the statute as enacted.

 

      And a lot of us came away from that call unsatisfied because there were no answers given, no guidance given. But it was clear when you looked at the guidance that started coming out and the ultimate final rule that the agency issue that they were in hearing mode. And not just for the employers. I would say the employees were heard as well. And they followed up with an online dialogue where you could submit comments—and we did at NFIB—and people could vote on those comments.

 

      I don't know that you want to do it for every rulemaking, but I do think that initial call, that at the first point seemed so unsatisfying, ended up being a tool that I might -- I would advocate agencies consider in the future because the cake wasn’t baked. The cake wasn’t baked. They didn’t know what they were going to do, and they got to hear the problems first, the questions first, so that they could navigate those as they were trying to issue the rules and provide more legal guidance for the implementation of this rule. And ultimately, they made it much less bad, if you will, for America’s small business owners than it otherwise could’ve been.

 

      So I want to leave on a positive note. I also am encouraged -- I should say now the debate is definitely shifting to opening up America again. We are definitely seeing small business owners across the country that are ready to open their doors. But they are concerned about their employees and their employees’ health and their safety too. So it’s going to be interesting as the states start experimenting here with timing and types of businesses they open up and the rules surrounding that, how it works.

 

      But getting America back to work is critical, I can say, because our first study on all of this, as far as what the runway was for the average small business owner to stay in business after this was all over, was anywhere from two weeks to two months but not longer. You already had a lot of business owners that, sadly, are not going to be coming back. Hopefully we can keep the rest that are still in business today in business in the future. And with that, I’ll take any questions people might have.

 

Micah Wallen:  Wonderful. All right, let’s go ahead and open up the floor for audience questions. We’ll now go to our first caller.

 

Mike Daugherty:  Good afternoon, Karen Harned. Mike Daugherty, here. How are you?

 

Karen Harned:  Oh, hey, Mike!

 

Mike Daugherty:  How are you doing?

 

Karen Harned:  Good, good.

 

Mike Daugherty:  So I’ve got a question about insurance because what I’ve seen with every policy—and, I mean, I’ve to general liability insurance, businesses. I’ve got a lot of rental properties in Florida and Georgia and Nevada. And the entire insurance industry is just running to not pay for this stuff, by not calling the virus a physical damage. And this is really going to train wreck a lot of businesses that were going to file claims. And it’s going to be, then, what I call the long jump up justice mountain because it’s going to be a really expensive take on insurance carriers, which is about as cheap as taking on the government.

 

      So have you seen anything with -- anyone dealing with these insurance carriers not wanting to pay for claims?

 

Karen Harned:  Right. So this is an issue that we are definitely hearing about. I can honestly say at the federal -- so basically as I can tell, Mike, this issue is one that is starting in the states. That’s where we’re hearing about it. We’re hearing about it from our state directors. And then the federal -- I cannot remember the name of the Congress person, I think it’s a New Jersey member, is doing some exploration of will there need to be some legislative fixes to this. I think it’s just too early to tell if there’s going to actually be legislation.

 

      As far as your experience, we’ve definitely heard from small business owners about that, though, honestly, not as many complaints as you would think. I think, truthfully, again, most of ours—maybe they didn’t have that insurance, at least our members, or those that did are just -- they're just into “How do I get a loan?” you know? I mean, everything right now --

 

Mike Daugherty:  -- That’s right. No, I don't think anyone’s even gone to really look at their insurance policy yet. We’re still kind of spinning out here.

 

Karen Harned:  Right. No, that’s exactly -- it’s just a new day and every day is just how do I make it through the day? And so that is an issue that I think is one to watch maybe moving forward. And I would predict that if you see legislation on it, which you may very well, it’s going to start in the states, and that might not be that far away. I mean, I could see that happening this year, even though some sessions are already out. But I could be wrong on that. But it does seem like we’re hearing lots from the states on that. So I don't know if that helps you, but that’s just my experience on what we’re hearing.

 

Mike Daugherty:  No, it’s great. It’s an issue that’s going to come later. I just want to make sure it’s on top of radar because it’s the next thing that’s going to go down. Thank you.

 

Micah Wallen:  Karen, is there anything else you wanted to cover today?

 

Karen Harned:  No, I just appreciate you doing this forum. And I do encourage all of you to shop small moving forward because our small business owners are going to need all of us to bring Main Street back.

 

Micah Wallen:  And actually we did just get one question in, so we’ll go ahead and -- we’ll fit that caller in before we close today.

 

Jim Gagel:  Thank you very much. This is Jim Gagel. I’m an attorney here in Coral Gables, Florida. Great information that you’ve given us. I’m just wondering does anybody have any idea as to the number of applications, the amount of money being requested? Does anybody have any idea as to whether $350 billion plus $250 billion plus this extra $60 billion, how does that match up with the demand for the funds? How did they come up with those numbers? And how do they know whether those numbers have any relationship to reality? That’s basically my question.

 

Karen Harned:  Well, and that’s a great question, and sadly, I don't know the answer. I mean, this is part of the problem with this process. Nobody knows the answer to that question. And I don't know -- I do think we’re going to know sooner rather than later, though, because like I mentioned in my remarks, there were a number of people that we know of through our research that have been in the queue but the funding was dried up before they could get their loan. Were they committed? Were they part of the commitment of the last tranche of money or this tranche of money? I think that’s the question.

 

      And to your point, nobody’s really been, as far as I can tell, truly monitoring this to know what is actually going to be needed. I just -- I feel like everybody is completely shooting in the dark. And then the other issue that you have with these loans is they're supposed to -- the 8-week window of forgiveness originates when the loan is originated, not when they money is received, and it’s not tied to payroll. And so what is all that going to mean? There are real life consequences for all that, real financial consequences for small business owners. So I don't know -- they're already talking today about yet another round, which I personally am concerned is going to be needed. But will a round after that be needed to? And a round after that?

 

      I just -- I don't know when it’s going to stop, and I don't really think anybody does, if I’m being completely honest.

 

Micah Wallen:  All right. Well, on behalf of The Federalist Society, I’d like to thank our expert for the benefit of her valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you everyone for joining us. We are adjourned.

 

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Dean Reuter:  Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.