New IRS Employee Retention Credit Guidance: The OSHA Argument

Published: November 3, 2023 by Max Shenker

Moratorium and Withdrawal Webinar

On November 2, 2023, the IRS presented a public webinar to explain the Employee Retention Credit moratorium and ERC withdrawal program. The bulk of the webinar was used to review the processing moratorium announced on September 14 and to describe the withdrawal program, details of which were released about a month later.

During a limited question and answer segment, IRS official John J. McInelly responded to some of the questions posed by attendees. In response to a question about how long the withdrawal option would be available, McInelly indicated that the option could end as soon as the end of the year when the moratorium is scheduled to be lifted. As quoted in TaxNotes, “We do anticipate to sunset the program. We don’t have that date nailed down yet.”

McInelly also emphasized that the ERC moratorium is not a cessation of the program and that eligible employers can and should continue to file claims even during the moratorium.

Chief Counsel Memo: Government Orders and OSHA

The IRS Office of Chief Counsel released a memo on November 3, 2023, generally discussing the requirements to be considered an eligible employer under the partial suspension due to government orders test and specifically addressing the question of whether communications from the Occupational Safety and Health Administration (OSHA) are considered government orders for this purpose. Some employers have tried to claim that Covid-19 related communications from OSHA and or Section 5(a)(1) of the OSH Act, known as the “General Duty Clause,” constituted government orders that lead to a full or partial suspension of operations resulting in eligibility for the ERC. The IRS Chief Counsel memo rejects this position.

The memo reiterates previously issued IRS guidance, primarily found in Notice 2021-20, and makes the following points:

  • The law requires “two important elements to be considered an ‘eligible employer’ due to a suspension of operations. First, an employer must be subject to orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19. Second, such orders must result in a full or partial suspension of an employer’s trade or business operations.” In other words, as stated later in the memo, “In order to qualify as an ‘eligible employer’ for the purposes of the credit, an employer must be able to substantiate that orders from an appropriate governmental authority caused an employer’s trade or business operations to be fully or partially suspended.”
  • “Assumptions, vague statements, and news articles are insufficient to meet the definition of orders…. Further, recommendations, guidelines, and suggestions do not constitute orders for purposes of the employee retention credit. The language of section 2301 of the CARES Act and section 3134 of the Code requires orders; neither statute mentions recommendations, guidelines, or other informal standards.”
  • “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.”

The memo appears to break with Notice 2021-20 in setting a potentially new standard for the full or partial suspension requirement:

“In order to qualify as an ‘eligible employer’ for the purposes of the credit, an employer must be able to substantiate that orders from an appropriate governmental authority caused an employer’s trade or business operations to be fully or partially suspended…. 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.”

This appears to contradict the guidance found in Notice 2021-20 Q&A 17, “If all, or all but a nominal portion, of an employer’s business operations may continue, but the operations are subject to modification due to a governmental order (for example, to satisfy distancing requirements), such a modification of operations is considered to be a partial suspension of business operations due to a governmental order if the modification required by the governmental order has more than a nominal effect on the business operations under the facts and circumstances.”

While the Notice says that a partial suspension of operations may exist due to government-ordered modifications even while all of an employer’s operations otherwise continued, the new Chief Counsel memo suggests that if the employer was able to operate despite the governmental order, “then the employer’s operations are not fully or partially suspended.” Indeed, the memo’s review of existing guidance on page 5 summarizes the conclusion of Q&A 18 as saying that it “provides that modifications altering customer behavior (for example, mask requirements or making store aisles one way to enforce social distancing) or that require employees to wear masks and gloves while performing their duties will not result in more than a nominal effect on the business operations,” without referencing the discussion in that Q&A of the factors for determining if government-ordered modifications caused a partial suspension despite the employer’s ability to continue operations.

However, on page 12, the Chief Counsel memo returns to Q&A 18 and acknowledges the earlier guidance that modifications could result in a partial suspension, but “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.”

In its conclusion, the memo does note that “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.”

The publication of this memo, along with a similar memo published in July about the supply chain argument for partial suspension, are indicators of the types of claims about which the IRS has been expressing concern. The memo also serves as a useful window into the IRS’s current thinking about the complex guidance in earlier Notices. Some will try to claim that the IRS is issuing new guidance or is changing the rules, but, with the exception of the possible contradiction noted above, this memo is consistent with information that has been available for over two years.

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