May municipalities use ARP funds to supplement salaries for municipal employees whose salaries were reduced in 2020 due to the COVID-19 pandemic?

The American Rescue Plan Act of 2021 (“ARP”) Coronavirus State and Local Fiscal Recovery Funds (“CSLFRF”) Final Rule, issued by the U.S. Department of the Treasury (“Treasury”) on January 6, 2022, clarifies how municipalities can address the issue of municipal employees who faced salary reductions due to the COVID-19 pandemic and the circumstances in which those employees may receive supplemental salaries.

Municipalities that furloughed employees or reduced employee pay are eligible for funding under the Final Rule. Specifically, the pay reduction or furlough must have been primarily and substantially due to the public health emergency or its negative economic impacts, and recipients must provide supporting documentation to that effect.[1] The Final Rule also indicates that unemployment insurance benefits received by the furloughed employee during the furlough period must be taken into account in order to meet the requirement that the additional funding is reasonably proportional to the negative economic impact of the pay cut or furlough of the employee.[2]

The Final Rule maintains the provisions related to premium pay for workers who performed essential services during the COVID-19 public health emergency.[3] The ARP as well as Treasury’s Final Rule authorize recipients to use CSLFRF to provide premium pay to eligible workers performing duties during the COVID-19 public health emergency that are considered “essential,” subject to certain factors and limitations detailed below.[4] Workers who do not perform work that meets the criteria to be considered essential work would not be eligible for premium pay.[5]

The Final Rule defines “premium pay” as an additional amount of up to $13 per hour paid to an eligible worker for work performed during the COVID-19 pandemic and capped at $25,000 for any single eligible worker (per period of performance for the CSLFRF program, though recipients should periodically reassess their determination of primarily dedicated staff, including as the public health emergency and response evolves).[6] The ARP defines eligible workers as those “needed to maintain continuity of operations of essential critical infrastructure sectors and additional sectors” designated as “critical to protect[ing] the health and well-being of the residents [by] each chief executive officer of a metropolitan city, non-entitlement unit of local government, or county.”[7] The Final Rule identifies 24 categories of “critical” infrastructure sectors, including health care and emergency response. While all such public employees are “eligible workers” and the chief executive (or equivalent) may designate additional non-public sectors as critical, in order to receive premium pay, these workers must still meet the other premium pay requirements (e.g., performing essential work).[8] For purposes of determining who may receive premium pay, guidance from Treasury defines “essential work” as involving regular in-person interactions with patients, the public, or coworkers, or regular physical handling of items also handled by patients, the public, or coworkers.[9] Essential work does not include any work performed while teleworking from a residence.[10] 

Treasury encourages recipients to consider providing premium pay retroactively for work performed during the pandemic, but notes that “funds may not be used to reimburse a recipient or eligible employer grantee for premium pay or hazard pay already received by the employee.”[11] Additionally, the Final Rule states that premium pay programs should “prioritize[s] low- and moderate-income persons, given the significant share of essential workers that are low- and moderate-income.”[12] Treasury’s guidance sets limits that appear to further that priority, noting that premium pay that would increase a worker’s total pay above 150 percent of the state or county average annual wage (whichever is greater) requires “written justification to Treasury detailing how the award responds to eligible workers performing essential work.”[13]

Notably, Treasury has stated that recipients should maintain records to support their assessments of premium pay eligibility, such as “payroll records, attestations from supervisors or staff, or regular work product or correspondence demonstrating work on the COVID-19 response.”[14] Treasury also advises recipients to periodically reassess their determinations. Treasury clarified its position on documenting justification on how premium pay responds to eligible workers performing essential work, noting in the Final Rule that written justification means:

a brief, written narrative justification of how the premium pay or grant is responsive to workers performing essential work during the public health emergency. This could include a description of the essential workers’ duties, health or financial risks faced due to COVID-19, and why the recipient determined that the premium pay was responsive despite the workers’ higher income.[15] 

Municipalities may consider tracking premium pay for employees separate from employees’ regular payroll through a separate billing code or account to ensure proper recordkeeping. A failure to maintain accurate records could lead to a clawback after the funds are received.

In addition to the explicit authorization of premium payments to eligible workers, the ARP authorizes certain assistance to individuals impacted by COVID-19. This can include direct financial and programmatic assistance to individuals experiencing economic harm (such as loss of employment or reduction in compensation) as a result of the pandemic.[16] This is applicable in the following areas:

1. Assistance to unemployed and underemployed workers, “including job training, for individuals who want and are available for work, including those who have looked for work sometime in the past 12 months or who are employed part time but who want and are available for full-time work”[17]; and
2. Assistance to households, including cash assistance or job training to address negative economic or public health impacts experienced.[18]

Additional information may be provided when Treasury issues new Frequently Asked Questions (“FAQs”) specific to the Final Rule, as indicated in the Interim Final Rule FAQ updated simultaneously with the issuance of the Final Rule.[19] In addition, Treasury encourages municipalities to consider the guidance issued in the Statement Regarding Compliance with the Coronavirus State and Local Fiscal Recovery Funds Interim Final Rule and Final Rule.[20]

Last Updated: February 4, 2022