The Internal Revenue Service (IRS) has provided clarifications of its position on a widely promulgated theory by numerous Employee Retention Credit (ERC) consultants, which has implications for a significant cohort of employers claiming eligibility for the ERC. This clarification pertains to interpretations of guidance issued by the Occupational Safety and Health Administration (OSHA), as detailed in the IRS General Legal Advice Memorandum (GLAM) AM-2023-007.[1]

Although the General Legal Advice Memorandum (GLAM) does not constitute official guidance that binds the IRS, taxpayers, or the judiciary, it offers employers valuable perspective on the probable stances IRS agents may adopt in response to claims predicated on the OSHA directives outlined within the memorandum.

IRS Framing of the Issues and Facts

Consistent with the customary structure of IRS memoranda, the GLAM initiates its discourse by comprehensively delineating the matters it intends to address.

ISSUE:

Whether an employer may rely on communications1 from the Occupational Safety and Health Administration (OSHA) on mitigating and preventing the spread of COVID-19 in the workplace to meet the definition of an “eligible employer” under section 2301(c)(2)(A)(ii)(I) of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136, 134 Stat. 281 (March 27, 2020), and section 3134(c)(2)(A)(ii)(I) of the Internal Revenue Code (Code).[2]

Subsequently, the IRS outlines two distinct factual scenarios to be analyzed, which the GLAM will deliberate upon in its concluding section.

FACTS:

Scenario 1

Employer A is located in a state and a local jurisdiction that lifted all COVID-19 related health orders and restrictions in the first calendar quarter of 2021. At that time, Employer A ceased any mitigation measures other than encouraging employees to wear masks and practice routine hygienic practices such as frequent handwashing. Employer A claimed the employee retention credit in the second and third calendar quarters of 2021 on the basis that the operation of Employer A’s business was partially suspended under section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(A)(ii)(I) of the Code by the communications from OSHA.

Scenario 2

Same facts as Scenario 1, except that prior to 2020, Employer A’s employees teleworked between two to three times a week. In March 2020, Employer A allowed employees to telework or work remotely full-time and continued this policy through the end of the third calendar quarter of 2021.[3]

The IRS moves on to analyze whether either (or both) of these employers can qualify for the employee retention credit for the various quarters based on specific OSHA guidance.

OSHA Guidance Issued in 2020 and 2021

The analysis and conclusions set forth make it evident that the IRS typically does not concur with the notion that various pieces of OSHA guidance can demonstrate that a taxpayer was under a government order causing a full or partial suspension of their trade or business operations. The prevailing view at the IRS is that such guidance does not constitute a compulsory directive. Additionally, it is perceived that the guidance does not sufficiently demonstrate a restriction on commerce, travel, or group meetings, nor can employers substantiate that the effects were substantial enough to cause a full or partial cessation of the business's activities.

The IRS summarizes the guidance issued by OSHA during the period the ERC was in effect as follows:

OSHA published on its website communications related to COVID-19 during both 2020 and 2021. The communications included instructions to field offices and CSHOs as well as nonbinding guidance for employers and employees.[4]

The Interim Enforcement Response Plan for Coronavirus Disease 2019 (COVID-19) is the first guidance discussed.

Interim Enforcement Response Plan for Coronavirus Disease 2019 (COVID-19), April 13, 2020 provided “instructions and guidance to [OSHA] Area Offices and . . . CSHOs[] for handling COVID-19-related complaints, referrals, and severe illness reports.” The memorandum was subsequently updated three times (May 19, 2020; March 12, 2021; and July 7, 2021) (hereinafter collectively referred to as the “OSHA memo” or “Interim Enforcement Response Plan”). The OSHA memo provides guidance to help CSHOs identify workplaces and job tasks with a risk-based potential for COVID-19 exposures and explains that workplace exposures to COVID-19 may depend on a variety of factors. Each version of the OSHA memo contains an Attachment 1 providing “Specific Guidance for COVID-19 Enforcement.” In all iterations of the memo, Attachment 1 provides that various OSHA standards may apply to COVID-19 hazards, including standards for personal protective equipment (PPE), respiratory protection, and sanitation, and that the General Duty Clause of the OSH Act may also apply. All versions of Attachment 1 also state that compliance personnel should consult the most current guidance from the Centers for Disease Control and Prevention (CDC) in assessing potential workplace COVID-19 hazards. In the document, OSHA also recommends implementing multiple layers of controls to mitigate risks (e.g., implementing physical distancing, maintaining ventilation systems, and properly using face coverings or PPE when appropriate.).[5]

The GLAM emphasizes that the heading of the document expressly states that the guidance does not impose additional legal obligations on employers.

As disclaimed in the heading of the document posted on the OSHA website, “OSHA requirements are set by statute, standards and regulations” and interpretations (including those contained in the OSHA memo) “cannot create additional employer obligations.” The OSHA memo is not addressed to employers. Additionally, nothing in the OSHA memo establishes a blanket mandate or any new requirements applicable to all workplaces. The OSHA memo simply contains instructions and guidance for OSHA field personnel with regards to evaluating and addressing workplace COVID-19 hazards.[6]

Further, the GLAM details the instructions set forth in the “Protecting Workers: Guidance on Mitigating and Preventing the Spread of COVID-19 in the Workplace,” which is designed to assist employers in safeguarding their workforce from COVID-19-related risks.

Protecting Workers: Guidance on Mitigating and Preventing the Spread of COVID-19 in the Workplace, January 29, 2021 (updated June 10, 2021 and August 13, 2021) (hereafter collectively referred to as “Protecting Workers guidance”), provides guidance on the OSHA website to help employers protect workers from COVID-19 hazards. As noted in the Purpose section, although the guidance references “mandatory OSHA standards,” the recommendations in the guidance “are advisory in nature and informational in content and are intended to assist employers in providing a safe and healthful workplace free from recognized hazards that are causing or likely to cause death or serious physical harm.” As further noted in the Scope section, the guidance “is not a standard or regulation, and it creates no new legal obligations.”[7]

The Protecting Workers guidance on OSHA’s website includes information about how employers can implement multi-layered interventions to protect workers and mitigate the spread of COVID-19, including information about (1) facilitating employees getting vaccinated; (2) instructing workers who experience COVID-19 symptoms to stay home from work; (3) educating and training workers on the employer’s COVID-19 policies and procedures; and (4) maintaining ventilation systems.[8]

Finally, the GLAM discusses three additional pieces of OSHA guidance.

Directive Number CPL 2-0.125, effective February 25, 2000, provides guidance to OSHA’s compliance personnel about inspection policies and procedures concerning worksites in an employee’s home. This guidance states that OSHA respects the privacy of the home and has never conducted inspections of home offices.

Section VII of Directive Number CPL 2-0.125 defines “home-based worksite” as the areas of an employee’s personal residence where the employee performs work of the employer and “home office” as office work activities in a home-based worksite (e.g., filing, keyboarding, computer research, reading, writing). Such activities may include the use of office equipment (e.g., telephone, facsimile machine, computer, scanner, copy machine, desk, file cabinet).

Section IX of Directive Number CPL 2-0.125 provides that OSHA will not conduct inspections of employees’ home offices nor will OSHA hold employers liable for employees’ home offices. Furthermore, OSHA does not expect employers to inspect the home offices of their employees.[9]

Taxpayers’ Positions That This OSHA Guidance Represented Government Orders that Fully or Partially Suspended Their Business

The GLAM observes that certain taxpayers have sought to leverage the aforementioned OSHA guidance as a basis to substantiate their eligibility for the Employee Retention Credit (ERC), contending that such guidance resulted in a full or partial suspension of their business operations.

OSHA is one of the many federal agencies that released guidance and general recommendations related to COVID-19 during the pandemic. Some taxpayers have argued that their businesses were fully or partially suspended for purposes of the employee retention credit because OSHA communications, including those described above, constituted an “order” that suspended the operations of their trade or business.[10]

A principal concern of the IRS is that the aforesaid OSHA guidance does not equate to governmental mandates that employers were obligated to comply with. Moreover, such guidance did not fulfill the criteria of having been established with the intention to restrict commerce, travel, or group meetings as a response to COVID-19

To meet the definition of an eligible employer due to a suspension of operations, an employer must be able to identify orders from an appropriate governmental authority limiting commerce, travel, or group meetings due to COVID-19 that cause a full or partial suspension of the employer’s trade or business operations. Assumptions, vague statements, and news articles are insufficient to meet the definition of orders for the purposes of qualifying as an eligible employer under section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(A)(ii)(I) of the Code. 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. [11]

The memorandum transitions to a detailed examination of what constitutes an 'order,' adopting an interpretive approach that the agency anticipates would align with judicial reasoning should the courts be called upon to resolve this matter.

Neither section 2301(c)(2)(A)(ii)(I) of the CARES Act nor section 3134(c)(2)(A)(ii)(I) of the Code explicitly define the term “orders.” Therefore, accepted principles of statutory construction will generally apply to determine the meaning of the term.

Courts have interpreted undefined terms with the ordinary meaning of the term at the time Congress enacted the statute. See Wisconsin Central Ltd. v. U.S., 138 S. Ct. 2067, 2070 (2018) (citing to Perrin v. United States, 444 U.S. 37, 42, 100 S. Ct. 311, 62 L.Ed.2d 199 (1979)). “To discern that ordinary meaning, those words ‘must be read’ and interpreted ‘in their context,’ not in isolation.” Southwest Airlines Co. v. Saxon, 142 S. Ct. 1783, 1788 (2022) (quoting Parker Drilling Management Services, Ltd. v. Newton, 139 S. Ct. 1881, 1888 (2019)).

Since the CARES Act and the ARP were passed in 2020 and 2021, respectively, contemporary meanings of the word “order” will generally apply. An “order” is generally understood to be a command or mandate delivered by a government official. See, e.g., Black's Law Dictionary (11th ed. 2019) (“order n. (16c) 1. A command, direction, or instruction. See MANDATE (1). 2. A written direction or command delivered by a government official, esp. a court or judge. The word generally embraces final decrees as well as interlocutory directions or commands.”).

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.[12]

Nothing in section 2301 of the CARES Act or section 3134 of the Code expands the definition of a government order to include guidelines that do not place mandatory obligations on employers. As explained above, the language of section 2301 of the CARES Act and section 3134 of the Code requires orders.[13]

The analysis progresses to evaluate whether there is a specific definition of 'orders' within the OSHA framework that could be pertinent. It concludes that no such specialized definition applicable to the situation at hand exists.

In some instances, the governmental authority used by the employer to claim eligibility has its own statutory definition of the term “orders” which can be used to evaluate whether a particular statement or communication made by that authority constitutes an order for the purposes of the credit. General, nonbinding guidance is not considered an “order” under OSHA’s statutory authority provided in the OSH Act. The term “order” is used in the OSH Act as an action directed at a particular employer or applicable to an order permitting a variance from a standard or a final order after OSHA has identified a violation and issued a citation. See 29 U.S.C. § 655(b)(6)(A) and § 655(d); 29 U.S.C. § 659.

OSHA provided recommendations throughout 2020 and 2021 on how employers could make their workplaces safer for employees and how to comply with pre-existing standards. Examples include OSHA’s Interim Enforcement Response Plan and OSHA’s Protecting Workers guidance. These OSHA communications do not fall within the meaning of the term “orders” as it is used in the OSH Act.

Given that the communications disseminated by OSHA do not conform to the ordinary meaning of the term “orders” at the time Congress enacted the statute and do not conform to the meaning of the term “orders” in the OSH Act, these issuances are not “orders” for purposes of the credit and cannot be used to claim the credit by employers, even if employers took steps in response to the communications.[14]

Orders Limiting Commerce, Travel, or Group Meetings Due to COVID-19

The IRS also highlights that any binding guidance from OSHA, which could be considered authoritative, precedes the onset of the COVID-19 pandemic.

To be considered an “eligible employer” for the credit, an order used to claim the credit must be both (a) from an appropriate governmental authority and (b) limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to coronavirus disease 2019 (COVID-19).

All standards referenced in OSHA communications discussed in this document (whether or not they are orders) applied to occupational exposure to infectious diseases prior to the emergence of COVID-19. For example, the pre-existing standards applicable to infectious diseases referenced in the OSHA memo include:

Recording and Reporting Occupational Injuries and Illness, 29 CFR Part 1904
General Requirements – Personal Protective Equipment, 29 CFR Part 1910.132
Respiratory Protection, 29 CFR Part 1910.134
Sanitation, 29 CFR Part 1910.141
Specification for Accident Prevention Signs and Tags, 29 CFR Part 1910.145
Access to Employee Exposure and Medical Records, 29 CFR Part 1910.1020
General Duty Clause, Section 5(a)(1) of the OSH Act

An employer cannot simply reference pre-existing OSHA standards to claim entitlement to the credit due to a full or partial suspension of operations. Assuming, for the sake of argument, that the above pre-existing standards referenced in the OSHA memo are “orders” for purposes of applying for the credit, an employer must still demonstrate how the pre-existing standard, as applied to its particular circumstances due to COVID-19, was implemented to limit commerce, travel, or group meetings. In this context, “commerce” is generally understood to mean the exchange of goods and services. See, e.g., Black's Law Dictionary (11th ed. 2019) (“commerce n. (16c) 1. The exchange of goods and services, esp. on a large scale involving transportation between cities, states, and countries”). These determinations will depend on the specific facts and circumstances in each case.[15]

Full or Partial Suspension of Operations

Even assuming taxpayers can successfully argue that they have pinpointed a governmental order from OSHA that imposed restrictions on commerce, travel, or group gatherings (whether for business, social, religious, or other reasons) due to COVID-19, they must also furnish concrete evidence of how such an order directly affected their business operations. Specifically, they need to demonstrate that this led to a full or partial suspension of their business activities.

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. See Section III.N., Q&A 70 of Notice 2021-20; see also Treas. Reg. § 31.6001-1 and Treas. Reg. § 1.6001-1. 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.

To fall within the provisions of Section III.D., Q&A 11 of Notice 2021-20, the determination of whether an employer experienced a full or partial suspension of operations depends upon whether more than a nominal portion of an employer’s trade or business operations was suspended by a governmental order or a governmental order had more than a nominal effect on an employer’s trade or business operations.

While these determinations depend on the specific facts and circumstances of each case, Section III.D., Q&A 18 of Notice 2021-20 provides that modifications altering customer behavior (for example, mask requirements or making store aisles one way to enforce social distancing) or requiring employees to wear masks and gloves while performing their duties will likely not result in more than a nominal effect on the business operations. The recommendations set forth in OSHA guidance related to modifications, such as requiring masks, providing sanitization supplies, and encouraging social distancing, are not considered orders from an appropriate governmental authority described in section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(A)(ii)(I) of the Code. Moreover, even assuming, for the sake of argument, that the recommendations were orders described in section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(A)(ii)(I) of the Code, they were not likely to impact an employer’s ability to operate their trade or business. 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.[16]

IRS Conclusions

As might be anticipated, the IRS determines that it is exceedingly improbable for taxpayers to qualify for the Employee Retention Credit on the grounds of a full or partial suspension of their business operations attributed to what could be deemed a government order from OSHA.

Generally, communications from OSHA are not considered “orders from an appropriate governmental authority that limit commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to the coronavirus disease 2019 (COVID-19)” for purposes of section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(A)(ii)(I) of the Code. The language of both section 2301 of the CARES act and section 3134 of the Code require an employer be subject to “orders” and that such orders “limit commerce, travel, or group meetings . . . due to the coronavirus disease 2019 (COVID–19).” Generally, OSHA communications are insufficient to meet the requirements under section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(ii)(I) of the Code.

During the time an employer could be eligible to claim the credit due to a full or partial suspension of operations, OSHA produced guidance interpreting pre-existing standards and the General Duty clause in light of COVID-19 and additionally provided nonbinding recommendations for employers on the official OSHA website. OSHA did not adopt and enforce any widely applicable standards that limited commerce, travel, or group meetings due to COVID-19.

Because OSHA communications are not considered “orders from an appropriate governmental authority,” even if an employer took steps following guidance or recommendations disseminated through OSHA communications, the employer will not be considered an eligible employer for purposes of section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(ii)(I) of the Code. [17]

The IRS acknowledges the possibility that a state or local governmental entity might have elected to enforce these OSHA recommendations as mandatory. In such instances, it is conceivable that an employer could demonstrate how adherence to these mandated recommendations resulted in a full or partial suspension of their business operations.

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. To fall within the provisions of Notice 2021-20, employers must be able to demonstrate that implementation of the recommendations suspended more than a nominal portion of the employer’s trade or business operations or had more than a nominal effect on the employer’s trade or business. Modifications must have had more than a nominal effect on the employer’s business operations. Modifications that required minor alterations to customer behavior or employee behavior (for example, masking or making store aisles one way to enforce social distancing) most likely did not result in more than a nominal effect on business operations because generally employers could continue operation of their trade or business without a reduction of their ability to provide goods or services in the normal course of the employer’s business.

The memorandum concludes by providing the agency’s conclusions for each of the fact scenarios given at the beginning of the memorandum.

Scenario 1

Employer A must be subject to orders from an appropriate governmental authority to be eligible for the employee retention credit. Under these facts, Employer A is not subject to any governmental order in the second or third calendar quarters of 2021. As stated above, orders from an appropriate government authority involve mandates or commands, or an order as defined under the relevant statute. OSHA communications did not mandate that employers implement specific modifications to an employer’s trade or business operations and did not constitute an “order” as that term is used under the OSH Act.

Furthermore, Employer A cannot demonstrate that encouraging employees to wear masks and practice routine hygienic practices such as frequent handwashing had more than a nominal effect on its business operations. Employer A cannot substantiate that it implemented modifications pursuant to a governmental order. Therefore, the employer does not meet the definition of “eligible employer” under section 2301(c)(2)(A)(ii)(I) of the CARES Act and section 3134(c)(2)(A)(ii)(I) of the Code.[18]

Scenario 2

In addition to the conclusion in Scenario 1, Employer A is able to continue operations in a manner comparable to operations prior to any closure. Employer A’s employees teleworked at least part of the time, indicating that Employer A’s employees were already equipped to work from a location other than Employer A’s offices and without a disruption to Employer A’s operations. In addition, the fact that Employer A continued to allow employees to telework in the second and third calendar quarters of 2021 despite there being no restrictions suggests the employees’ absence from the physical workspace did not disrupt operations.

Furthermore, OSHA’s policies have long stated that OSHA does not conduct inspections of home offices and thus any orders from OSHA, if any, would not apply to the home offices of Employer A’s employees. Under these facts, Employer A cannot substantiate that a governmental order fully or partially suspended its business operations.[19]

[1] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023, https://www.irs.gov/pub/lanoa/am-2023-007.pdf

[2] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[3] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[4] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[5] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[6] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[7] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[8] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[9] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[10] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[11] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[12] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[13] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[14] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[15] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[16] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[17] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[18] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023

[19] IRS Generic Legal Advice Memorandum (GLAM) AM-2023-007, November 3, 2023