COVID hit American businesses on several legal fronts at once: emergency federal loans with forgiveness rules and fraud exposure, new tax credits that the IRS is still auditing, OSHA safety duties enforced through the General Duty Clause, denied business interruption insurance claims, contract disputes over force majeure, expanded employee leave and disability accommodation obligations, and a wider door into small-business bankruptcy. Some of these effects ended with the emergency. Others still shape tax returns, litigation, and compliance work today.
Emergency Loans and the Strings Attached
The Coronavirus Aid, Relief, and Economic Security Act, passed in March 2020, funneled hundreds of billions of dollars to businesses through two main channels.1Office of the Law Revision Counsel. 15 USC 9001 – Definitions The Paycheck Protection Program offered forgivable loans to companies with fewer than 500 employees. Full forgiveness required spending at least 60 percent of the loan on payroll, with the remaining 40 percent going to rent, mortgage interest, and utilities.2U.S. Department of the Treasury. PPP Interim Final Rule – Paycheck Protection Program as Amended by Economic Aid Act
The Economic Injury Disaster Loan program ran alongside PPP but worked differently. EIDL funds came directly from the Small Business Administration, carried repayment terms of up to 30 years, and were not forgivable. Borrowers could receive up to $2 million, but the SBA attached a lien on business assets for any loan over $25,000, required a personal guarantee above $200,000, and demanded real estate collateral above $500,000.3U.S. Small Business Administration. About COVID-19 EIDL Owners who applied quickly during the crisis often discovered those obligations later.
Fraud and Misuse Enforcement Continues
The speed of relief distribution left a long enforcement tail. By March 2021, the Department of Justice had charged at least 120 defendants specifically for PPP fraud, part of a broader effort that saw 474 defendants charged in COVID-19 fraud schemes involving over $569 million.4U.S. Department of Justice. Justice Department Takes Action Against COVID-19 Fraud Prosecutions have continued well beyond the programs’ closure.
Legitimate borrowers who misused funds face civil exposure under the False Claims Act, which penalizes anyone who knowingly submits a false claim for government payment or misrepresents how federal funds were used. Statutory penalties run from $5,000 to $10,000 per violation, adjusted for inflation, plus three times the government’s actual damages.5Office of the Law Revision Counsel. 31 USC 3729 – False Claims The treble-damages piece is what makes the statute so punishing for businesses that stretched the rules on loan use or forgiveness applications.
Tax Consequences That Still Matter
PPP Forgiveness and Expense Deductions
Forgiven PPP loans were always excluded from taxable income, but the Treasury Department initially took the position in November 2020 that expenses paid with those forgiven funds could not be deducted. That would have wiped out the tax benefit of forgiveness. Congress reversed the position weeks later in the Consolidated Appropriations Act of 2021, stating that no deduction would be denied by reason of the income exclusion.6Internal Revenue Service. Paycheck Protection Plan Loan Forgiveness and Deductibility of Associated Expenses Businesses paid no federal tax on forgiven amounts and kept the deductions for the payroll, rent, and utility costs those loans covered.
The Employee Retention Credit and IRS Scrutiny
The Employee Retention Credit rewarded employers that kept workers on payroll, and it became one of the most complicated and abused pieces of the relief package. In 2020, eligible employers could claim 50 percent of qualified wages up to $5,000 per employee for the year.7Internal Revenue Service. Notice 2021-20 – Guidance on the Employee Retention Credit Under Section 2301 of the CARES Act For 2021, the credit rose to 70 percent of qualified wages up to $10,000 per employee per quarter, generating up to $28,000 per employee for the year.8U.S. Department of the Treasury. Employee Retention Credit COVID Snapshot
Eligibility required either a government-ordered shutdown or a significant decline in gross receipts: more than 50 percent for 2020 quarters compared to 2019, dropping to 20 percent for 2021.7Internal Revenue Service. Notice 2021-20 – Guidance on the Employee Retention Credit Under Section 2301 of the CARES Act The lower 2021 bar drew aggressive promoters who pushed the credit on employers who did not qualify.
The IRS has flagged a large number of improper claims and continues to review returns closely.9Internal Revenue Service. Employee Retention Credit If you filed a questionable claim that has not yet been paid, the IRS withdrawal process lets you pull it back and treat it as if it were never filed. To qualify, the adjusted return must have been filed only to claim the ERC with no other changes, and you have to withdraw the entire claim.10Internal Revenue Service. Withdraw an Employee Retention Credit ERC Claim Withdrawal avoids penalties and interest. It does not block a criminal investigation if the underlying claim was fraudulent.
Workplace Safety Duties Under OSHA
OSHA relied on its General Duty Clause, which requires every employer to maintain a workplace free from recognized hazards likely to cause death or serious physical harm, to enforce pandemic-era safety expectations.11Occupational Safety and Health Administration. OSH Act of 1970 – Section 5 Duties That translated into distancing, masks and gloves, frequent surface disinfection, and often physical barriers between workers and customers.
Penalties are steep. A serious violation currently carries a maximum of $16,550, and willful or repeated violations reach $165,514 per violation.12Occupational Safety and Health Administration. OSHA Penalties Failing to correct a cited hazard by the abatement deadline adds another $16,550 per day.
Reporting rules were specific. Employers had to report any employee COVID-19 fatality within 8 hours and any in-patient hospitalization within 24 hours of learning about it.13Occupational Safety and Health Administration. COVID-19 Healthcare ETS – Frequently Asked Questions COVID-19 infections also had to be recorded on the OSHA 300 log when the case was a confirmed diagnosis, the illness was work-related, and it resulted in death, days away, restricted duty, or medical treatment beyond first aid. OSHA acknowledged the difficulty of determining work-relatedness and focused enforcement on whether the employer conducted a reasonable investigation, with factors like clustered cases among coworkers pointing toward a work connection.14Occupational Safety and Health Administration. Revised Enforcement Guidance for Recording Cases of Coronavirus Disease 2019 COVID-19
Business Interruption Insurance Claims Mostly Failed
Thousands of businesses filed business interruption claims arguing that government-ordered closures triggered coverage. The legal fight came down to whether the virus caused “direct physical loss or damage” to the insured property, the standard trigger in commercial policies.
Insurers won these disputes across jurisdictions. Courts concluded that the virus did not physically alter buildings and that temporary loss of use was not physical damage. Many policies also contained virus or pathogen exclusions, added after earlier outbreaks like SARS, that expressly barred coverage. A small number of policyholders reached settlements or favorable rulings on unusual policy language, but the general pattern was denial upheld.
Congress considered bills in 2020 that would have mandated retroactive payouts, but none passed. Treasury and congressional leadership raised concerns about forcing insurers to cover risks they had never priced. No federal law overrode the exclusions or redefined “physical loss.”
Force Majeure and Broken Contracts
When performance became impossible, businesses turned to the force majeure clauses in their contracts. These provisions excuse performance when an extraordinary event beyond the parties’ control makes fulfillment impossible or impracticable, and the pandemic tested them like nothing before.
Outcomes depended almost entirely on the contract language. Clauses that listed “pandemic,” “epidemic,” “government action,” or “public health emergency” gave the claiming party a strong position. Clauses with only narrow language like “natural disaster” or “act of God” were harder to invoke, and courts split on whether a pandemic fit. Timing mattered too: the claiming party generally had to show the pandemic was not reasonably foreseeable when the contract was signed, which became a losing argument for contracts executed after early 2020.
Most force majeure clauses also require prompt written notice. Missing the notice window could waive the protection regardless of how legitimate the disruption was. When no force majeure clause existed, businesses fell back on the common law doctrines of impossibility (performance became physically or legally impossible) and frustration of purpose (the fundamental reason for entering the contract was destroyed by an unforeseen event). Both set a high bar and succeeded only in a minority of cases.
Employment Law Obligations
Emergency Paid Leave Under the FFCRA
The Families First Coronavirus Response Act ran from April through December 2020 and required employers with fewer than 500 employees to provide up to 80 hours of paid sick leave when an employee could not work because of a quarantine order, COVID-19 symptoms, or the need to care for someone under quarantine. It also expanded family and medical leave for parents whose children’s schools or child care providers had closed. A 100 percent tax credit offset the cost, so the expense ultimately fell on the federal government rather than individual employers. The mandate ended when the law expired.
ADA Accommodations and Long COVID
The Americans with Disabilities Act drove a surge of accommodation requests from employees with health conditions that made them especially vulnerable. Employers cannot refuse reasonable accommodations for a qualified employee’s known disability unless doing so imposes an undue hardship.15Office of the Law Revision Counsel. 42 USC 12112 – Discrimination The most common accommodation was remote work, and employers who refused to consider it or failed to engage in an interactive process risked discrimination claims.
Long COVID extended these obligations past the acute phase. The Equal Employment Opportunity Commission confirmed that Long COVID can qualify as a disability under the ADA when symptoms substantially limit a major life activity, including persistent brain fog, chronic fatigue, shortness of breath, or gastrointestinal problems that interfere with concentrating, breathing, or performing daily tasks.16U.S. Equal Employment Opportunity Commission. What You Should Know About COVID-19 and the ADA the Rehabilitation Act and Other EEO Laws The analysis is case-by-case, but the EEOC has said the “substantially limits” standard is construed broadly and the impairment does not have to be severe or permanent. Employers still receiving reports of lingering symptoms have an ongoing obligation to explore reasonable accommodations rather than dismiss the condition.
Small Business Bankruptcy Under Subchapter V
For businesses that relief could not save, Subchapter V of Chapter 11 offered a faster and cheaper reorganization path. Created by the Small Business Reorganization Act of 2019, Subchapter V was temporarily expanded by the CARES Act, which raised the debt eligibility limit from roughly $2.75 million to $7.5 million. That expanded limit expired on June 21, 2024. The current threshold, adjusted for inflation, is $3,024,725.17U.S. Department of Justice. Subchapter V Small Business Reorganizations
Subchapter V strips out several features of traditional Chapter 11 that made it impractical for smaller companies. There is no creditors’ committee, a trustee is appointed to facilitate the process, and the absolute priority rule does not apply, so owners can retain equity even if unsecured creditors are not paid in full. A debtor can confirm a plan over creditor objections if the plan commits all projected disposable income for three to five years toward repayment and the court finds a reasonable likelihood of performance. For pandemic-battered small businesses, that combination offered a workable path to survival that traditional Chapter 11 would not have.