UPDATE April 15, 2023: Premium pay is only authorized through the end of the COVID-19 national emergency. That ended on April 10, 2023, thus according to SFLRF FAQ 4.11, premium payments may no longer be made from ARP/CSLFRF funds as of that date.

The Coronavirus State and Local Fiscal Recovery Funds program of the American Rescue Plan Act of 2021 (ARP/CSLFRF) provides funding to all NC counties and municipalities to address pandemic-related and essential infrastructure needs. One of the eligible expenditure categories of ARP/CSLFRF monies is to respond to workers performing essential work during the COVID-19 public health emergency by providing premium pay. US Treasury’s Final Rule states that

A recipient may use funds to provide premium pay to eligible workers of the recipient who perform essential work … provided that any premium pay … must respond to eligible workers performing essential work during the COVID-19 public health emergency. A recipient uses premium pay …. to respond too eligible workers performing essential work during the COVID-19 public health emergency if: (1) The eligible worker’s total wages and remuneration, including the premium pay, is less than or equal to 150 percent of the greater of the eligible worker’s residing State’s or county’s average annual wage for all occupations as defined by the Bureau of Labor Statistics’ Occupational Employment and Wage Statistics; (2) The eligible worker is not exempt from the Fair Labor Standards Act overtime provisions (29 U.S.C. 207); or (3) The recipient has submitted to the Secretary [of US Treasury] a written justification that explains how providing premium pay to eligible worker is responsive to the eligible worker performing essential work during the COVID-19 public health emergency (such as a description of the eligible workers’ duties, health, or financial risks faced due to COVID-19, and why the recipient determined that the premium pay was responsive despite the worker’s higher income).

The following summarizes these parameters, identifies substantive and process requirements, and provides a checklist to aid local governments in implementing premium pay for local government employees.

Premium Pay for Employees Who Perform Essential Work During Pandemic

As stated above, the ARP/CSLFRF allows local governments to provide premium pay to eligible workers who perform essential work during the pandemic.

Eligible Local Government Workers. According to the Final Rule, all local government employees are among the categories of eligible workers, including full- and part-time and permanent and temporary employees. However, volunteers and public officials, who are not employees of the local government, do not qualify. In implementing a premium pay program, a local government must then determine which local government employees are performing essential work during the pandemic. It also must set the payment time-period, calculate payment amounts, and identify the method(s) of payment.

Performing Essential Work During the Pandemic. To qualify for ARP/CSLFRF funded premium pay an eligible employee must perform essential work during the pandemic. Essential work is defined by the Final Rule as work that

(1) Is not performed while teleworking from a residence; AND

(2) Involves:

(i) Regular in-person interactions with patients, the public, or coworkers of the individual that is performing the work; or

(ii) Regular physical handling of items that were handled by, or are to be handled by patients, the public, or coworkers of the individual that is performing the work.

Under these criteria, many, but not all, local government employees will qualify for premium pay. US Treasury makes clear that premium pay may not be awarded to an employee for telework. And it also does not apply to employees who work in person, but the nature of their work does not involve regular in-person interactions with others or regular physical handling of items that are handled by others.

Must Target Low- and Moderate-Income Workers. As a further requirement, a local government’s premium pay program must target low- and moderate-income employees. In the Final Rule, US Treasury has provided two independent measures to identify these employees. If an employee meets either criteria, the employee is considered a low- or moderate-income worker. First, an employee who is NOT EXEMPT from the Fair Labor and Standards Act (FLSA) overtime provisions is deemed to be a low- or moderate-income worker. Second, an employee whose total wages and renumeration (including premium pay) is less than or equal to 150 percent of the State’s average annual wage for all occupations or the county’s average annual wage, whichever is higher, is deemed to be a low- or moderate-income worker. If an employee does not meet either of these parameters, the local government will have to provide an additional written justification to US Treasury (in its Project and Expenditure Report) on how granting premium pay to the employee (or employee class) responds to eligible workers performing essential work. (Details on that additional justification are below.) For reference, NC State wage data is available here, and county wage data is available here.

Additional Eligibility Criteria Optional. A local government may establish additional eligibility criteria above the ARP/CSLFRF minimum requirements. A local government may target only one or a few categories of employees for these payments, assuming it does not unlawfully discriminate, or it may authorize them more broadly for all employees who meet the ARP/CSLFRF criteria. A local government also may use the promise of prospective premium pay during the remaining grant period as an incentive to attract new employees who will meet the ARP/CSLFRF criteria.

Covered Time Period. Premium payments may be made to an eligible employee for all qualifying essential work performed during the COVID-19 public health emergency. The payments may be made retroactively, from the beginning of the pandemic (January 27, 2020), to provide salary supplements to employees who were not adequately compensated for the heightened COVID-19-imposed risk for work previously performed. In fact, US Treasury encourages recipients to prioritize providing retroactive premium pay where possible, recognizing that many essential workers have not yet received additional compensation for work conducted over the course of many months. The payments also may be awarded prospectively to eligible employees who perform essential work from today through December 31, 2026 (all legal obligations to make the payments must be entered into by December 31, 2024, but prospective payments may not be actually paid out until the work is performed). A local government may choose the period in which to award premium pay that includes only retroactive payments, only prospective payments, or some combination of both. An individual employee may earn both retroactive and prospective premium pay and may receive premium pay even if the employee already received some additional renumeration for work performed during the pandemic. If a local government wants to reimburse itself for prior premium payments it may do so, but only if the payments otherwise meet the qualifying criteria and only for expenditures made after March 3, 2021.

Total premium payments to each employee may not exceed the maximum amounts detailed below. Recognizing the nature of the pandemic has changed over time (and likely will continue to change), a local government may use different eligibility requirements for retroactive payments than for prospective payments, assuming the minimum ARP/CSLFRF eligibility requirements are met.

Note that under state law, premium payments may not be made to former employees who are no longer employed by the local government, even if they otherwise would qualify for retroactive pay according to the unit’s eligibility criteria.

Premium Pay Amounts. There are a few components to determining premium payment amounts.

Per Person Maximums. A local government may make a premium payment of up to $13 per hour, for each eligible employee, for work performed during the pandemic. The maximum total per employee payout is $25,000. (Note that is an overall cap, including any retroactive and prospective payments, not just a yearly cap.)

Must Supplement, Not Supplant. Premium pay is intended to compensate essential employees for heightened risk due to COVID-19. It must be entirely additive to an employee’s regular rate of wages and other compensation and may not be used to reduce or substitute for an employee’s normal earnings. If paid retroactively, it may not be used to reduce current or prospective compensation to the employee. And if an employee qualifies for a raise or bonus according to the local government’s pay classification plan, it may not be used to substitute for that raise of bonus. (Note, however, that most salary increases are at the discretion of the governing board. Nothing in the premium pay program requires a governing board to award a salary increase or bonus to its employees.)

Methods of Payment. Local governments have options to pay premium pay on an hourly basis, as a lump sum per pay period, as a monthly allotment, as a one-time payment, or according to other similar methods. The only limitation is that the monies must be paid for work already performed. They may not be used to provide sign-on bonuses or similar upfront payments. And regardless of how the monies are paid, a local government may not exceed the per employee caps detailed above. Also, no matter what method of payment is used (hourly, flat rate, one-time, etc.) premium payments must be run through payroll and treated as wages to the employee for employment tax, retirement, and other withholding purposes.

State Law Authority for Premium Pay Program for Local Government Employees

In addition to determining if a program is ARP/CLFRF eligible, a local government also must ensure that it has state law authority to undertake the program. In the case of premium pay for local government employees, there is clear state law authority. A local government’s governing board sets the salary and other compensation for most local government employees. The board must approve any changes to employee compensation, including premium pay, unless this authority has been delegated to the manager or other employee or official in the local government’s pay classification plan. See G.S. 160A-162 (municipalities); G.S. 153A-92 (counties). County governments have a complicated organizational hierarchy which may raise issues as to who must approve premium pay. For example, Sheriff Office employees and Register of Deed Office employees are not county employees for most purposes but are treated as county employees for compensation purposes. Id. Thus, these employees could be included in a county premium pay program. Election board employees are county employees; however, their compensation is set by the local board of elections (except for the director of elections). See G.S. 163-32. Thus, other than the director of elections, election employees may not be included in a county premium pay program without the approval of the local board of elections.

ARP/CLFRF Compliance, Documentation & Reporting on Premium Pay Program

All ARP/CLFRF monies are subject to most provisions of the federal Uniform Guidance (UG), 2 C.F.R. 200, including contracting, internal controls, and auditing provisions. Additionally, US Treasury has provided some guidance on required documentation and reporting of ARP/CLFRF monies. The following are important compliance requirements related to premium pay.

Applicable UG Requirements

One of the key compliance requirements under the UG is that the local government institute appropriate internal controls. These federal internal controls go beyond safeguarding the cash. They must be designed to ensure programmatic compliance. With respect to premium pay, a local government must adopt and implement the following UG policies: allowable cost policy, financial management and internal controls policy, consistent with federal Green Book, records retention policy, conflicts of interest policy, and a nondiscrimination policy. Further, US Treasury states that a local government should adopt a written policy documenting the procedures for determining worker eligibility for premium pay. See Table 1 of Compliance and Reporting Guidance: State and Local Fiscal Recovery Funds. That policy also should address how premium pay will be calculated and distributed, the time-period for awarding premium pay, and what specific costs will be covered.

US Treasury Reporting Requirements

Project and Expenditure Report. Each local government is required to submit periodic Project and Expenditure Reports. The first report for counties and metropolitan cities who are over 250K population or who will receive over $10 million in total ARP/CSLFRF funding is due by January 31, 2022. The first report for all other local governments, including all NEUs, is due by April 30, 2022. Subsequent reports will be required either yearly or quarterly thereafter, depending on unit size and amount of ARP/CLFRF award. (See the Compliance Guide for more info on reporting deadlines.)

According to current US Treasury guidance, reporting on ARP/CLFRF funds will be done at the project level. Each project will be associated with an Expenditure Category (EC) (based on the list in the Appendix of the Compliance Guide). A local government must track obligations and expenditures, as well as any subaward data, at the project level. Additionally, a local government must track some programmatic data at both the program and EC level.

Premium pay for local government employees will be reported under EC 4.1. In addition to obligations and expenditures, a local government must address the following programmatic elements in its report:

• Number of employees to be served
• For groups of employees (by department or pay plan classification), or individual employees, who do not meet the low- or moderate- income criteria outlined above: A brief written narrative justification of how the premium pay or grant is responsive to employees performing essential work during the public health emergency. This could include a description of the essential employee’s duties, health or financial risks faced due to COVID-19, and why the local government determined that the premium pay was responsive to employees performing essential work during the pandemic.

Additional Reporting Requirements for Largest Units. Note that our largest cities and counties, specifically metropolitan cities and counties with populations over 250,000, are also required to submit a yearly Recovery Plan Performance Report. In that report, a local government must describe its approach, goals and occupations served in the premium pay program. It also must detail how its approach prioritizes low-income workers.

Premium Pay Checklist

Here is a premium pay checklist to help guide local governments in implementing a premium pay program consistent with the ARP/CSLFRF.

Premium Pay vs. Revenue Replacement

Now that local governments have the option to take a standard allowance of up to $10 million in ARP/CSLFRF monies, to be spent on general government services, how does that impact proposed (or already implemented) premium pay programs? Premium pay and revenue replacement are separate eligibility categories under the Final Rule. If a local government has (or will) enact a premium pay program, it should proceed under the authority/requirements/reporting structure of the premium pay category, NOT the revenue replacement category.

What about paying premium pay to higher income employees, specifically those who do not meet the low- or moderate-income criteria discussed above? May a local government use revenue replacement funds to make these premium payments? The answer is unclear. First, remember that even if an employee does not meet the income criteria for low- or moderate-income workers, a local government may still use ARP/CSLFRF premium pay funds to make the premium payments if it provides a reasonable justification for including these employees. (The justification should include a description of the employees’ duties, health or financial risks faced due to the pandemic that warrant their inclusion.) If a local government does not believe it can provide a sufficient justification for including certain higher-income employees, it should consider leaving them out of the premium pay program or using other (non-ARP) resources to pay for their premium payments. It is not clear that making the premium payments to higher-income employees fits within the allowable cost expenditures for “general government services.” It may for certain employees, but recall that under a local government’s Uniform Guidance-allowable cost policy, a unit may not pay higher salaries just because it is using ARP/CSLFRF funds. Thus it is possible that making premium payments with revenue replacement funds constitutes an unallowable cost for this expenditure category. As discussed in this post, it will be safer for a local government to use revenue replacement ARP/CSLFRF funds for clearly-allowable capital and operating costs associated with providing general government services, freeing up other revenues to be used for less clearly-allowable expenditures.