PPP: SBA Provides New Guidance on One Aspect of Forgiveness

Attorney Keith T. Zimmet

Keith T. Zimmet | President, Managing Shareholder

May 4, 2020

When an Employee Declines an Offer to Be Rehired at the Same Salary/Wages/Hours

as of May 4, 2020

On March 27, 2020, Congress passed and the President signed into law the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), which is an approximately $2 trillion stimulus and economic relief package. One principal feature is the Paycheck Protection Program (“PPP”), to be administered by the Small Business Administration (“SBA”). On April 24, 2020, the President signed into law the Paycheck Protection Program and Health Care Enhancement Act, providing additional funds for the PPP (the “Enhancement Act”).

The PPP expands eligibility for SBA loans under Section 7(a) of the Small Business Act. The most significant feature of these PPP loans (“PPP Loans”) is that if the borrower complies with certain requirements, some or all of the PPP Loan will be forgiven.

The CARES Act’s general rule is that the forgiven amount is reduced by the percentage drop in a borrower’s average number of full-time equivalent employees per month during the eight-week period following the PPP Loan funding, as compared to the borrower’s average number of full-time equivalent employees per month during either of the following periods (whichever will result in a lower forgiveness reduction):

a.  From February 15, 2019, through June 30, 2019; or

b.  From January 1, 2020, through February 29, 2020.

For example, if Company A had 100 full-time equivalent employees during the period from February 15, 2019, through June 30, 2019, but only has 75 full-time equivalent employees during the eight-week period following the PPP Loan funding, then the expected forgiveness amount will be reduced by 25 percent.

The CARES Act also provides that if the borrower had layoffs of full-time employees or salary reductions during the period from February 15, 2020 through April 26, 2020, and the borrower re-hires such full-time employees or undoes such salary reductions prior to June 30, 2020, then such layoffs and reductions will not be recognized as reductions when calculating the forgiveness amount. But what if the borrower offers to rehire an employee, but such employee declines the offer and refuses to return to work?

The SBA has now issued guidance (as of May 3, 2020) that if a borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer, the same shall be deemed an exemption from the CARES Act’s general limits on loan forgiveness, and the amount of loan forgiveness shall not be reduced because of such employee, provided that:

(i) the offer for rehire is “for the same salary/wages and same number of hours”;

(ii) the borrower must have made a good faith, written offer to rehire, and

(iii) the employee’s rejection of that offer must be documented by the borrower.

Using the same example as above, if Company A had 100 full-time equivalent employees during the period from February 15, 2019, through June 30, 2019, but only has 75 full-time equivalent employees during the eight-week period following the PPP Loan funding, then the expected forgiveness amount will be reduced by 25 percent. However, under this new exemption, if two employees had declined the rehire offer as described above, then subject to the conditions described above, the expected forgiveness amount will be reduced by only 23 percent, rather than 25 percent.

The new SBA guidance also issues the following caveat: “Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.”

Keith T. Zimmet is the Chair of our Commercial Finance Practice Group, and President and Managing Shareholder of our firm.

This information provides an overview of a specific developing situation. It is not intended to be, and should not be construed as, legal advice for any particular fact or situation.

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