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Employee Definition Remains Fluid for PPP Loan Recipients

Posted on Apr. 29, 2020

The government continues to release some guidance on the small business loan program as the application process heats back up, but key information on requirements for the loans to be forgiven remains elusive.

The Small Business Administration on April 26 updated its FAQ on the Paycheck Protection Program to clarify how to count the number of employees necessary to determine if the borrower meets the loan eligibility requirements.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), signed into law March 27, imposes limits on the size of businesses that can apply for the loans — including that businesses generally must have fewer than 500 employees to be eligible. Congress initially allocated nearly $350 billion to back the loans, and businesses rushed to apply because if a specified portion of the proceeds are used for payroll costs and employee levels are retained, the loan will be forgiven tax free.

The updated FAQ added question 36, which said that for purposes of loan eligibility, the CARES Act defines “employee” to include “individuals employed on a full-time, part-time, or other basis.” The FAQ said a business must include the total number of employees, including part-time employees, in the calculation when applying for a loan.

But the FAQ points out that the definition is different on the back end when loan forgiveness is being determined.

“By contrast, for purposes of loan forgiveness, the CARES Act uses the standard of ‘full-time equivalent employees’ to determine the extent to which the loan forgiveness amount will be reduced in the event of workforce reductions,” the FAQ said.

That highlights a difference in the employee head count: For loan eligibility, businesses must count all employees to determine whether they’re over the 500-employee threshold, even part-time employees. But for loan forgiveness, the amount forgiven is reduced by the reduction in full-time equivalent employees, a term that has proven elusive, and now some practitioners are nervous about how the government might define that phrase in future guidance, among other issues.

Part-Time Employees

Lane Powell PC lawyers said the definition of employee for loan eligibility was clear in the CARES Act, so the FAQ wasn’t a surprise. What’s unfortunate, they said, is that the SBA still didn’t provide a definition of full-time equivalent employee, including the hours the employee must work to make that determination. (For other issues stemming from loan forgiveness, see an analysis by Martin A. Sullivan.)

In an April 27 firm alert, the lawyers said it's not clear how to count part-time employees for purposes of loan forgiveness. For example, it’s unknown if an employee whose schedule is determined based on the needs of the business, but who is only paid when working, is considered a full-time equivalent employee. They asked whether the answer depends on the number of hours the employee worked during the week of forgiveness, or whether it’s an average over the entire eight-week period in which the loan proceeds must cover payroll costs to be forgiven.

Other laws have varying standards for what counts as a full-time employee, the lawyers pointed out. The Fair Labor Standards Act determines full-time employee status based on the employee working 40 hours a week, but the SBA could also look to the standard in the Affordable Care Act, which is 30 hours a week.

“Unfortunately, the FAQs do not address the time period during which the test should be applied nor the number of hours used to determine full-time status,” the alert said.

In a recent post on the topic, Jackson Lewis PC lawyers agreed that the definition of full-time equivalent employee needs to be sorted out.

“While the typical calculation of full-time equivalent (FTE) is an employee’s scheduled paid hours divided by the employer’s hours for a full-time workweek, the rules of the Small Business Administration typically treat all employees (full time, part-time, temporary or employed on any other basis) equally,” the lawyers wrote.

Guidance on the treatment of employees in work-share programs, those with reduced schedules, and those who voluntarily terminated would also be helpful, the lawyers said.

More Questions

Lawyers at RKL LLP highlighted several open questions in a recent firm post, one of which is what to do when a business is closed by a governor and the business doesn’t want to use loan proceeds to pay employees who aren’t working.

“When is the utilization of proceeds for unintended purposes risky or potentially fraudulent?” the lawyers asked.

The firm also asked whether a business can rehire for any position or whether the rehires must be for similar positions. And while some of the proceeds may be used for items such as rent, the firm said there’s no answer on how related-party rentals will be treated for purposes of loan forgiveness granted for rental payments.

The updated FAQ isn’t the only guidance that was recently released — an April 24 document on how to calculate the maximum loan amount by each business type included partnership calculations. And on April 27, the government released a third interim final rule that outlined additional criteria for seasonal employers.

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