SBA Clarifies Effect of Laid-off Employees in Calculating PPP Loan Forgiveness

Posted in: Employment Law by Dowling Aaron on

As of May 1, 2020, under second round of loans for the Paycheck Protection Program (PPP), California businesses have been approved for more loans (320,156) and total dollars ($33,221,857) than any other state. Many businesses that receive PPP loans face a situation in which they laid off employees prior to obtaining a PPP loan and now want to hire them back. The ratio of full-time employees that a borrower has on June 30 as compared to pre-COVID, as well as the per employee ratio of a borrower’s post loan payroll to its pre-loan payroll will affect the amount forgiven under a PPP loan.

The federal government’s addition of $600 per week to California State unemployment insurance benefits means that lower wage workers may make more money remaining on unemployment than as an employee. Some make significantly more, up to 2.5 times their normal wage. Recognizing that employers may have difficulty in hiring back many of their employees by June 30, the Small Business Administration (SBA) has provided welcome guidance to address this situation. On May 3, the SBA published its latest FAQ responses to questions from lenders and borrowers, which can be found here. To address the re-hire problem, the SBA and Department of Treasury plan to issue an interim final rule that would exclude from the loan forgiveness calculation any laid-off employees who the borrower unsuccessfully offers to rehire.

There are specific requirements and best practices that a borrower should follow in order to exclude these former employees from the loan forgiveness calculation. First, the offer to rehire must be for the same salary or wages and the same number of hours as those worked prior to being laid off. The offer must be a good faith, written offer to rehire. The borrower must also document any rejection of the offer. This does not mean that the rejection must also be written, although that would be preferable. It does mean that the borrower must document that the former employee rejected the offer.

Of note, former employees who reject offers of re-employment may no longer be eligible to receive unemployment benefits. Generally, a recipient of these benefits must certify that they are willing to accept employment if offered.

As in most cases, maintaining good documentation will be critical. The PPP loan forgiveness process will be very technical and will require borrowers to maintain appropriate documentation. If you would like guidance or assistance regarding the CARES Act, or any other business issues in these uncertain times, please contact Robert Tookoian at 559-432-4500.

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