Editor’s note: Regulations and guidance from the SBA and the U.S. Department of Treasury on the PPP are evolving rapidly. Please refer to the latest guidance from SBA and Treasury to confirm current program rules and how they apply to your particular situation.
As of July 13, 2020, more than 4.9 million borrowers have been approved for a Paycheck Protection Program (PPP) loan. PPP loans are intended to help small business owners and other eligible organizations keep employees on the payroll and out of the unemployment office, and cover certain business expenses. They’re not meant to put struggling small business owners in debt. For many borrowers, the chance to have a PPP loan forgiven is a big draw.
PPP loans may be forgiven, in whole or in part, if borrowers meet certain requirements. As an example, borrowers should maintain the average number of full time employees on the payroll during their loan forgiveness covered period compared to the average weekly number of employees during one of the reference periods. The reference periods are either between February 15, 2019 and June 30, 2019 or January 1, 2020 and February 29, 2020. If the borrower reduced headcount, they must restore headcount and rehire any employees they laid off before December 31, 2020, or before the date they submit their loan forgiveness application.
Lenders may also reduce the borrower’s forgiveness amount if the borrower reduces employee average salary or wages for any employee by more than 25% within their loan forgiveness covered period compared to Q1 2020. PPP loan borrowers began to worry their lenders wouldn’t forgive loans when laid-off employees couldn’t or wouldn’t come back.
The SBA has since released additional information, including important information about loan forgiveness reduction exemptions. The SBA also recently updated their PPP Loan Forgiveness Application. Below are some common questions borrowers have about the employee headcount requirement.
1. Do I have to rehire the same employees I laid off?
No. Borrowers can hire new employees to restore and maintain their original average full time employee headcount. The PPP loan forgiveness application doesn’t differentiate between new and old employees on the payroll.
2. Will my lender reduce my forgiveness amount if an employee rejects my offer to rehire them?
No. A borrower’s loan forgiveness amount will not be reduced if the borrower is able to document in good faith an inability to rehire employees and an inability to hire a similarly qualified individual for the unfilled position before December 31, 2020.
A borrower whose employee has rejected their offer will need to show that they have:
- made a written offer in good faith to rehire an employee for the same salary or wages and the same number of hours as compared to the last pay period before the reduction in hours;
- the offer was rejected by the employee; and
- the borrower has records documenting the offer and the rejection.
If the borrower can show that they were unable to rehire their employee because the employee rejected their offer, the borrower’s loan forgiveness will not be reduced.
It’s important to note that employees who reject offers of re-employment may forfeit their eligibility for continued unemployment compensation. Borrowers are required to inform their state unemployment insurance office of any employee’s rejected rehire offer within 30 days of the employee’s rejection of the offer. Please refer to your state’s relevant employment development department for more information.
3. What if I can’t rehire employees because my business isn’t open or operating as usual?
Your loan forgiveness amount will not be reduced based on headcount reductions if your business was unable to operate between February 15, 2020, and the end of the covered period at the same level as before February 1, 2020, due to compliance with certain federal requirements or guidance issued between March 1, 2020, and December 31, 2020, related to maintaining standards of sanitation, social distancing, or other work or customer safety requirements related to COVID-19.
4. An employee requested a reduction in hours, will this impact my forgiveness amount?
Many employees are requesting reduced hours to care for children or other family members while their normal care routines are disrupted. The SBA will not reduce a borrower’s loan forgiveness amount if an employee voluntarily requested and received a reduction of their hours during the borrower’s loan forgiveness covered period. Borrowers should have clear documentation that the employee(s) requested the reduction in hours worked.
5. If an employee voluntarily resigns, will it impact my forgiveness amount?
The SBA will not reduce a borrower’s loan forgiveness amount if an employee voluntarily resigns during the borrower’s loan forgiveness covered period. Borrower’s should have clear documentation that the employee voluntarily resigned.
6. Can I terminate employees for cause during my covered period?
Yes. Employees can still be terminated for cause during the loan forgiveness covered period. The SBA will not reduce a borrower’s loan forgiveness amount if a borrower terminates employees as long as the employee was terminated for cause. As always, it’s important to document the reason for employee termination and do your due diligence as you would when terminating any employee.
These reduction exemptions may mitigate a loan forgiveness reduction due to decreased employee wages or headcount.
The resources described above are made available to businesses within the United States of America.
Given the large demand for additional authorized Paycheck Protection Program funds, not every qualified Paycheck Protection Program applicant will receive a loan.
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