We have now gone through the initial phase of the Payroll Protection Program (PPP) with many businesses submitting their loan applications to their banks. While the initial application process was a bit frenzied, the next phase – loan forgiveness – will be even more important and potentially just as confusing as the application process. 

As of the writing of this post, we are still waiting for solid guidelines from the SBA on how forgiveness will work. However, it is important to begin planning now. Therefore, we are offering this preview of PPP and highlighting both what we know and what we don’t know. We will be providing more information and analysis as soon as more guidelines are released.

Purpose of the PPP Loan and Certifications Made on the Application

The loan should be used to maintain payroll for existing employees and to bring employees that have been laid off back onto payroll. This is the entire purpose of the loan: so employers can keep paying people to sit at home and remove some of the burden from the state unemployment system. The states can't deficit spend like the federal government can, so this will allow the federal government to remove some of that financial burden from the states and provide a vehicle for federal funds to help shoulder the load.

Note that when filling out this application, borrowers certified that the loan was necessary to the ongoing operations of the business and that "the funds will be used to retain workers and maintain payroll", subject to legal liability, up to charges of fraud, for knowingly using the loan for unauthorized purposes. 

75% of the proceeds of the loan must be used for payroll to receive 100% forgiveness on eligible expenses. The remaining 25% may be used for rent, mortgage interest, and utility payments only.  Payments made to 1099 contractors are not eligible as payroll expenses- only wages paid to employees. 

Important Things We Don't Yet Know About Forgiveness

First, we don’t know how the SBA and banks are going to be calculating the number of full-time equivalent (FTE) employees.  Likely each full-time, 30-40 hour a week or so, employee will be classified as one FTE employee. Then there will be a calculation for each part-time employee. It may consist of running all of your part-time employees' hours through a calculation to determine how many additional "full-time equivalent employees" you have based on the number of part-time hours being worked. Using the accounting method, you could have, say, 10.6 additional FTE's based on part-time hours. If this is the FTE method they use to determine if your staffing has decreased, then it's the number of hours being paid to employees through payroll, not the actual headcount of "full-time" employees, that will determine if your FTEs are the same to determine if you're eligible for 100% forgiveness of your qualified payroll and other expenses during the 8 weeks. 

Next, we don’t know how they're going to evaluate "salary decreases by more than 25%." The verbiage in the CARES Act suggests that they will be looking at individual salary reductions (in employees making under $100k/year) by 25% or more from before as compared to during the 8-week covered period of the loan. This implies that they'll be doing an "apples to apples" comparison in salary for each individual employee. From a practical standpoint, we don't know how they'll do this when normal employee turnover could have occurred following the payroll determination period, and this also doesn't seem to align with how we suspect they'll be calculating FTEs - based on total hours worked, not on individual employee head counts.

Both of the foregoing remain to be determined, but we do expect guidance on these topics from the SBA.

What About Reclassifying Workers to Be Covered Under PPP?

You may be thinking about reclassifying workers to be covered under PPP or hiring on contractors to complete short-term projects - hoping to get them covered under PPP funds. In our opinion, this is risky.

In order to use PPP funds to pay contractors or for short-term projects, those folks would have to be hired on as employees. You would need to be consistent with your standard hiring practices to avoid discrimination issues. For instance, if you normally conduct a background check and drug screen, you'll need to do that here; if you have any obligations regarding job postings, i.e. some federal contractors are required to post all open jobs to veteran hiring sites, for instance, you'll need to meet all of your standard posting requirements; if you offer benefits to employees, you will need to provide those benefits to your "short-term" hires for these two-week projects; you will need to complete I-9 forms within 3 days of hire, set them up in payroll, set up their tax withholdings, etc. You will have to assume all of the same responsibilities and risks of the employer-employee relationship for these folks as you would for any other hire because they will be employees, not contractors.

Doing the foregoing has risks as it runs contrary to the letter and the spirit of the PPP. The purpose of this program is to retain staff with allowances to bring back staff that was already laid off so that employers can ease some of the burden on the unemployment system. That needs to be the primary objective for the use of these funds. In fact, an argument could be made that the intention to use the funds in a different manner without even attempting to do this could be seen as fraudulent use of the funds and subject to legal liability. 

Importantly, the PPP loan should really be viewed as a benefit to employees, not employers. You've essentially become a vehicle for the federal government to pay unemployment benefits to your employees - only instead of paying them directly - they're paying the employer to be the "middle man" and disburse these "unemployment" funds to their own teams.

Remember, the PPP loan is not a windfall for small businesses to finance additional projects or goals that they maybe couldn't accomplish while they were open, and everything was status quo. There are many industries where employees are laid off but don't qualify for unemployment- like servers who often don't meet the required minimum average weekly wage to get unemployment compensation, so the PPP loan is a life-raft for those employees who can't work but can't get unemployment. 

Conclusion

We expect to see strong oversight of these loans. Specifically, in how the funds were used, staff retention, and any decreases in salary, which will likely be closely scrutinized. Businesses that received PPP funds are advised to stick to the guidelines closely or they risk losing forgiveness.

 We will have more updates as they come. Please reach out to us with any questions.