PPP Question Answered: Do New Employee Wages Qualify for Payroll Protection Program Forgiveness?

Employment attorney, Chisa Chervenick, answers several questions about the Payroll Protection Program (PPP) and loan forgiveness.

Q: I just hired a new employee. Are their wages considered eligible payroll expenses under the PPP loan? Is forgiveness limited to the wages of former employees only?

A new hire’s wages fall under the definition of payroll costs eligible for forgiveness. Had Congress intended to exclude these wages, it likely would have done so expressly alongside exclusions for wages paid to employees principally residing outside of the U.S. However, there are still outstanding questions about the forgiveness process as we await more guidance from the SBA. We provided some initial guidance about forgiveness here, but there will be more coming.

Average monthly payroll for purposes of loan funding is based on the wages paid during the 12-months preceding the loan. While this should capture natural ebbs and flows in staffing levels, it is an average, so it is entirely possible that a company with recent growth would not see those increased payroll costs captured in this initial payroll calculation. This could result in insufficient loan proceeds to cover payroll and other eligible expenses. It’s also entirely possible that a company that downsized before the COVID pandemic could have received a higher loan amount than current payroll necessitates and make it difficult to meet the requirement that 75% of the loan proceeds be spent on payroll expenses. It will be important for businesses to monitor their use of the loan funds accordingly to ensure that at least 75% of the expenses submitted for forgiveness are attributable to payroll. However, you are certainly permitted to spend over 75% of the loan on payroll expenses.

Where we are really lacking in guidance at the moment is in the determination of “penalties” that can decrease the amount of the loan forgiven. Once it’s been established that the expenses you’ve submitted for forgiveness are all qualified expenses, 100% of those qualified expenses are eligible for forgiveness. However, the amount of those eligible expenses actually forgiven may be decreased by a percentage proportionate to (a) a decrease in full time equivalent employees (“FTEs”) during the 8-week covered loan period as compared to before, and/or (b) a decrease in individual employee salaries by 25% or more (excluding anyone making over $100,000 per year- the SBA doesn’t care if you decrease those salaries). We currently don’t know how FTEs will be calculated or how salary decreases will be reviewed.

 For purposes of this question - we just don’t know how, or if, a new hire’s wages will be evaluated against “the before time” for purposes of forgiveness. Will we be looking at employees by name to determine if their individual salary was decreased? Will the comparison be based on job title? What happens if someone tenured left a role after receiving several years-worth of merit increases and someone new is hired to fill that role at the bottom of your current salary band? What if it’s a new employee and a new position? What if an employee stepped down and assumed a lower paid position? Is it really an “apples to apples” comparison if we’re looking at the same person’s compensation a year apart in different roles?

Additionally, although the language of the Act seems to indicate that the SBA will be looking at decreases in wages by more than 25% on an individual employee basis versus a 25% decrease in overall wages paid in aggregate, it’s likely that the SBA will be evaluating FTE staffing levels not by individual employee headcount but by an accounting calculation that determines the number of FTEs based on actual hours worked, including those worked by part-time employees. This is only my opinion, but it seems odd that the SBA would use a “generic” calculation of FTEs based on an aggregated number but then evaluate salary decreases individually comparing wages on a person-by-person basis.

So while I do believe that new hire wages will be qualified payroll expenses and eligible for forgiveness, I’m not sure how, or if, the forgiveness “penalties” will account for those folks.

Q: Can I use PPP funds to pay employees a bonus?

The CARES Act defines payroll costs to include salary, wages, tips, commissions, or similar compensation paid to employees. While the Act does not specifically address employee bonuses, a bonus reasonably falls under the category of “similar compensation” and should qualify as a payroll cost eligible for forgiveness.

The purpose of the PPP loan is to compensate your employees during this tough time and help ease the burden on unemployment; there are no prohibitions to paying your employees a little more than usual or spending more than 75% of the proceeds of the loan on payroll costs. Using the proceeds of the PPP loan to pay your employees a bonus is within the letter and spirit of the law.

Q: If an employee makes over $100,000 annually will any of their wages count as authorized payroll expenses or is their entire salary excluded from forgiveness?

The CARES Act caps payroll expenses for individual employees at $100,000 annualized for purposes of determining the maximum amount of loan proceeds available as well as payroll expenses eligible for forgiveness. The entire salary of these employees is not excluded from the calculations; instead, only the first $100,000 (as annualized) of their salary paid during the 8-week covered loan period will be eligible for forgiveness.

Please contact us if you have questions.