PPP loan remission and employee loyalty


Thousands of businesses nationwide are trying to reopen after shutting down due to stay-at-home orders statewide due to COVID-19. Undoubtedly, this has created a significant burden on employers whose financial obligations – employee wages and benefits, rent and mortgage payments, among others – have not ceased despite economic uncertainty and declining consumption at home. all levels.

To combat this uncertainty and keep businesses afloat, Congress passed the CARES Act (Coronavirus Aid, Relief, and Economic Security) which established the Paycheck Protection Program (PPP), a loan fund for employers that is entirely forgivable as long as employers respect the loan forgiveness terms. The loan fund is expected to provide more than $ 650 billion to US businesses.

As complicated as employee layoffs were before the pandemic, they have become even more complicated for companies that have or will accept PPP loans. This is because the PPP reduces the amount of loan cancellation available to a borrower if the company reduces the number of its full-time equivalent employees. Of course, underperformance and employee misconduct issues will not magically disappear during the loan coverage period. Here are some important considerations and options for businesses when making employment decisions while receiving PPP loan funds.

Basics of PPP loans

P3 loans allow employers to borrow funds to cover salary costs, mortgage interest, rent, utilities, and interest on any other debt incurred before February 15, 2020.

Eligible businesses can take out a loan for a maximum amount equal to the lesser of (A) $ 10 million, or (B) 2.5 times the total average monthly salary costs incurred by the employer during the period of time. ” one year before the date of granting of the loan (with salaries or wages of employees capped at $ 100,000 annualized per employee).

The loan is fully repayable as long as the employer 1) fully uses the loan proceeds within eight weeks of disbursement (to pay (A) salary costs, (B) interest on mortgages taken out before February 15, 2020, (C) rental obligations under rental contracts in effect before February 15, 2020, or (D) utilities for which service began before February 15, 2020 — note that any amount paid for interest on any other debt, although a use of the PPP loan proceeds, is excluded from the rebate), with at least 75% of the funds earmarked for salary costs, 2) does not decrease employee salaries (for those who earned $ 100,000 or less annualized in each period of pay in 2019) by more than 25 percent, and 3) does not decrease its number of full-time equivalent employees.

Loan Considerations in Making Employment Decisions

Employers looking to maximize the cancellation of their PPP loan should adhere to the terms of the loan, including the requirement to maintain their full-time equivalent workforce, subject to the “re-hire” exception discussed below. This does not mean that employers should keep each employee individually. Instead, employers are only required to maintain the same average number of employees during the eight-week covered period.

The best practice for an employer would obviously be to retain as much of its workforce as possible throughout the period covered. However, circumstances can prevent an employer from achieving this goal, either because essential employees refuse to come to work, perform poorly, or engage in other misconduct requiring termination.

Fortunately, loan forgiveness is not an all-or-nothing proposition for employers. When an employer has failed to maintain 100 percent of its full-time equivalent workforce during the eight-week period and apologizes, the pardon will be reduced proportionally rather than entirely.

  • Calculating loan forgiveness: The easiest way to look at the reduction in a loan forgiveness is to treat the calculation as a fraction. The numerator is the average number of full-time equivalent employees during the eight-week coverage period of (determined by calculating the average number of full-time equivalent employees for each pay period within a month). The denominator is the average number of full-time equivalent employees over the chosen period described in the following paragraph.

Seasonal businesses, as judged by the Small Business Administration (SBA), will have their average number of full-time equivalent employees measured between February 15, 2019 and June 30, 2019. Employers who are not seasonal will be able to choose between the period from February 15, 2019 to June 30, 2019 or the one that measures the average number of full-time equivalent employees from January 1, 2020 to February 29, 2020. The calculation as a fraction looks like this:

Average number of full-time equivalents over the eight-week period covered
Average number of full-time equivalents during the chosen denominator period

Best practices for employers

Employers need to be strategic in their decisions when deciding the terms of their PPP loan. Specifically, employers should, when possible, determine which measurement period gives them the best chance of obtaining full loan forgiveness.

In addition, employers must be prepared to quickly replace employees made redundant after April 26, 2020 (employees made redundant between February 15, 2020 and April 26, 2020 may be covered by the “rehiring” exception described in the following paragraph) . The objective of the PPP loan is to maintain the workforce of employers throughout the eight week period covered.

If an employer has already laid off or put employees on leave early in the coronavirus response, hope is not lost. The cancellation of the PPP loan gives employers until June 30, 2020 to restore full-time equivalent employment and salary levels for any reductions made between February 15, 2020 and April 26, 2020. Although guidance has remained limited , the US Treasury Department has clarified that an employer will not see a decrease in their loan forgiveness amount if they offer to rehire a laid-off employee and that employee rejects the employer’s offer to return. Accordingly, employers should consider making written offers of reinstatement to each terminated employee in the event that documents are requested at a later date, bearing in mind that such an offer of reinstatement may affect the eligibility of the employee. the employee on state unemployment benefits.

While this article provides a general overview of the PPP loan cancellation program and the implications of employment and termination decisions during the loan term, employers should keep an eye out for additional advice on this matter. So far, SBA and Treasury Department guidelines have focused on loan sizing and related matters, but we expect both to issue guidelines on forgiveness calculations soon.

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