Non-U.S. Employees Count When Determining Eligibility for Paycheck Protection Plan Loans; Repayment Grace Period Extended to May 14, 2020 for “Necessary Loan” Certification

Legal Alert

05.20.2020

Update May 20, 2020

In an interim final rule titled “Business Loan Program Temporary Changes; Paycheck Protection Program – Treatment of Entities with Foreign Affiliates”, the SBA confirmed that due to “‘reasonable borrower confusion based on SBA guidance”, any borrower that applied for a PPP loan prior to May 5, 2020, which together with its affiliates had fewer than 500 U.S. employees, will not be deemed to have made an inaccurate certification of eligibility based on excluding non-U.S. employees in their headcount calculation. The rule is clear that Paycheck Protection Program funds may not be used to support non-U.S. workers or operations.

Originally published May 7, 2020:

The Small Business Administration (SBA) and U.S. Treasury Department continue to trickle out guidance on the Payment Protection Program.

Employees of foreign affiliates

Most significantly, the SBA stated on May 5 in FAQ 44 that for purposes of determining whether a Paycheck Protection Program (PPP) applicant has fewer than 500 employees, the applicant must count the employees of its U.S. and foreign affiliates.[i] Many applicants with foreign-based affiliates and employees had relied on FAQ 3 to exclude foreign-based employees from their calculations.[ii] FAQ 3 includes the seemingly unambiguous language that “a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States.”[iii]

Loan recipients who would not be eligible for a PPP loan under FAQ 44 are now wondering what to do. There is no clear answer or guidance from the SBA.[iv]

We believe that some borrowers will continue to rely on the earlier guidance in FAQ 3 and on the SBA’s guidance in FAQ 17, which states that a borrower can rely on guidance available at the time of the loan application.[v] Borrowers that submitted their applications in good faith based on FAQ 3 are likely at low risk of an enforcement action by the SBA. Similarly, continued use of loan proceeds for uses allowed under the PPP may not materially increase the risk of an enforcement action. The more significant risk may be that, if the SBA audits a borrower when it applies to have the loan forgiven, the SBA may require that the entire loan be repaid. That may be painful for an employer that, if it had not received a PPP loan, would not have hired employees and paid expenses in the covered period of the loan. A borrower that keeps the loan may be more comfortable if it can document its reliance on a favorable interpretation of FAQ 3, for example based on advice from a law firm, accounting firm or lender.[vi] A borrower may also argue that, if it was not reasonable to rely on FAQ 3, the SBA would not later have been compelled to issue FAQ 44.

To limit the risk of potential future loan repayment obligations in light of FAQ 44, other borrowers may repay the PPP loan or conserve loan proceeds they otherwise would have spent on payroll costs and other allowable uses. Borrowers should consider that, if they do not fully repay the loan, terminating or furloughing employees in the remaining 8-week covered period of the loan may affect the amount of the loan that is forgivable.[vii]

Extension of PPP loan repayment grace period

Also on May 5, the SBA extended the grace period to repay PPP loans from May 7 to May 14. The grace period applies to borrowers that are considering whether to return their PPP loan proceeds because they did not make in good faith the required certification on the PPP loan application that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” Although the SBA offered no additional guidance on factors a borrower should consider in re-evaluating the certification, it stated that it intends to provide additional guidance on how it will review the certification prior to May 14, 2020.[viii]

Notably, the grace period does not appear to apply to a borrower that determines it is ineligible for a PPP loan for any reason other than that it could not make the required “need” certification. However, if a borrower returns a PPP loan promptly after discovering that it was ineligible or could not make a required certification, that may be a factor that weighs in that borrower’s favor if the SBA or other federal agency assesses (or determines whether to assess) a fine or other penalty against that borrower.

In FAQ 45 published May 6, the SBA allowed that an employer that repays its PPP loan by May 14 would again become eligible for the Employee Retention Credit.[ix] See the IRS FAQs and our client alert here.

[i] 44. Question: How do SBA’s affiliation rules at 13 C.F.R. 121.301(f) apply with regard to counting the employees of foreign and U.S. affiliates?
Answer: For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the affiliation rules. 13 C.F.R. 121.301(f)(6). Business concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same.

[ii] 3. Question: Does my business have to qualify as a small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP?
Answer: No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable). Similarly, PPP loans are also available for qualifying tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, and Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act that have 500 or fewer employees whose principal place of residence is in the United States, or meet the SBA employee-based size standards for the industry in which they operate.

[iii] More conservative readers of FAQ 3 suggested that that while 500 or fewer employees in the United States was a necessary condition to PPP loan eligibility, it was not a sufficient one, and that even formal guidance in a FAQ was insufficient to outweigh (a) the SBA’s affiliation regulations, which state that in determining a business concern’s size, the SBA counts the receipts, employees or alternate size standard of the business “and all of its domestic and foreign affiliates” (see 13 CFR § 121.301(f)(6)); (b) the absence of an explicit exemption from affiliation rules in the CARES Act for non-U.S. employees, unlike for restaurants, hotels and franchisees; (c) skepticism that the SBA intended to advantage companies with foreign-based employees over those with only U.S.-based employees; and (d) speculation that FAQ 3 was intended only to address early concerns that foreign-owned U.S. companies were not eligible for PPP loans.

[iv] FAQ 44 suggests an applicant must count employees of foreign affiliates “absent a waiver of or exception to the affiliation rules.” We are not aware of any waiver process. More likely this is a generic reference to waivers granted by statute or by SBA regulation. Although the SBA adopted on May 5 an extension of its safe-harbor deadline to repay PPP loans, that safe harbor appears to apply only to borrowers that return funds because they are unable to make the specific certification regarding the necessity of their loan request to support their ongoing operations.

[v] 17. Question: I filed or approved a loan application based on the version of the PPP Interim Final Rule published on April 2, 2020. Do I need to take any action based on the updated guidance in these FAQs?
Answer: No. Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application. However, borrowers whose previously submitted loan applications have not yet been processed may revise their applications based on clarifications reflected in these FAQs.

[vi] For example, the following:

“It is currently an open question whether an applicant should include non-U.S. employees of its affiliates when determining headcount for any employee-based size test.” Proskauer Rose LLP, Guide to the Paycheck Protection Program, originally dated April 14 ,2020.
“Further, foreign employees do not count toward the number of employees considered for business size determinations.” O’Melveny & Myers LLP, SBA’s Paycheck Protection Program and Economic Injury Disaster Loan Program, dated April 14, 2020.
“[W]hen calculating an applicant business’ number of employees, only those of it and its affiliates, if any, whose residence is within the United States should be counted. In other words, an applicant business which has a foreign affiliate that has 500+ employees living outside of the United States may still be eligible for a PPP loan under the Interim Final Rule.” Paul Hastings LLP, Borrower’s Guide to PPP Loans, dated April 8, 2020.
“[T]he PPP provisions of the CARES Act and all subsequent guidance to date has stated that only ‘employees whose principal place of residence in the United States’ will be included in the determination of maximum head count . . . .” and “as of today it is a reasonable position to exclude foreign entity employees in any calculations relating to a PPP loan.” Taylor English Duma LLP, New SBA Guidance on CARES Act PPP Loans: Affiliation Considerations, dated April 8, 2020.

[vii] The loan proceeds that qualify for forgiveness are reduced by multiplying the qualified amount by a ratio of full time employee equivalents (FTEEs) in the initial 8-week covered period of the loan over FTEEs in a pre-COVID-19 historical period.

[viii] To the extent that the SBA and Treasury intended the grace period as an opportunity for borrowers that submitted their PPP loan application before April 23, 2020 to reconsider their “need” certifications in light of the new guidance in FAQ 31, we note the apparent contradiction between that concept and FAQ 17, which states that a borrower can rely on guidance available at the time of the loan application.

[ix] 45. Question: Is an employer that repays its PPP loan by the safe harbor deadline (May 14, 2020) eligible for the Employee Retention Credit?
Answer: Yes. An employer that applied for a PPP loan, received payment, and repays the loan by the safe harbor deadline (May 14, 2020) will be treated as though the employer had not received a covered loan under the PPP for purposes of the Employee Retention Credit. Therefore, the employer will be eligible for the credit if the employer is otherwise an eligible employer for purposes of the credit.