What Does My Business Need to Know About Payroll Protection Program Loans?

In late March, the Coronavirus Response, Aid, and Economic Security Act (“CARES Act”), a $2.2 trillion stimulus bill aimed at softening the economic impact of COVID-19, was enacted into law.  As we first addressed in a prior post, the CARES Act includes many programs meant to aid both employers and employees, including: an expanded unemployment compensation system, refundable loans for small businesses to maintain their payroll costs, loans for mid-sized employers, and payroll tax credits and deferrals.  As the CARES Act is more than 800 pages in length, it would be impossible to succinctly cover all of these programs in one post.  We will, however, address these programs in a series of posts this week.  We sill start with the program that we have received the most questions about – the forgivable Payroll Protection Program (“PPP”) loans available to small employers.

What Small Businesses Are Eligible for PPP Loans?

Most businesses (whether for-profit or not-for-profit) with fewer than 500 employees that were in operation as of February 15, 2020.  There are, however, a number of exceptions to this general rule.

An entity is ineligible for a PPP loan if an owner of 20% or more of the equity of the business is incarcerated, on probation, on parole; has been convicted of a felony within the last 5 years; or is presently subject to an indictment, criminal information, arraignment, or other means by which formal criminal charges are brought.

An entity is also ineligible for a PPP loan if it is: a financial business primarily engaged in the business of lending (e.g., a bank); a life insurance company; a business deriving more than one-third of its gross annual revenues from legal gambling activities; and a private club or business that limits its number of memberships for reasons other than capacity.

What Can a PPP Loan Be Used For?

To cover payroll costs; interest on mortgage obligations incurred before February 15, 2020; rent under lease agreements in force before February 15, 2020; and utilities for which service began before February 15, 2020.  The PPP loan covers these costs over the 8 week period after the loan Is made.  At least 75% of the loan proceeds must be used to pay payroll costs.

What Is the Maximum Amount that Can Be Borrowed?

Up to 2.5 times a business’s average monthly “payroll costs” during the one-year period leading up to loan origination. This is capped at $10 million.

What Counts as Payroll Costs?

 Payroll costs include: (1) employee salaries, wages, commissions, or tips (up to $100,000.00 on an annualized basis for each employee); (2) employee benefits, including costs for vacation, parental, family, medical, or sick leave, payments required for the provisions of group health care benefits (including insurance premiums), and payment of any retirement benefit; and (3) state and local taxes assessed on compensation.

Any wages that an employer pays for Emergency Paid Sick Leave (“EPSL”) or Emergency FMLA Leave (“E-FMLA”) required by the Families First Coronavirus Response Act (“FFCRA”) are not eligible “payroll costs,” as the FFCRA allows an employer to take a payroll tax credit for such wages.

When and Where Can an Eligible Business Apply?

Starting April 3, an eligible business can apply for a PPP loan through any existing Small Business Administration (“SBA”) lender or through any federally insured depository institution or credit union that is participating.  Although the loans are on a first-come first-served basis, President Trump stated over the weekend that he will ask for more funding for the PPP if the original funding cap is exhausted.  Businesses are encourage to consult with their bank to see if it is participating in the program or visit www.sba.gov for a list of SBA lenders.

What Documentation Will an Eligible Business Need?

In addition to the application, which can be found here, an eligible business will need to provide certain payroll documentation to its lender.  This documentation will need to verify the number of full-time equivalent employees on the business’s payroll and the dollar amount of payroll costs, covered mortgage interest payments, covered rent payments, and covered utilities for the 8 week period following the loan.  There may also be additional documentation that the lender will require.

What are the Terms of the PPP Loan?

Although the term of the loan is 2 years, there are no prepayment penalties or fees.  No collateral is required for the loan.  The loan has a fixed interest rate of 1.00%.  All interest payments are deferred for 6 months, but interest will accrue during this period.

How Much of the PPP Loan is Forgivable?

The maximum amount of loan forgiveness is the sum of all qualified payroll costs, mortgage interest payments, rent payments, and utility payments incurred and made by the borrower during the 8 weeks following loan origination.  This is capped at the total loan principal amount.  No more than 25% of the loan forgiveness amount can be attributable to non-payroll costs.

Can the Forgivable Amount be Reduced?

Yes.  The forgiveness amount can be reduced proportionately if a PPP loan recipient reduces its employee headcount or employee compensation and does not rectify the reduction by June 30, 2020.

The forgiveness amount can be reduced proportionately if a PPP loan recipient reduces the headcount of Full Time Equivalent Employees (“FTEs”) during the life of the PPP loan and does not rectify the reduction by June 30, 2020.  First, an eligible business needs to establish its baseline headcount of FTEs, which can either be: (1) the average number of FTEs employed from January 1, 2020 to February 29, 2020 or (2) the average number of FTEs employed from February 15, 2019 to June 30, 2019.  If the business’s average number of FTEs drops below the FTE baseline for the life of the loan (and this reduction is not remedied by June 30, 2020), then the loan forgiveness will be reduced proportionately.

The forgiveness amount can also be reduced if a PPP loan recipient cuts employee compensation below its baseline amount.  To calculate baseline compensation, a business must include all employee salaries and wages (up to $100,000.00 per employee).  If the compensation paid during the life of the loan is less than 75% of this baseline amount and this reduction is not rectified by June 30, 2020, then the loan forgiveness will be reduced proportionately.

How Does an Eligible Business Request Loan Forgiveness?

By submitting a request to a lender that is servicing the PPP loan.  The request will include documents that verify the number of full-time equivalent employees and pay rates, as well as the payments on eligible mortgage, lease, and utility obligations.  The business must certify that the documents are true and that the forgiveness amount was used to keep employees and make eligible mortgage interest, rent, and utility payments.  The lender must make a decision on the forgiveness application within 60 days.

If you have any questions about PPP loans or any other labor and employment law topic, please do not hesitate to contact the attorneys at Hoffman & Hlavac.