KEY TAKEAWAYS

1. Borrowers that utilize bi-weekly and weekly payroll schedules may choose to use an Alternative Payroll Covered Period which begins the first day of the first pay period following the disbursement of the PPP Loan.
2. Certain eligible payroll costs and nonpayroll costs incurred, but not paid, during the Covered Period (or Alternative Payroll Covered Period) may be forgiven if paid on or before the next pay date or regular billing date. 
3. Employers are relieved from the FTE employee reduction calculation to the extent former employees reject a good-faith offer for rehire, were terminated for cause, voluntarily resigned, or requested and received a reduction in hours. 

On Friday May 15, 2020, the Treasury Department released the Paycheck Protection Program Loan (“PPP Loan”) Forgiveness Application for Borrowers (the “Application”). An Interim Final Rule on PPP Loan Forgiveness and further guidance is expected to be issued as early as this week. This client alert provides a brief overview and interpretation of key provisions contained in the Application. The full Application can be found here.

Flexibility of Payroll Schedule [p. 1]

The Application provides certain Borrowers some flexibility on when to begin their eight-week (56 days) period for utilizing the PPP Loan proceeds. Borrowers using a bi-monthly or monthly payroll schedule are required to begin this period on the date the PPP Loan was disbursed (“Covered Period”). However, Borrowers that utilize bi-weekly or weekly payroll schedule may use the Covered Period or, at their own discretion, may begin this period on the first day of the first pay period following the date the PPP Loan was disbursed (“Alternative Payroll Covered Period”). It is unclear why the Application limits the Alternative Payroll Covered Period to bi-weekly and weekly payroll schedules, but it is suspected that additional guidance on this issue may allow for broader use of the Alternative Payroll Covered Period.

Summary of Eligible Costs for Forgiveness [p. 4]

Eligible payroll costs are generally forgivable if: 

• Equal to an amount that is at least 75% of the total amount of forgiveness; and 
• Were incurred or paid during the Covered Period (or Alternative Payroll Covered Period).

However, payroll costs incurred, but not paid, during the last pay period of the Covered Period (or Alterative Payroll Covered Period) can be forgiven if paid on or before the next pay date, even if that is after the end of the period. Borrowers may count a payroll cost only once, either when it is incurred or when it is paid. Although the Application is not clear on this point, based on the strict eight-week (56 day) period, our interpretation is that any payroll costs incurred prior to the date the period begins cannot be included in the forgiveness calculation, regardless of when it is paid. 

For information on what qualifies as payroll costs, see Interim Final Rule on Paycheck Protection Program posted on April 2, 2020 (85 FR 20811). 

Eligible nonpayroll costs are generally forgivable if: 

• Equal to an amount that is no more than 25% of the total amount of forgiveness; and 
• Were incurred or paid during the Covered Period.

However, nonpayroll costs incurred, but not paid, during the Covered Period can be forgiven if paid on or before the next regular billing date, even if that is after the end of the period. Eligible nonpayroll costs include: 

• Covered mortgage obligations: payments of interest (not including any prepayment or payment of principal) on any business mortgage obligation on real or personal property incurred before February 15, 2020 
• Covered rent obligations: business rent or lease payments pursuant to lease agreements for real or personal property in force before February 15, 2020; and
• Covered utility payments: business payments for a service for the distribution of electricity, gas, water, transportation, telephone, or internet access for which service began before February 15, 2020. 

Just as it is for payroll costs, a nonpayroll cost may only be counted once, when it is incurred or when it is paid. The Application is silent as to the use of the Alternative Payroll Covered Period for nonpayroll costs. Further guidance may clarify. 

Average FTE Employees Reduction [Instructions for PPP Schedule A Worksheet pp. 7-8]

The Application provides for the reduction to the amount of PPP Loan forgiveness based on any reduction in average full-time equivalency (FTE) employees during the Covered Period (or Alternative Payroll Covered Period) as compared to 1) February 15, 2019 through June 30, 2019 or 2) January 1, 2020 through February 29, 2020. To calculate average FTE, the Borrower must calculate the average number of hours worked per week and divide by 40 and round to the nearest tenth (capped at 1.0). Alternatively, the Borrower may use a simplified calculation of 1.0 for all employees working 40 hours or greater per week and 0.5 for all employees working less than 40 hours per week. Borrowers are relieved from the FTE reduction calculation to the extent former employees: 

• Reject a good-faith written offer to rehire; 
• Were terminated for cause;
• Voluntarily resigned; or 
• Voluntarily requested and received a reduction of hours. 

Additionally, an FTE safe harbor allows a Borrower to avoid a reduction in forgiveness. In order to qualify for the safe harbor, the Borrower must have, when compared to the total FTE employee level for the pay period which include February 15, 2020: 

• Had an FTE employee level reduction between February 15, 2020 and April 26, 2020, and
• Eliminated said reduction prior to June 30, 2020.

Salary or Hourly Wage Reduction [Instructions for PPP Schedule A Worksheet pp. 7-8]
The Application provides for the reduction to the amount of PPP Loan forgiveness based on a reduction of 25% or more in the salary or hourly wage of an individual employee during the Covered Period or Alternative Payroll Covered Period as compared to the average salary or hourly wage during the first quarter of 2020 (January 1, 2020 through March 31, 2020). 

The Application does not specifically provide for a salary or hourly wage safe harbor, but it does mention that a Borrower who restores salary or hourly wages can eliminate the reduction. Based on the CARES Act, we anticipate further guidance will clarify if the same test used for the FTE safe harbor will be applicable to the salary or hourly wage safe harbor. Also, while they are not specifically exempt under the Application from the salary or hourly wage calculations, it is our interpretation that only employees that are employed throughout the Covered Period or Alternative Payroll Covered Period are included in the calculation.