- The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provides relief for certain payroll-related costs to small businesses under the Paycheck Protection Program (PPP) and authorizes (but does not require) an adjustment for government contractors of up to 40 hours per week of leave for certain employees unable to work because of COVID-19-related restrictions under Section 3610 of the CARES Act.
- Government contractors that qualify for both forgivable loans under the PPP and an adjustment under Section 3610 face complex and sometimes conflicting guidance on whether they are permitted to accept funds under both CARES Act programs.
- Most agency guidance recognizes contractors' ability to access both programs, so long as the funds are not applied to cover the same costs. However, some agency regulations and contract modifications suggest that Section 3610 relief must be reduced by the amount of PPP or other COVID-19 funding for which a contractor is eligible — even if the funds are used to pay separate costs.
Small businesses impacted by the coronavirus (COVID-19) pandemic may apply for forgivable loans under the Coronavirus Aid, Relief, and Economic Security Act’s (CARES Act) Paycheck Protection Program (PPP), which was designed to assist companies in paying their employees and select other business-related expenses. The CARES Act also includes Section 3610, under which government contractors may request relief for payroll costs incurred to maintain staff in a "ready state" who are not able to continue working in furtherance of a federal government contract because of COVID-19. For additional information about the PPP, see Holland & Knight's previous alert, "SBA Paycheck Protection Program Loans: Forgiveness Guidance, Part II" (May 18, 2020). For additional information about Section 3610, see Holland & Knight's Government Contracts Blog, "Department of Defense Releases Further Guidance for Implementing Section 3610 of the CARES Act" (April 15, 2020).
The PPP and Section 3610 both focus on helping businesses pay their employees. In fact, forgiveness of a PPP loan is premised on use of at least 75 percent of the loan on payroll costs. The CARES Act prohibits "double-dipping" — meaning that a contractor may not be paid twice for the same incurred cost. But what if a contractor uses PPP funds to pay for one set of payroll and business costs, while using Section 3610 funds to pay for a different set of payroll costs? Similarly, what if a contractor credits and does not include any payroll costs covered by PPP loan proceeds in its invoices or requests an equitable adjustment under Section 3610? Both scenarios are consistent with the CARES Act, but some agency guidance may suggest a different view.
Agency Guidance on PPP and Section 3610 Funding
Most agency guidance, as well as the Federal Acquisition Regulation (FAR) cost principles, seem to allow for the use of both programs so long as the contractor avoids double-dipping. Section 3610 directs that "the maximum reimbursement authorized by this section shall be reduced by the amount of credit a contractor is allowed pursuant to" the Family First Coronavirus Response Act and "any applicable credits a contractor is allowed under this Act." (See Holland & Knight's previous alert, "DOL, IRS and Treasury Preview Employment Provisions for Families First Coronavirus Response Act," March 23, 2020.) This is consistent with the cost principle at FAR 31.201-5, requiring that "the applicable portion of any income, rebate, allowance, or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government either as a cost reduction or by cash refund." These provisions clearly prohibit double-dipping. When read together, though, they do not seem to prohibit a contractor from accepting multiple sources of government funding so long as the funding is used to pay separate costs.
The Office of Management and Budget's (OMB) guidance to date reinforces the conclusion that a contractor may receive funding under both PPP and Section 3610 so long as the contractor avoids double-dipping. In its April 17, 2020, guidance memo, OMB first addressed the issue of double-dipping, making clear that agencies should avoid federal funds "being used to make multiple payments for the same purposes." OMB's guidance then acknowledged that a contractor may seek to use both the PPP program and Section 3610:
In some cases, provisions other than section 3610 may provide a more efficient means of getting payment into the hands of contract employees. In other cases, a contractor may find it beneficial to take advantage of a combination of resources. For example, a business may wish to use the Paycheck Protection Program (PPP) established pursuant to sections 1102 and 1106 of the CARES Act for certain relief and request agency support under section 3610 for other relief.
Some agency guidance, however, is less clear. The U.S. Department of Defense (DoD) guidance, for example, has created some confusion among contractors about whether they may accept both PPP and Section 3610 funding.
- In its April 8, 2020, Class Deviation, DoD stated that where a contractor receives a loan under PPP for "sheltering-in-place" employees, the contractor "should not seek reimbursement for the payment from DoD using the provisions of section 3610." This clearly addresses the prevention of double-dipping.
- On the other hand, the accompanying new Defense Federal Acquisition Regulation Supplement (DFARS) provision may be read more expansively. DFARS 231.205-79(b)(6) states that "Costs made allowable by this section are reduced by the amount the contractor is eligible to receive under any other Federal payment, allowance, or tax or other credit allowed by law that is specifically identifiable with" the COVID-19 pandemic (emphasis added).
- The DFARS provision could be interpreted to mean that DoD contractors would be eligible to receive Section 3610 reimbursement only for allowable costs for which relief is not otherwise available under the CARES Act or other pandemic relief legislation — regardless of whether or not the contractor actually received such relief, and regardless of whether the contractor was able to accept the Section 3610 reimbursement without double-dipping.
There have been contract modifications from agencies and prime contractors that include similarly expansive language. As with DFARS 231.205-79(b)(6), the broad restrictions in such contract clauses are not limited to the prohibition of double-dipping. This could lead contractors to believe that they may not receive funding from both programs — even if they were able to use the PPP and Section 3610 funds to pay for separate costs.
Conclusion and Takeaways
The foregoing hyper-technical interpretation should not prevail, and the government's focus should be solely on whether the contractor has made an improper double-recovery for the same costs. That said, the government's guidance is evolving, and it is difficult to predict how a particular court or board of contract appeals might decide these issues in the event of a dispute over allowability of costs in the case of a contractor that has received an adjustment under Section 3610 and also received a PPP loan (even if the contractor is able to demonstrate that no PPP loan proceeds were applied to costs included in its invoices).
The latest COVID-19 relief bill — Health and Economic Recovery Omnibus Emergency Solutions Act (HEROES Act) — passed by the House on May 15, 2020, directs OMB to issue uniform guidance for implementation of Section 3610. Hopefully this portion of the legislation will be passed into law and OMB will provide further clarity to contractors with respect to accepting both PPP and Section 3610 funds. The guidance also may address additional topics of potential contractor uncertainty, such as whether acceptance of a PPP loan (prior to forgiveness) constitutes a "credit" under the statute, and the impact on indirect rates when a contractor uses PPP funds to pay allowable business expenses such as rent and utilities.
In order to manage the risks inherent in navigating this rapidly changing environment, it is important that contractors maintain meticulous records carefully documenting any and all relief programs for which they are eligible, whether or not such relief was sought (including support for any decision not to seek any such relief), the amount of any relief actually received and how the relief funds were actually spent. Additionally, in seeking Section 3610 relief, contractors should be transparent as to any such other relief that they have received or declined to seek and should be careful not to include any requests for funds that could potentially result in double-dipping. Successful implementation of these strategies should help to mitigate the risks inherent in operating during this unprecedented and evolving environment.