On June 17, 2020, the SBA and U.S. Treasury published an updated form of application and instructions for borrowers seeking forgiveness of their Paycheck Protection Program loans, as well as a new “EZ” form of application and instruction. In both cases, these applications generally implement the statutory changes required by the Paycheck Protection Program Flexibility Act.
While the improved likelihood of full forgiveness due to the 24-week covered period is likely to draw the most attention, potential compliance with two of the safe harbors provided to avoid a loss of forgiveness in the event of a reduction in the number of Full Time Equivalent (FTE) employees comparing the applicable “covered period” with the applicable reference period. Under the CARES Act, while borrowers are generally eligible for loan forgiveness for certain expenditures during the covered period, actual loan forgiveness must be reduced if the borrower’s weekly average number of FTE employees during the covered period was less than during the borrower’s chosen reference period (generally, February 15, 2019 through June 30, 2019 or January 1, 2020 and February 29, 2020; or, for seasonal employers, any consecutive 12-week period between May 1, 2019 and September 15, 2019).
However, under the revised PPP loan forgiveness application, there are certain FTE reduction exceptions and two safe harbors. Each of these provide potential relief from a decrease in forgiveness due to a reduction in FTE levels… but they also provide enhanced risk for borrowers needing to rely on them. In addition, general eligibility for the use of the Form EZ loan forgiveness application is conditioned on compliance with the reduction exceptions or one of the safe harbors.
FTE Forgiveness Reduction Exceptions
As provided in the original forgiveness application, in calculating the average number of FTE employees during the covered period, borrowers are permitted to effectively add back the FTEs for: (1) any positions for which the employer made a good-faith, written offer to rehire, which was rejected, (2) any employees who were fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours. (If the positions were re-filled during the covered period, than borrowers are required not to double-count such positions.)
Consistent with the PPP Flexibility Act, the revised forgiveness application expanded the forgiveness reduction exceptions to also add back any positions for which the employer made a good-faith written offer to restore any reduction in hours during the covered period that was rejected by the employee. The new forgiveness application also adds two potentially significant qualifications to the reduction exception for rejected offers of rehiring. First, the individual to whom the offer to rehire is made must have been an employee on February 15, 2020. Second, the employer must be “unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020.”
This second qualification is potentially significant, and there is currently no further guidance that has been provided. What does it mean to be “unable to hire?” What does it mean to be “similarly qualified?” Given a deadline of December 31, 2020, can applicants rely on the forgiveness reduction exception in any manner prior to year-end? (And for the lenders, can they accept the borrower’s certification without further diligence?)
FTE Reduction Safe Harbors
Consistent with the CARES Act and the PPP Flexibility Act, the PPP loan forgiveness application also provides two safe harbors related to FTE reductions. Compliance with either safe harbor eliminates any decrease in loan forgiveness based upon a reduction in FTE levels.
Note #1: Compliance with either of the FTE safe harbors does not eliminate the potential for a decrease in loan forgiveness based on salary/hourly wage reductions; the FTE reduction and the salary/hourly wage reductions are separately administered.
Note #2: While compliance with either safe harbor is sufficient to eliminate a decrease in forgiveness based upon a reduction in FTE levels, only compliance with the “due to COVID-19” safe harbor makes a borrower eligible to use the Form EZ. Compliance with the “restoration” safe harbor is not identified as a means for achieving eligibility under the Form EZ.
“Due to COVID-19” Safe Harbor
This new safe harbor was added following the language of the PPP Flexibility Act. The instructions provide (emphasis added): “The Borrower is exempt from the reduction in loan forgiveness based on a reduction in FTE employees described above if the Borrower, in good faith, is able to document that it was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020, due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.”
The application provides a checkbox “If you were unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19” and a new certification that Borrowers must certify by initialing: “If the Borrower has checked the box for FTE Reduction Safe Harbor 1 on PPP Schedule A, the Borrower was unable to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020, by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19.”
Unfortunately, no mention of “good faith” is made on the application.
The application also provides, in the list of documents that the Borrower must maintain, but is not required to submit: “Documentation supporting the certification, if applicable, that the Borrower was unable to operate between February 15, 2020, and the end of the Covered Period at the same level of business activity as before February 15, 2020 due to compliance with requirements established or guidance issued between March 1, 2020 and December 31, 2020 by the Secretary of Health and Human Services, the Director of the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration, related to the maintenance of standards of sanitation, social distancing, or any other work or customer safety requirement related to COVID-19. This documentation must include copies of the applicable requirements for each borrower location and relevant borrower financial records.”
Like the “need” certification before it, this PPP certification seems ripe for ambiguity and second-guessing. As of the publishing of this blog post, there has been no further guidance on the factors expected to be analyzed, or the types of requirements or guidance that are expected to be applicable to such a certification. As analyzed previously, these certifications present reputational, forgiveness, and litigation risk. Borrowers looking to rely on the “Due to COVID-19” safe harbor, should consult with experienced advisors and document their files extensively to support the validity of the certification when made.
“Restoration” Safe Harbor
A borrower is similarly exempt from the reduction in loan forgiveness based upon a reduction in FTE employees if both: (a) the borrower reduced its FTE employee levels in the period between February 15, 2020, and ending April 26, 2020, and (b) the borrower then restored its FTE employee levels by not later than December 31, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.
Consistent with the PPP Flexibility Act, the revised application extended the deadline for restoration of FTE levels from “not later than June 30, 2020” to “not later than December 31, 2020.” While this certainly provides greater flexibility for PPP borrowers to delay restoration of their payrolls, it might also necessarily force delayed filing of applications for loan forgiveness, as reliance on this safe harbor appears to require that FTE levels have been “restored.” There has also not been any guidance as to what is meant by having “restored” its FTE employee levels; is one day of restoration sufficient? Again, likely to raise concerns of reputational, forgiveness and litigation risks.
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