The SBA’s latest round of frequently asked questions (FAQs) about the Paycheck Protection Program (PPP) gives employers an important new tool to address one of the biggest challenges of trying to maximize PPP forgiveness: How to respond to employees who refuse to return to work by June 30, 2020.

Loan forgiveness is the cornerstone of the PPP, which was established under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). To protect jobs, the PPP’s offer of loan forgiveness is in part based on an employer’s ability to maintain headcount through the COVID-19 crisis. Specifically, if between February 15, 2020 and April 26, 2020, an employer reduces its employee headcount, then the amount of loan forgiveness will be reduced. If the employer reinstates those employees by June 30, 2020, however, the loan forgiveness amount will not be reduced. Further explanation of the PPP and loan forgiveness reduction calculation can be found here.

Unfortunately, employers have encountered a new challenge in restoring headcount. Increasingly, employees are refusing to return to work. In a large number of circumstances, current unemployment benefits pay more than the amount employees normally earn working fulltime. As a result, many employees are incentivized to refuse to return to work to attempt to continue collecting enhanced unemployment benefits. One question troubling employers is whether a laid-off employee’s refusal to return to work, even after an offer to rehire, will reduce the loan forgiveness amount.

The U.S. Department of Treasury answered this question in a new round of FAQ’s issued on May 3, 2020. The FAQ indicates that the Small Business Association (SBA) and Treasury, under their authority to grant “de minimis” exemptions from the CARES Act’s limits on loan forgiveness, may exclude laid-off employees from the loan forgiveness reduction calculation if the borrower offers to rehire the employees (for the same salary/wages and same number of hours), and the employees decline the offer. Additionally, the SBA’s new guidance reminds employers to advise employees that they may forfeit their eligibility for unemployment compensation benefits if they refuse an offer of rehire. This factor will become all the more important as states increasingly begin to chargeback unemployment claims against employer experience ratings.

This new exemption presents two important limitations. First, employers must properly document each employee’s refusal to return to work to qualify for the exemption. Specifically, employers must be able to provide proof of:

  • A good faith, written offer of rehire, and
  • The employee’s rejection of that offer.

Thus, documentation of each incident will be essential to preserving PPP forgiveness. Second, the full scope of this “de minimis”exemption remains uncertain. For instance, while the SBA may excuse a few job losses based on employee refusals, the SBA may not excuse widespread refusals if they dramatically impact an employer’s average FTE. Similarly, the FAQ does not address whether this exemption will apply where an employer alters the terms and conditions of employment in extending a rehire offer; for example, where an employer reduces pay rates or scheduled hours for returning employees.

The SBA and Treasury are expected to issue an interim final rule that will hopefully provide further guidance and clarification. In the meantime, employers should begin developing strategies for responding to refusals to return as part of their larger return-to-work planning. Such proactive steps are essential to making sure that refusals are properly documented and employers can make timely, informed forgiveness applications in the short forgiveness window following June 30, 2020.

Employers with questions about how their return to work plans will impact their PPP loan forgiveness should reach out to their Reed Smith attorneys.