Last week, the Paycheck Protection Program Flexibility Act (PPPFA) was signed into law, becoming effective immediately. The PPPFA reforms the Paycheck Protection Program (PPP), which was passed under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and is intended to improve the terms of PPP loans obtained by small businesses to help cover payroll and other costs during the COVID-19 crisis. Certain aspects of the new law, however, may make it more difficult for some businesses to obtain full loan forgiveness.
Employers who received PPP loans after the CARES Act went into effect as of March 27, 2020, soon ran into challenges. For instance, many found that the eight-week period covered by the loan was not enough to provide the financial relief needed to stay afloat. This was particularly true for employers whose businesses were shut down as a result of state orders. Others faced unavoidable reductions to their loan forgiveness amount under the PPP’s reduction rules, based on an inability to return to pre-pandemic workforce numbers by the PPP’s June 30, 2020, deadline.
The PPPFA reforms the PPP by:
- Extending the covered period for forgiveness. The PPP’s eight-week covered period for loan forgiveness will now be extended to 24 weeks after origination of the loan or December 31, 2020, whichever is earlier. A borrower may still elect an eight-week period if it received a loan prior to enactment of the PPPFA.
- Altering the loan forgiveness full-time equivalent (FTE) reduction rules. Under the PPPFA, FTE reductions to a loan forgiveness amount will not be assessed against a borrower who, in good faith, can show via documentation that it could not rehire someone who was employed by the borrower on February 15, 2020, and that it could not find a similarly qualified employee to fill the position by December 31, 2020. Additionally, FTE reductions will not be assessed against a borrower who, in good faith, can show that compliance with the requirements of COVID-19 official guidance – such as social distancing – prevented a return to pre-February 15, 2020, business activity. However, this exception does not excuse lack of activity due to general economic decline or recession.
- Changing the 75/25 ratio to a 60/40 ratio. The Small Business Association’s (SBA) PPP guidance previously required borrowers to use at least 75 percent of the loan on payroll costs and 25 percent on other permitted non-payroll expenses (such as rent, mortgage interest, and utilities). The PPPFA now requires borrowers to use no less than 60 percent of PPP funds on payroll and 40 percent on other permitted non-payroll expenses.
These changes to the PPP may impact businesses’ employment decisions for the rest of the year in a variety of ways. First, the easing of the 75/25 ratio to a 60/40 ratio, combined with the extended covered period for loan forgiveness, allows for a broader distribution of PPP resources. Employers need not spend as much of the loan on payroll, allowing them to maintain employment by partially rather than completely subsidizing employees over a longer period.
Additionally, the extension from June 30, 2020, to December 31, 2020, may incentivize employers to maintain lower workforce numbers for a longer period of time in order to save costs. At the same time, however, the new “good faith” requirements that employers must meet in order to avoid FTE reductions to the loan forgiveness amount appear to abrogate the exceptions previously made by the SBA for employees who are fired for cause or who refuse to return to work. Specifically, under the PPPFA, the employer must show in “good faith” both (1) a qualifying inability to rehire an employee and (2) an inability to find a suitable replacement. This sets a higher bar for employers, potentially making it more difficult to avoid FTE reductions to the loan forgiveness amount.
The SBA is expected to issue a new form application for forgiveness, incorporating the PPPFA changes. Employers currently working on their forgiveness applications should consider waiting for the new application, which may provide additional SBA guidance on the latest terms. For employers who have not yet applied for a PPP loan, note that the deadline for doing so is June 30, 2020.
Employers with questions about the PPPFA and how it will impact their PPP loan forgiveness amount and return-to-work plans should reach out to their Reed Smith attorneys.