On Friday, March 27, 2020, the President signed into law the CARES Act, which contains $376 billion in relief for American workers and small businesses. In addition to traditional SBA funding programs, the CARES Act established several new temporary programs to address the COVID-19 outbreak. Among these was the Payroll Protection Program (“PPP”). The Paycheck Protection Program is a loan designed to provide a direct incentive for small businesses to keep their workers on the payroll. The Small Business Association will forgive loans if all employees are kept on the payroll for eight weeks and the money is used for payroll, rent, mortgage interest, or utilities.
The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.
Additionally, as part of the CARES Act, federal government is giving an additional $600/week in federal aid to unemployed workers. In light of this added $600/week, many employees are earning more on unemployment than they were earning while at work. Employers are beginning to bring employees back to work or back on the payroll in order to comply with the loan forgiveness provisions of the PPP. In light of the federal benefit, some employers are facing pushback from employees who would prefer to remain on employment. Employers have questioned whether employees' refusal (and a corresponding decrease in payroll costs) will disqualify them from loan forgiveness.
Recently, the SBA in consultation with the Department of Treasury answered that very question in its most recent FAQ:
Question: Will a borrower's PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA's implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?
Answer: No. As an exercise of the Administrator's and the Secretary's authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act's limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act's loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee's rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.
Therefore, businesses that receive PPP loans can exclude laid off employees if an employee turns down a written offer to be rehired and that written offer is rejected.
Practical Advice: In light of the foregoing, employers wishing to bring employees back to work, increasing their hours or increasing their pay in order to secure loan forgiveness should document these offers in writing. Where employees refuse, employers should secure that refusal in writing, thereby resulting in a permanent termination. Employers should be mindful of the reasons for the employee's refusal and ensure compliance with other laws. For example, the situation presented by an employee who is refusing to return to work due to fears about returning to work due to an underlying medical condition that makes him/her susceptible to COVID-19 should be separately analyzed under the Americans With Disabilities Act and applicable state anti-discrimination law. While the refusal would not trigger repayment of the PPP loan, employers should be careful not to convert a furlough to a permanent layoff as a result of his/her refusal.