PPP Loan Forgiveness Issue: Rehire Offer is Rejected

As states begin to lift stay-at-home orders, businesses are taking steps to return to a normal schedule and pattern of employment. While some employees welcome this opportunity, some employees will refuse to return to work, particularly if they are making more money through the coronavirus stimulus bill that currently provides an extra $600.00 per week paid by the federal government through July 31, plus expanded state unemployment benefits for up to 39 weeks.

This can create havoc for employers who received funds through the Paycheck Protection Program (“PPP”). The PPP requires employers to rehire employees and return to pre-COVID staffing levels or face a reduction in loan forgiveness.

What can be done to eliminate this reduction?

In essence, PPP loan recipients are eligible for loan forgiveness if the funds were used for qualified expenses over the eight-week coverage period commencing when the loan was disbursed.  However, the amount of the loan forgiveness may be reduced if the percentage of eligible expenses attributed to non-payroll expenses exceeds 25% of the loan, if the employee headcount decreases or compensation decreases by more than 25% for an employee making less than $100,000, unless the headcount or compensation are restored by June 30, 2020.
The U.S. Department of Treasury and the U.S. Small Business Administration recently released the Paycheck Protection Program Loan Forgiveness Application.  The application and associated instructions provide some initial guidance for borrowers trying to navigate the forgiveness process.
There were three notable provisions in the released documents:

  • Borrowers are provided with the flexibility to include eligible payroll and non-payroll expenses paid or incurred during the eight-week period after receiving their PPP loan.  Previously eligible payroll and non-payroll expenses had to be paid or incurred during the effective eight-week period.
  • Borrowers are exempt from the reduction in loan forgiveness based on FTE employees if both the following conditions are met:  (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020, and (2) the FTE level noted on February 15, 2020, are restored to employment no later than June 30, 2020. 
  • For exemption consideration, borrowers can show, via written offer/refusal, that they made a good faith, offer to rehire workers.

PPP Loan Forgiveness Application (SBA Form 3508):

For the SBA PPP Interim Final Rule – Requirements for Loan Forgiveness: