Paycheck Protection Program
What is the Paycheck Protection Program?
The Paycheck Protection Program, the PPP, is a newly enacted federal law to help employers deal with the fallout from COVID-19. Employers with less than 500 employees can qualify for a forgivable loan that would cover their payroll (including certain benefits), rent or mortgage interest, and utilities for a period of 8 weeks from the date they receive the loan.
This is money that employers don’t have to repay if they qualify for and comply with the terms of the program.
This article is written based on the limited guidance available as of April 2, 2020. Information may change and be updated as various government agencies provide guidance. Additionally, the PPP has some confusing and inconsistent provisions for which further guidance is needed.
Who is Eligible?
Business, nonprofits, veteran organization, and tribal businesses with 500 or fewer employees are eligible.
Businesses in the hospitality and dining industries may be eligible to receive a loan if they:
- have more than one physical location;
- employ 500 or fewer employees per location; and
- are assigned to the accommodation and food services sector under the North American Industry Classification System (NAICS).
Sole-proprietors, independent contractors, and other self-employed individuals are also eligible.
Even if the borrower could obtain credit elsewhere, it can still qualify for the forgivable loan.
A business or non-profit must:
- have been operational on February 15, 2020.
- have paid salaries and payroll taxes to employees or independent contractors
- make a good faith certification that it:
- has been affected by COVID-19;
- will use funds to retain workers, maintain payroll, and address other debt obligations; and
- is not receiving funds from another SBA program for the same uses.
What Certifications Do You Have to Make?
The borrower must certify the following:
- “the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations”;
- the funds will be used to retain workers and maintain payroll or make mortgage payments, lease payments, and utility payments; and
- the borrower does not have an application pending for another federal loan for the same purpose and duplicative of amounts applied for or received under a covered loan.
What are the Details?
Eligible employers may obtain a forgivable loan that covers the following expenses for the 8-week period after they obtain the loan money:
- Payroll including salary, commissions, tips, or similar compensation for all employees.
- There is a $100,000 per employee cap. In other words, an employer can recover up to $8,333 per month for any employee making more than $100,000.
- health benefits,
- retirement benefits,
- paid time off for vacation, medical, and family leave,
- this does not include payments made pursuant to the revised FMLA and federal paid sick leave law. Employers will instead receive a tax credit for any paid leave under these two new laws. This means the employer can still get a 100% reimbursement, but in the form of a tax credit, as opposed to a forgivable loan.
- state or local (but not federal) taxes assessed on compensation for employees,
- rent or mortgage interest,
- utilities (electricity, gas, water, transportation, telephone, and internet), and
- interest on any other debt obligation incurred before the loan application was submitted.
The most recent guidance also mandates that 75% of the total loan amount must be used towards payroll, as opposed to utilities, rent and/or mortgage interest.
What About Owner or Shareholder Compensation?
It is unclear whether an employer can seek loan forgiveness for compensation paid to an owner or shareholder.
What About Independent Contractors and Self-Employed?
Independent contractors and self-employed can take advantage of the forgivable loan.
The most recent guidance states that employers may NOT recover a loan for payments made to independent contractors because independent contractors have the ability to apply for a PPP loan on their own.
What is the Total Amount of the Forgivable Loan?
The total amount an employer may receive is the lesser of:
- $10 million; or
- 2.5x the average total monthly “payroll costs” from the one-year period before the loan is made.
The “payroll costs” includes all of the items above (payroll, benefits, utilities, and rent or mortgage interest).
It is unclear what happens if the amount of the loan is greater than needed to cover the actual payroll costs during the 8-week “covered period.” The employer may have to return any unused loan money.
What are the Requirements for Loan Forgiveness?
The loan will be 100% forgiven UNLESS the employer reduces pay or lays off employees during the 8-week “covered period” of the loan.
The amount forgiven is reduced in direct proportion to any reduction in employees during the 8-week covered period.
The amount forgiven is also reduced in proportion to any reduction in pay of 25% or more. However, this doesn’t apply to any employee making more than $100,000. In other words, an employer may reduce the pay of an employee making $100,000 per year without it affecting their right to obtain full loan forgiveness.
Notably, the bill seems to allow an employer to obtain full loan forgiveness if it lays off its employees or reduces their pay after June 30, 2020, but that remains to be seen.
Employers must certify that the funds were used to retain employees and make mortgage interest, rent, and utility payments. The lender must make a decision on the forgiveness within 60 days.
What About the Employees We Just Laid Off or Reduced Pay?
Employers have until June 30, 2020 to re-hire employees and restore the pay of employees who were laid off or received a reduction in pay between February 15, 2020 and April 26, 2020.
When Can I Apply?
Starting April 3, 2020, small businesses and sole proprietorships can apply.
Starting April 10, 2020, independent contractors and self-employed individuals can apply.
Where Can I Apply?
You can apply through any existing SBA lender or through any federally insured depository institution, federally insured credit union, and Farm Credit System institution that is participating. Other regulated lenders will be available to make these loans once they are approved and enrolled in the program.
Where is the Application?
You will need to complete the Paycheck Protection Program loan application and submit the application with the required documentation to an approved lender that is available to process your application by June 30, 2020. Click here for the application.
What Supporting Documents do I Need?
When requesting forgiveness, the borrower must provide all relevant documentation to the lender, including payroll tax filings and state income tax filings. Borrowers that rehire workers previously laid off cannot be penalized for having reduced payroll at the beginning of the period.
Are There Fees?
There are no fees to the borrower in obtaining a loan.
Do I have to Make a Personal Guarantee or Provide Collateral?
The loans do not require or permit that the borrower provide collateral or make personal guarantees.
If the Loan is Not Completely Forgiven, Can Owners or Shareholders be Held Liable?
Loan administrators have no recourse against any individual, shareholder, member, or partner of an eligible loan recipient for non-payment, unless the individual uses the loan proceeds for unauthorized purposes.
Should I Apply Now?
There is $355 billion dedicated toward this loan forgiveness program. It is described as a funding “cap,” so it would be wise for employers to apply, now. However, there are many unknowns about PPP.
About the Author: Jeffrey Silence is a partner at the Phoenix law firm of Jaburg Wilk. He helps employers address complaints of discrimination and defends them in litigation. He also advises employees who believe they are being discriminated against. He enjoys finding creative ways to help solve the common problems that employees and employers face, including miscommunication.