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By: D. Zachary Wiseman

Congratulations! After what were probably some sleepless nights, your Paycheck Protection Program (PPP) funding finally came through and you now have access to a forgivable loan. Free money? Not so fast. Here are four forgiveness factors that I think all employers should be thinking about.

1. Use Your PPP Loan Proceeds on Payroll and Other “Covered” Expenses

Principal amounts of a PPP loan that can be forgiven must be spent on “covered” costs. Covered costs include a) payroll costs; b) mortgage interest; c) rent payments; and d) utility payments (there are some restrictions on each of these categories that you should review with your lawyer or accountant). Moreover, because the primary purpose of the PPP loan program is to keep workers paid and employed, you must use at least 75% of your PPP loan proceeds on payroll costs. In order to meet the 75% threshold, you will obviously not be able to lay off a significant number of employees during the loan period.

2. Restore the Average Monthly Payroll Costs Used to Qualify for Your PPP Loan

Many employers furloughed employees or reduced work hours in March. However, you now have 2.5 times your average monthly payroll costs from February 2019 to February 2020 in your bank account. In order to qualify for forgiveness, you need to spend at least 75% of that amount on payroll costs during the next eight weeks. That will not be possible unless you restore both your full-time equivalents (FTEs) and your payroll costs to at or near the average monthly amount you used to qualify for your loan. If you own a business that is not yet ready or able to get back up and running (a restaurant, bar or elective surgery center, for example) then this means that you will likely need to pay employees to stay home for some time if you want to ensure forgiveness of your PPP loan. That’s okay. In fact, it’s likely exactly what Congress intended. In the CARES Act, Congress essentially agreed to cover your payroll costs (up to $100,000 in salary and wages) if you would keep your employees on your payroll while we ride out the worst of the COVID-19 pandemic. Now we cross our fingers as a nation and hope that eight weeks is enough time for businesses to open up and employers like you to resume covering the payroll costs that are currently being covered by the PPP loans.

3. Be Careful About Cutting Costs by Decreasing Wages or Salaries

The amount of your loan was calculated based on 2.5 times your average monthly payroll costs. Many employers may want to maximize their loan proceeds by cutting wages and salary and freeing up cash for other expenses. However, this will likely be difficult. In addition to the requirement that at least 75% of loan proceeds be spent on payroll costs, the CARES Act was also drafted to discourage wage reductions and layoffs. With respect to wage reductions, the CARES Act reduces the amount of forgiveness by the amount of any reduction in total salary or wages of any employee in excess of 25 percent of the total salary or wages the employee made in the first quarter of 2020. Because the loan period (8 weeks) is shorter than Q1 (13 weeks), employers would actually need to increase an employee’s wages in order to avoid a reduction in total salary in excess of 25%. It seems unlikely that this is what Congress intended and I am anxiously awaiting further guidance on this issue. In the meantime, I recommend that you continue to pay employees who make $100,000 or less the same amount in wages or salary that formed the basis of the monthly payroll averages used to qualify for your loan. Notably, the CARES Act excludes employees making over $100,000 per year from its restriction on wage reductions of more than 25%. In other words, you can reduce the salaries of employees making more than $100,000 per year to as low as $100,000 without jeopardizing the forgiveness of your loan. This makes sense, because you were capped at $100,000 dollars per employee in calculating your average monthly payroll when you qualified for your loan. Thus, reducing salaries to the $100,000 level will not impact your ability to spend at least 75% of loan proceeds on payroll costs. For many, a strategy of temporarily reducing highly paid employees to annual salaries of $100,000 could be very useful.

4. Determine Your Target FTEs for the Loan Period and Adjust as Needed

In addition to discouraging wage reductions, the CARES Act is designed to discourage layoffs. This is accomplished by reducing the amount of forgiveness based on FTEs. At the end of your loan, you will submit an application for forgiveness to your lender. With your application, you will be required to provide documentation verifying the number of FTEs during the eight weeks following the funding of your loan and one of two comparator periods of your choosing – January 1, 2020 to February 29, 2020 or February 15, 2019 to June 30, 2019. If your average number of FTEs during the loan period is less than the average number of FTEs in whichever comparator period you choose (as determined by calculating the average number of FTEs for each pay period falling within a month) , then the amount of loan forgiveness is reduced proportionally. For example, if the average number of FTEs you employed during the loan period was 120 and the average number of FTEs you employed from January 1, 2020 to February 29, 2020 was 125 then your loan forgiveness would be capped at 96% (125/120 = .96). In order to maximize the amount of your loan forgiveness, you need to immediately determine your FTEs from the comparator periods in both 2019 and 2020. Obviously you will then choose the period with the lowest number of FTEs and that number will become the target FTE number you will want to maintain during the loan period. Finally, the amount of loan forgiveness will not be reduced by losses in FTEs that occurred between February 15, 2020 and April 27, 2020 if you restore those losses before June 30, 2020. So look at your FTEs now compared to February 15. If they are lower because of layoffs or terminations that occurred between February 15, 2020 and April 27, 2020 you have until June 30 to restore those FTE numbers to their February 15, 2020 levels. This will allow you to increase your FTEs to pre-pandemic levels. There are still many questions that remain about how to calculate and restore FTEs and how long FTEs must be retained, so stay tuned! However, because your forgiveness application only requires that you submit documentation verifying FTEs for the loan period and the comparator period of your choosing, it is my current belief that your loan forgiveness will not be impacted if you restore your FTEs during the loan period and then terminate some or all of your employees after the completion of the loan period.

Congratulations again on your PPP loan. Like all of America, I am hoping these loans help bridge the gap between “Shelter in Place” and something closer to “Business as Usual.”

Of course, individual situations may vary, so please obtain advice from your lawyer or accountant specific to your circumstances.

D. Zachary Wiseman is an experienced labor and employment attorney and is monitoring related legal updates for the COVID-19 pandemic. His practice includes labor relations, employment litigation, representation of clients before administrative agencies and commercial litigation. He assists both private and public employers as well as Service Contract Act employers with a wide range of labor and employment issues.