Your inbox is likely flooded with news about the forgiveness guidance from the Small Business Administration (SBA) that came in the form of instructions on how to fill out the application. These instructions provided much needed guidance and a few unexpected surprises. By now, you might be approaching the half-way point of the eight-week covered period. Should you change your business plan to account for the new rules? Most of the articles, including ours, accurately predicted how the SBA would interpret the law. If you have been following those articles, you should be in decent shape. But there a few things we did not expect. The purpose of this article is to highlight those surprises so that you can adjust your plans accordingly.

#1. An FTE Bonus

The forgiveness provisions of the Paycheck Protection Program (PPP) are designed to encourage employers to rehire all of their employees. But, the generous federal unemployment benefits are designed to encourage employees to not look for work. Should an employer demand that their workers return just so they can receive the maximum amount of forgiveness? What if there is nothing for them to do? What if an employee refuses to return to work because they are afraid to come back?

In an attempt to alleviate the awkward position employers find themselves in, the SBA has declared that employees who are offered their jobs back at full pay, but who refuse to return, will be counted in the forgiveness calculation so long as the employer made a written offer and can document the refusal. While we had some indication about this rule last week, the SBA went even further in also counting those who were fired for cause, those who voluntarily resigned, or those who voluntarily requested a reduction in hours. But you can only include these full-time equivalent (FTEs) if the position was not filled by a new employee.

Because of the generous federal benefit, many employees have requested to return only part-time so that they can continue to collect a state benefit, plus the $600 per week federal benefit. Does this instruction mean that if the employee makes the request, the employer can still take credit for the full time hours? The answer is yes, but the requirement is that the employer offer the employee the same wages and the same number of hours they were previously working. So while the employer gets credit for the hours, the employee’s entitlement to the benefit is compromised by their refusal to return to work. In many cases, the employee might still be entitled to unemployment benefits, but those cases are outside the scope of this article.

The takeaway here is to make sure that all of your recall notices are in writing and if an employee refuses to return, have them send a confirming email. Similarly, employees who request a reduction in hours should also do so in writing. As for terminations, those should be well documented anyway, right?

#2. An Alternative Covered Period

We have received many questions about how to account for the use of the PPP funds when the beginning of the covered period hits in the middle of the pay period. The instructions now allow you to use the beginning of the next pay period as the beginning of the covered period so that the dates line up with your payroll schedule.

This creates a problem for the last pay period since you will be making the final payroll payment outside the eight-week window. The instructions solve this problem by allowing you to make this final payment outside the eight-week period so long as you make the payment on or before the next payroll date.

#3. What exactly are “utilities”?

The instructions tell us that utilities are “electricity, gas, water, transportation, telephone, or internet access.” Does that mean cell phone? Yes, it probably does. But remember, non-payroll costs cannot make up more than 25% of the total forgiveness amount.

#4. A New Reference Period for Seasonal Employers

In order to secure full forgiveness, the statute required that the company meet or exceed their full time equivalents during the covered period compared to one of two reference periods. Those were fixed as February 15, 2019 to June 30, 2019 or January 1, 2020 to February 29, 2020. The statute gave the SBA discretion on how to handle the reference period for seasonal businesses. Now, seasonal businesses can choose a third reference period – any 12-week period between May 1, 2019 and September 15, 2019.

#5. A Full Time Employee is 40 hours, not 30

This might have been the largest surprise, for some. Most analysts expected the SBA to adopt the definition of “full time” from the Affordable Care Act (ACA). That law defined a full time employee as one who works more than an average of 30 hours per week. Analysts who advised using the ACA as a guide were wrong. The SBA has defined a full time employee as one who works, on average, at least 40 hours. So to find your FTEs you add up all your hours and divide by 40, not 30.

Many companies have already issued spreadsheets to help their clients calculate their forgiveness quotients. Those spreadsheets will need to be re-written. If you were staffing according to these spreadsheets, you need to re-run the numbers.

The SBA also introduced a simplified way to calculate FTEs. Here is what you do:

1. Add up all your employees who work more than 40 hours per week.
2. Then add up all you employees who work less than 40 hours per week and divide than number by two.
3. Add the two numbers to get your full time equivalents.

So if you had five full time employees, three employees each working 32 hours per week, and two employees each working eight hours per week, you would have 7.5 full time equivalents under the new method, but you would only have 7.8 under the traditional method. Either way you choose to calculate the number, you must use the same method in both your reference period and your covered period.

#6. The Ultimate Safe Harbor

I admit, we struggled to figure out how the SBA was going to interpret what we dubbed the “Hail Mary” provision. While other analysts predicted this would provide full forgiveness if FTEs and salaries returned to their pre-crisis levels by June 30, 2020, the language in the statute left us uneasy about such a rosy outlook. Fortunately, the safe harbor is as safe as others predicted it would be. So, if you meet the following conditions, you will be exempt from any reduction in forgiveness:

1. You reduced your FTEs or salaries between February 15, 2020 and April 26, 2020
2. By June 30, 2020, you restored your FTEs or salaries to a level at or above where they were in the pay period that included February 15, 2020

The takeaway here is that even if you cannot get your average FTEs or salaries back up during the eight-week covered period, you get a second chance at 100% forgiveness if you can hit that number by June 30. No, you cannot just hire everyone back on June 30th and call it good. The application requires your list all your employees at the time of the application. Having fewer people on that application than were supposedly working on June 30th would likely arouse a suspicion of gaming the system.

#7. A Certification Whiplash

Finally, a warning. The PPP application required the signer to certify in good faith that “[c]urrent economic uncertainty makes this loan request necessary to support the ongoing operations of the Applicant.” The penalty for not making this certification in good faith is a charge of fraud against the Federal Government, something a CFO would likely not want to deal with in the middle of rebuilding their company. This statement is incredibly broad and vague. By signing this, you are not saying that you need the money because you are being directly affected by COVID-19, you are just saying that the existence of the crisis itself has caused you to question whether you should cease operations and layoff your employees.

Within days of the first loans being issued, stories began to emerge about companies that may have qualified as a “small business” under the PPP statute, but were certainly not small businesses in the minds of the average voter. Stories about Shake Shack, Ruth’s Chris Steakhouse, and the L.A. Lakers made it appear that an economic stability program had yet again been coopted by wealthy business owners and the funds were flowing to stock holders rather than to the mom and pop businesses on Main Street.

In the face of bad press, the SBA needed to make a correction, and issues the following guidance:

Borrowers must make this certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. For example, it is unlikely that a public company with substantial market value and access to capital markets will be able to make the required certification in good faith, and such a company should be prepared to demonstrate to SBA, upon request, the basis for its certification.

Acknowledging the vague and ambiguous language in the original certification, the SBA then established a safe harbor period where companies not meeting the new standard could return the money without fear of penalty. After a few extensions, that period ended on May 18.

The SBA’s correction caused a minor panic in board rooms and C-suites across the country. What does “other sources of liquidity” mean? If a company had untapped lines of credit, does this mean they should use those funds first? What does “not significantly detrimental” mean? Banks sent out letters warning their customers of what appeared to be a new and higher standard for eligibility to receive funds. As a result, applications to the second round of funding froze as company officers were not willing to sign a statement they did not understand, especially after the dire warning issued by the banks and the SBA. Even more concerning, companies considered returning the funds and laying off workers rather than taking the risk that their CFOs would land in jail.

Perhaps realizing they over-corrected, the SBA issued a new guidance, declaring that they would consider those whose loans were less than $2 million to have made the certification “in good faith,” justifying such a declaration on the basis that a company taking out such a small amount likely would not have adequate alternative sources of liquidity. In addition to the blanket good faith declaration for loans under $2 million, the SBA also softened its language for those who took out loans over that amount. As to those larger loans, the SBA has declared:

If SBA determines in the course of its review that a borrower lacked an adequate basis for the required certification concerning the necessity of the loan request, SBA will seek repayment of the outstanding PPP loan balance and will inform the lender that the borrower is not eligible for loan forgiveness. If the borrower repays the loan after receiving notification from SBA, SBA will not pursue administrative enforcement or referrals to other agencies based on its determination with respect to the certification concerning necessity of the loan request.

Now, rather than a charge of fraud against the government, should the SBA auditor find that a company had alternative sources of liquidity, all they need to do is pay the money back; a downside presumably more attractive than federal prison.

But, you are not out of the woods yet because the forgiveness application requires seven more certifications. You will want to read these very carefully because you are essentially swearing to the following:

1. You used the money on permissible expenses and in permissible amounts
2. You understand that if you didn’t use the money for permissible expenses, the government can come after you
3. You accurately verified the payments for those permissible expenses
4. You submitted the proper documentation to the bank
5. The information you provided in this application and in all the supporting documents is true and correct in all material respects and you understand that making a false statement could land you with a fine or jail time
6. The tax documents you submitted to your bank are consistent with the tax documents you submitted, or will submit to the IRS
7. You understand the SBA may require additional information and failure to provide that information may result in your ineligibility for forgiveness

Between the dire warnings in the applications and the permissive tones in the FAQs, you can be justifiably confused by the constantly changing tone of the SBA. The bottom line is very simple. If you have a loan for under $2 million, treat this like you would your taxes. Gather your documents and err on the side of the caution. If you have a loan for over $2 million, bring in reinforcements to look over the application and to double check the accuracy of the information. If you are close on any issue having to do with your eligibility for forgiveness or the loan itself, consult with your attorney.