One of the most attractive reasons to get a Paycheck Protection Program (P3) loan is the possibility of loan cancellation.1 The federal CARES (Coronavirus Aid, Relief, and Economic Security) law authorized the US Department of the Treasury to create the PPP through the Small Business Administration (SBA) 7 (a) loan program.2 The forgiveness aspect of the loan allows employers to secure savings funds without simply “kicking the box” to face debts in a financially uncertain future. The cancellation of the loan, however, is conditional on the use of the loan funds for employee payrolls.3 While promising, the program poses a serious dilemma for some employers: in practice, can employers afford to take out small business loans that may or may not be canceled, especially when employees refuse to return to work?

This dilemma arises because another provision of the CARES Act essentially goes against the incentives to cancel PPP loans. Some employers find it difficult to get hourly employees back to work after time off and layoffs because, depending on the circumstances, employees may earn more by staying home. For example, California offers the unemployed up to $ 450 per week in unemployment benefits.4 They can receive an additional $ 600 per week under the CARES Act’s Pandemic Unemployment Assistance Program (PUA).5 Together, these programs entitle some workers to more than $ 26.00 per hour for a standard 40-hour work week and $ 35 per hour for a 30-hour work week.6 While these funds are certainly essential for workers who cannot find work or who have to stay home to care for sick family members or school-aged children, they also discourage those who are fully able to return to work.

California, like other jurisdictions, traditionally prohibits employees from receiving unemployment benefits if they refuse to work without just cause. However, the number of unemployment claims and filings caused by the COVID-19 pandemic make the traditional processes used by states to tackle such actions impractical, if not impossible. Given the tension between the PPP and the PUA, employers are left to wonder if their repayment obligations under the PPP will be affected if employees refuse to work.

The SBA, in consultation with the Treasury, maintains a “Frequently Asked Questions»(FAQ) page regarding PPP loans. On May 4, 2020, the SBA updated the page to add an FAQ (# 40), which addresses the aforementioned issue regarding loan cancellation and also provides guidance to employees. It is said:

Question: Will the amount of a borrower’s PPP loan cancellation (in accordance with Article 1106 of the CARES Act and SBA Implementation Rules and Guidelines) be reduced if the borrower terminates a employee, offers to rehire the same employee, but the employee declines the offer?

Responnse: No. In exercising the authority of the Administrator and Secretary under section 1106 (d) (6) of the CARES Act to prescribe regulations granting de minimis exemptions from the limits of the Cancellation Act loans, the SBA and the Treasury intend to issue an interim rule excluding laid-off employees whom the borrower has offered to rehire (for the same salary / wages and the same number of hours) from the calculation of the reduction in loan remission of the CARES law. The interim final rule will specify that, to benefit from this exception, the borrower must have made a written offer to rehire in good faith, and the rejection of this offer by the employee must be documented by the borrower. Employees and employers should be aware that employees who reject re-employment offers may lose their eligibility for continued unemployment compensation.

According to FAQ No. 40, “SBA and Treasury intend to issue an interim final rule excluding terminated employees as the [employer] proposed to rehire “, but who refused to return to work from the calculation of the cancellation of the PPP loan. The FAQ specifies that the employer must make a “good faith written offer” to rehire the employee, and must specifically document the rejection of this offer by the employee. The FAQ also states that the offer should be “for the same pay / wages and the same number of hours” that the employee worked before the layoff.

The FAQ does not specify how employers must document a former employee’s refusal to return to work, or whether the reduction in an employee’s wages or hours will prevent the exemption. Additionally, there are other nuanced fact models that may require further clarification. For example, a person cannot refuse to return to work for a reason related to COVID-19 within the meaning of the PUA. While this should presumably be within the intent of the FAQ, further clarification is needed. Hopefully these uncertainties will be removed by the final interim rule. Finally, FAQ n ° 40 reminds employees of the importance of their return to work, specifying that “employees who reject re-employment offers may lose their right to maintain unemployment compensation”.

While it is not certain when the final provisional rule will be released, it is important to note that the second paragraph of the SBA FAQ states: Paycheck Protection Program Provisional Final Rules (“Provisional Final Rules of the PPP ”). The US government will not challenge any PPP actions of lenders that comply with these guidelines, the Interim Final PPP Rules, and any subsequent regulations in effect at that time. This express statement tells employers that they can rely on FAQ 40 when applying for SBA loans, looking to rehire employees, and calculating the loan amount that can be forgiven.

The SBA’s updated FAQ recognizes the loan cancellation problem, promises a solution, and removes some of the constraints employers face when deciding whether or not to apply for small business loans. It’s a small victory, which most of us are looking for in these difficult times. Until further guidance is released, whether through other FAQs or the Final Interim Rule, we recommend that employers:

  • Make any return to work offer in writing
  • Include a specific date by which the employee must respond, with a notice that no response will be treated as a refusal to return to work
  • Also include a statement that refusal to return to work may result in the person ineligible for continued unemployment benefits