May 18, 2020

New PPP Interim Final Rule Clarifies That Foreign Employees Count for Size

But SBA Creates Safe Harbor for Applications Made Prior to May 5
Holland & Knight Alert
Gregory Bauer | David S. Cole | David Matuszewski | Tim Ryan | Keith N. Sambur | David A. Surbeck | Daniel T. Sylvester

Highlights

  • A new Interim Final Rule from the U.S. Small Business Administration (SBA) solidifies Paycheck Protection Program (PPP) counting rules, stating that all employees, foreign and domestic, of a business and its affiliates (absent an exception) count for purposes of size limitations.
  • The SBA will not deem a business that applied for a PPP loan prior to May 5, 2020, ineligible based on the exclusion of foreign employees – citing "reasonable borrower confusion."

The U.S. Small Business Administration (SBA) published a new Interim Final Rule (IFR) on May 18, 2020, related to the Paycheck Protection Program (PPP) created by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act). The IFR clarifies that borrowers must count all employees, both foreign and domestic, for purposes of the size limitations of the PPP, subject to certain exceptions to affiliation.

The IFR follows closely after the SBA and U.S. Department of Treasury published FAQ 44 on May 5, 2020, in its ongoing list of Frequently Asked Questions, which similarly provided that for purposes of the PPP's 500 or fewer employee size standard, an applicant must count all of its employees and all of those of its affiliates, both U.S. and foreign.

FAQ 44 created angst for many borrowers who had already applied for and received a PPP loan on the basis of a prior IFR and a prior version of the FAQs, which supported an interpretation that, for purposes of the PPP, a business was eligible if it had 500 or fewer employees whose primary residences are in the United States. Although this interpretation may have been at odds with the SBA historically and also may have created seemingly unfair results (i.e., a U.S. business with just more than 500 employees would not qualify but a large international business whose U.S.-based employee count is less than 500 technically would qualify), when viewed through the lens of protecting U.S. workers the interpretation seemed plausible if not intentional. FAQ 44 certainly made clear that the SBA's view was that all workers, both U.S. and foreign, need to be counted for the size standards, but left borrowers that had already applied for or received PPP funds confused about whether or not they were permitted to receive or keep the loans. (See Holland & Knight's previous alert, "Paycheck Protection Program and Foreign Employees: Treasury and SBA Try to Clean Up Their Mess," May 8, 2020.)

FAQ 17 provided a previous safe harbor for borrowers that had relied on the original IFR published on April 2, 2020, but FAQ 44 did not. The SBA's new IFR finally provides the guidance that borrowers had been seeking – if you had applied for a PPP loan prior to May 5, 2020, the SBA will not find you to be ineligible based on your exclusion of non-U.S. employees if you (together with your affiliates to the extent required) had no more than 500 employees whose primary residence is in the United States.

Note that the SBA nevertheless cautions in the IFR that under no circumstances may PPP funds be used to support non-U.S. workers or operations. All borrowers, including those that received PPP loans on the basis of the prior guidance, should carefully document their use of PPP loan proceeds.

DISCLAIMER: Please note that the situation surrounding COVID-19 is evolving and that the subject matter discussed in these publications may change on a daily basis. Please contact your responsible Holland & Knight lawyer or the author of this alert for timely advice.


Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.


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