The Impact of a Declined Re-Hire Offer on Loan Forgiveness

While we wait to find out if the Senate approves the bill to loosen restrictions on the Paycheck Protection Program that the House approved on May 28^th (which includes an extended deadline to rehire employees from June 30, 2020 to December 31, 2020 as well as expansion of the loan forgiveness period from eight weeks to 24 weeks), we will continue to provide information about the program that is relevant to the majority of business owners who received a PPP loan.

As many taxpayers are now in the midst of the current eight-week Paycheck Protection Program (PPP) period, questions regarding company specifics and nuances are continuously being raised. One commonly asked question was addressed in the SBAs recently released interim final rule: “Will a borrower’s loan forgiveness amount be reduced if the borrower laid-off or reduced the hours of an employee, then offered to rehire the same employee for the same salary and same number of hours, or restore the reduction in hours, but the employee declined the offer? No. Employees whom the borrower offered to rehire are generally exempt from the CARES Act’s loan forgiveness reduction calculation.”

Section 1106 of the CARES Act calls for a reduction in the loan forgiveness amount based on reductions in full-time equivalent employees (FTEs) subject to a statutory exemption for those who have either rehired employees or restored hours and wage levels by June 30, 2020. If this ‘safe harbor’ is met, a company may be exempt from this forgiveness reduction test.

In the case of an employee declining a re-hire offer, which would clearly impact the head count in an FTE test, the SBA and Treasury have adopted a regulatory exemption to the reduction rules to resolve this dilemma. As long as the following criteria are met, employees who decline a re-hire offer can effectively be excluded from this calculation:

• The borrower made a good faith, written offer to re-hire the employee (during the covered period or alternative covered period)
• The offer was for the same salary or wages (and same number of hours) as earned by the employee in the last pay period prior to the reduction
• The offer was formally rejected by the employee
• The borrower maintained records documenting the offer and its rejection
• The borrower informed the applicable state unemployment insurance office of such employee’s rejected offer of reemployment within 30 days of the employee’s rejection

With the covered period presumably coming to an end in the next couple of weeks for many Round 1 Borrowers, companies are starting to put together preliminary forgiveness calculations, and this is a key component when determining what could be forgiven.

 

DISCLAIMER: The WM Daily Update COVID-19, COVID-19 Business Resources and COVID-19 Client News Alerts and other related communications are intended to provide general information on legislative COVID-19 relief measures as of the date of this communication and may reference information from reputable sources. Although our firm has made every reasonable effort to ensure that the information provided is accurate, we make no warranties, expressed or implied, on the information provided. As legislative efforts are still ongoing, we expect that there may be additional guidance and clarification from regulators that may modify some of the provisions in this communication. Some of those modifications may be significant. As such, be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed.