Many businesses are actively trying to determine how to count employees for purposes of determining whether they can avail themselves of the loan and grant stimulus provided by the Paycheck Protection Program (PPP) in Sections 1102 and 1106 of the CARES Act.
We summarized the PPP program here. Basically, the PPP expands the SBA 7(a) loan program to allow “eligible entities” to borrow up to $10 million. The term “eligible entities” includes most “small businesses” (including 501(c)(3) non-profits and other listed entities).
Context for those coming late to the PPP party. The PPP is one of the principal ways in which the CARES Act hopes to stimulate the economy. PPP loans are forgivable — a few months after the loan is made — if the loan proceeds are used to pay “payroll costs” (a defined term), rent (including rent paid to a related party), utilities (including internet connection fees), and mortgage interest (including interest paid to related parties) during the eight-week period following loan closure. The maximum amount of any loan, and the amount of expected forgiveness, can be determined using this spreadsheet. Any unforgiven balance is payable at a 4% interest rate over 10 years with no security interest and no personal guarantees required. Timing is critical because we believe the $349 billion allocated to this program will quickly be claimed, so early birds will get this particular worm.
The purpose of this Legal Update is to remind clients that, when determining their eligibility for the PPP, it is often necessary to include employment by affiliates in their employment count.
Specifically, PPP loans are available to “small businesses,” which are generally defined as every business with not more than the greater of:
(i) 500 employees, or
(ii) the size standard (in number of employees) established by the SBA for the industry in which the business concern operates.
The size standard is determined based on the business’s NAICS code available here. Not surprisingly, a number of exceptions are provided, most notably for franchises, SBIA grantees, and the hospitality industry, but those exceptions are beyond the scope of this Legal Update.
One question we are hearing is whether the SBA affiliation rules require that they combine related businesses for purposes of applying the “not greater than 500 Employees or Industry Size” tests. Here are the SBA affiliation rules, also reproduced in relevant part below. Lane Powell can perform the affiliation analysis for our clients, but clients can often do so better, faster and/or cheaper.
In addition to the material in the link provided to the relevant federal regulations, whoever makes this determination should also be aware of the affiliation principles outlined (also included in the link). (Remember, CARES expressly waives these principles only for the hospitality industry and franchise industry.)
We note that some potential PPP applicants initially conclude that their related businesses quickly put each affiliated business over the threshold. However, some of the rules below simply presume affiliation, but such presumption can be refuted by business-specific facts and circumstances. Ultimately, your bank will probably be the one to make any final decision, though a reasoned opinion of counsel could help convince the lender that your eligibility representation is reasonable.
Regardless of the results of your affiliation test, remember that your business also might be eligible for other provisions in the CARES Act, such as the ability to:
13 CFR Section 121.103 included in the Exhibit under Additional Resources.
 For purposes of the 500 employee threshold test, but not for purposes of industry size standard test or other stimuli in the CARES Act, an employee is included in the count regardless of whether they are full or part time employees, i.e., not FTEs.
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