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SBA and Treasury Issue Guidance Regarding Employees Who Decline Rehire Offer

May 05, 2020

By: Mark Heimendinger, Nicole Cuccaro & Ferran Arimon

On Sunday night, the SBA published questions 40-42 of the Paycheck Protection Program (PPP) frequently asked questions (FAQ) file it maintains with the Treasury. Among the new questions, the SBA provided guidance for small businesses regarding employees who reject offers of reemployment.

Per FAQ 40, the SBA and Treasury intend to issue an interim final rule that will exclude laid-off employees whom the borrower has offered to rehire (for the same salary/wages and same number of hours) from the loan forgiveness reduction calculations under Section 1106 of the CARES Act. To qualify for this exemption, the guidance states that employers must have “made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented…”

In addition to the exemption for employers who attempt to rehire employees, the SBA warned that employees who reject a good faith offer of re-employment “may forfeit eligibility for continued unemployment compensation.” The interim rule promised by the SBA and Treasury will likely contain some clarification as to under what circumstances such employee will forfeit unemployment eligibility.

This guidance comes in light of reports that a number of employers who have received PPP funds and have begun their rehiring efforts are finding that some employees are turning down offers. The rejection of rehire offers appears to largely come as a result of the additional $600 per week in unemployment compensation paid to qualified persons under Section 2104(b)(1)(B) of the CARES Act.

We also wish to point out that while FAQ 40 does not directly address employees who resign (which would be expected to happen in the normal course of business), it does indicate that the SBA and Treasury are viewing the employee reduction issue from an economic layoff perspective. While this could reasonably be interpreted as consistent with the spirit of the law, Title 1 of the CARES Act itself does not use the concept of “layoffs” nor does it address the purpose of any such layoffs, but it instead simply looks at headcounts regardless of the reasons for any reduction of such headcounts.

This begs the question of whether the SBA and Treasury will take the next logical step of permitting employers to disregard employee resignations in calculating headcount reductions for the purposes of calculating the amount of a PPP loan that may be forgiven. One might argue that an employer who actually laid off employees should clearly not be treated more favorably than an employer who did not, but it remains to be seen if SBA and Treasury should agree.

Question 41 of the FAQ clarified that for purposes of calculating maximum loan amount, seasonal employers may elect to use average monthly payroll for the time from February 15, 2019, to June 30, 2019, or a 12-week period between May 1, 2019, and September 15, 2019 (per the April 28 Interim Final Rule).

Question 42 provides some guidance on whether not-for-profit hospitals exempt from taxation under Section 115 of the Internal Revenue Code will be eligible for PPP loans as “nonprofit organizations” under Section 1002 of the CARES Act.

One particular issue that still remains unclear is the definition that the SBA will be using for “full-time equivalent employees” (FTEs) when calculating loan forgiveness reduction as a result of cutback on headcount and hours. Further, clarity is also required regarding how forgiveness reduction will be calculated.

Additional guidance from the SBA and Treasury regarding forgiveness was promised 30 days after the enactment of the CARES Act and is past due as of April 26.

We will continue to monitor any additional guidance issued by the SBA and Treasury and will provide you with any updates as they become available.

Be sure to visit our Coronavirus (COVID-19) Resource Center to keep up to date on the latest news.


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Mark
Getting the deal done requires flexibility, creativity, and efficiency. Clients and colleagues alike turn to Mark Heimendinger for his years of debt and equity finance experience, particularly in the commercial real estate and other asset-based arenas.

A seasoned pro who has seen the risks and iterations associated with both sides of a deal and all aspects of the capital stack, Mark understands that many contentious legal issues often mask a business concern – one that he likely has faced before. Even with the most complex and challenging negotiations, Mark is pragmatic, and focused on the client’s commercial goals.

Mark’s clients include issuers, borrowers, lenders, and underwriters. He has negotiated and executed a variety of transaction structures, including term and revolving credit facilities, public bond financings, public and private securitization transactions (including CMBS), mezzanine financing, equipment financing, 144A and Reg. D offerings, repo agreements, syndications, currency and interest rate cap and swap transactions, underwriting agreements, intercreditor agreements, joint ventures, and jurisdiction-specific non-recourse structures. Within the real estate space, Mark has covered multiple asset classes, including hotels and leisure facilities, office towers, senior living facilities, and multi-family residential buildings.

In addition to his Florida practice, Mark has years of both domestic and overseas “AmLaw 100” experience and has completed numerous cross-border transactions, mostly in the Asia Pacific region and in Europe.
Nicole

Nicole Cuccaro focuses her practice on real estate transactions, real estate development and commercial leasing.


Nicole's practice includes the acquisition, disposition, leasing and financing of commercial real estate in the retail and hospitality industries. Before she began her career in real estate law, her practice was focused on commercial and corporate litigation where she regularly represented lenders and business entities.

Ferran

Ferran Arimon focuses his legal practice on corporate and securities law, mergers and acquisitions and tax law.


A member of the firm’s Corporate Group, Ferran works with clients to structure financing transactions in compliance with federal and state securities laws and represents both public and private companies in mergers, acquisitions, capital raising, and corporate governance matters. Additionally, he counsels clients on a broad range of tax issues and business planning issues from entity selection and formation to dissolutions.

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