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To Terminate or Not to Terminate? How PPP Loans Impact Termination Considerations for Employers Seeking Loan Forgiveness
Tuesday, May 12, 2020

Thousands of businesses nationwide are trying to reopen after shutting their doors because of statewide stay at home orders due to COVID-19. Without question, this has created a significant burden on employers whose financial obligations – employee wages and benefits, rent and mortgage payments, among others – have not ceased despite economic uncertainty and decreased consumption across the board.

To combat this uncertainty and keep businesses afloat, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act that established the Paycheck Protection Program (PPP), a loan fund for employers that is fully forgivable so long as employers meet the loan’s forgiveness terms. The loan fund is expected to provide more than $650 billion to U.S. businesses.

As complicated as employee terminations were before the pandemic, they’ve become even more complicated for businesses that have or will accept PPP loans. That’s because the PPP reduces the amount of loan forgiveness available to a borrower if the business reduces the number of its full-time equivalent employees. Of course, performance deficiencies and employee misconduct issues will not magically disappear during the loan’s coverage period. Here are some important considerations and options for businesses when making employment decisions while receiving PPP loan funds.

PPP Loan Basics

PPP loans allow employers to borrow funds to help cover payroll costs, mortgage interest, rent, utilities, and interest on any other debt obligations incurred before February 15, 2020.

Eligible businesses can take out a maximum loan amount equal to the lesser of (A) $10 million, or (B) 2.5 times the average total monthly payroll costs incurred by the employer over the one-year period before the date of loan origination (with employee salaries or wages capped at $100,000 annualized per employee).

The loan is fully forgivable so long as the employer 1) uses the loan proceeds fully within eight weeks of disbursement (to pay (A) payroll costs, (B) interest on mortgages incurred before February 15, 2020, (C) rent obligations under lease agreements in force before February 15, 2020, or (D) utilities for which service began before February 15, 2020—note that any amount paid for interest on any other debt obligation, while an allowable use of PPP loan proceeds, is excluded from forgiveness), with at least 75 percent of the funds going toward payroll costs, 2) does not decrease employee salaries (for those who made $100,000 or less annualized in every pay period during 2019) by more than 25 percent, and 3) does not decrease its number of full-time equivalent employees.

Loan Considerations in Making Employment Decisions

Employers seeking to maximize their PPP loan forgiveness must follow the terms of the loan, including the requirement to maintain their full-time equivalent employee head count, subject to the “re-hire” exception discussed below. This does not mean that employers must retain each individual employee. Instead, employers are only required to maintain the same average number of employees over the eight-week covered period.

The best practice for an employer would obviously be to retain as much of its workforce as possible throughout the covered period. However, circumstances may prevent an employer from achieving that goal, either because essential employees refuse to come to work, perform poorly, or engage in other misconduct that requires termination.

Fortunately, the loan forgiveness is not an all-or-nothing proposition for employers. Where an employer has failed to maintain 100 percent of its full-time equivalent workforce over the eight-week period and seeks forgiveness, the forgiveness will be reduced proportionally rather than altogether.

  • Calculating Loan Forgiveness: The easiest way to look at loan forgiveness reduction is to treat the calculation as a fraction. The numerator is the average number of full-time equivalent employees over the eight-week covered period of (determined by calculating the average number of full-time equivalent employees for each pay period falling within a month). The denominator is the average number of full-time equivalent employees in the chosen time frame described in the following paragraph.

Seasonal businesses, as deemed by the Small Business Administration (SBA), will have their average number of full-time equivalent employees measured from the period of February 15, 2019 through June 30, 2019. Employers who are not seasonal will be able to choose between the February 15, 2019 through June 30, 2019 timeframe or one which measures the average number of full-time equivalent employees from January 1, 2020 through February 29, 2020. The calculation in fraction form looks like this:

Average number of full-time employee equivalents during the eight-week covered period
Average number of full-time employee equivalents during the chosen denominator period

Best Practices for Employers

Employers should be strategic in their decisions when deciding the terms of their PPP loan. Specifically, employers should, where they are able, determine which measuring period gives them the best chance to receive full loan forgiveness.

Additionally, employers should be prepared to quickly replace employees who are terminated after April 26, 2020 (employees terminated between February 15, 2020 and April 26, 2020 may be covered by the “re-hire” exception discussed in the following paragraph). The goal of the PPP loan is to maintain employer workforce numbers throughout the eight-week covered period.

If an employer has already let go or furloughed employees at the outset of the coronavirus response, hope is not lost. PPP loan forgiveness gives employers until June 30, 2020, to restore full-time equivalent employment and salary levels for any reductions made between February 15, 2020 and April 26, 2020. While guidance has remained limited, the U.S. Department of Treasury has clarified that an employer will not see a decrease in the amount of its loan forgiveness if it offers to re-employ a laid-off employee and that employee rejects the employer’s offer to return. As a result, employers should consider making written offers of reinstatement to each laid-off employee in case documentation is requested at a later date, while keeping in mind that such an offer of reinstatement may affect the employee’s eligibility for state unemployment benefits.

While this post provides a general overview of the PPP loan forgiveness program and the implications of employment and termination decisions during the term of the loan, employers should keep an eye out for additional guidance on this issue. The SBA and Department of Treasury guidance so far has been focused on loan sizing and related issues, but we expect both to issue guidance on the forgiveness calculations soon.

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