PPP Loan Forgiveness Issues: When Employees Refuse to be Rehired

By Seth A. Nadel, Esq.

On May 3, 2020, the Small Business Administration (“SBA”) issued updated guidance to address the most recent concern of employers who have received Paycheck Protection Program (“PPP”) loans: employees who decline to be rehired.

The most compelling feature of PPP loans is the prospect of loan forgiveness. Under the applicable rules, a business receiving a PPP loan is eligible to have some or all of the loan amount forgiven so long as the loan proceeds are used for eligible expenses in the 8-week period following the disbursement of the loan. For some businesses – particularly those that have been forced to close by government mandates – this may mean that employers will be essentially paying the employees to stay home, but this is how the program is designed to operate.

Because the PPP’s primary objective is to protect the jobs of employees at small businesses, the rules provide that loan forgiveness will be proportionately reduced if a business reduces and does not restore its employee headcount to at least 75% of pre-COVID levels before June 30, 2020. For example, if a business terminates 25% of its employees and does not rehire or replace those employees before the end of June 2020, it will be subject to a 25% reduction in amounts that would otherwise be forgivable under the program.

However, due to enhanced unemployment benefits authorized by the CARES Act through July 31, 2020, concerns about COVID exposure, and other considerations, many furloughed employees are now refusing offers to be rehired or restored to their previous positions or salaries. These refusals present a quandary for employers who are specifically required to use a certain amount of their PPP funds for payroll in order to avoid taking an across-the-board haircut on their prospective loan forgiveness. As an employer cannot force an employee to return to work or accept their salary, employers have been left to wonder what might happen in the event a sizable portion of their workforce would simply prefer to remain unemployed and collect enhanced unemployment benefits            .

Fortunately, the SBA has specifically addressed this issue in its updated FAQ. To summarize, employers can avoid the penalties resulting from employees’ refusal to be rehired by meeting two requirements. First, they must make a written offer of rehire to the employee. Second, in the event the employee declines to be rehired, the employer must document the employee’s refusal to be rehired. Employers that do so in good faith will be allowed to exclude those employees when calculating whether they have maintained adequate staffing to avoid loan forgiveness penalties. A link to the most recent FAQ may be found here, and this issue is addressed in Question # 40.

As a matter of best practices, employers should additionally document the transmission of all offers of rehire (by retaining proof of either conventional or electronic mailing), as well as the responses of employees to the extent they are in writing. Also, as noted by the SBA, employers and particularly employees should be aware that a refusal to accept rehire by a former employee could very well render the refusing employee ineligible to continue receiving unemployment benefits. Should the Department of Labor learn that an employee has refused an offer of rehire, it is doubtful that the desire to remain unemployed to capture the enhanced benefits will be seen as a legitimate reason to have remained unemployed.

Because the issues surrounding PPP loan forgiveness will loom large in the coming months, it is anticipated that additional guidance from the SBA will be forthcoming on this and other outstanding issues. As such, the Firm will be keeping abreast of new information as it becomes available.

If you have any questions about PPP loans, please feel free to reach out to Seth Nadel, Esq. at 516-627-7000 or snadel@weisszarett.com.

Weiss Zarett Brofman Sonnenklar & Levy, P.C. is a Long Island law firm providing a wide array of legal services to the members of the health care industry, including corporate and transactional matters, civil and administrative litigation, healthcare regulatory issues, bankruptcy and creditors’ rights, and commercial real estate transactions.

ATTORNEY ADVERTISING: PRIOR RESULTS DO NOT GUARANTEE FUTURE OUTCOMES.