By Jay L. Morse and Jack F. Petroskey

Since the passing of the CARES Act, we have provided general information regarding what the CARES Act PPP is, who qualifies under the program, the amount of funding a borrower may obtain, and how certain amounts of loan funding may be forgiven. This article explains how the amount of “loan forgiveness” for which a borrower is originally eligible under the Paycheck Protection Program may be reduced based on the borrower’s conduct.

Generally, there may be a reduction in the amount of loan forgiveness to which a borrower is entitled for two reasons. First, there may be a reduction in loan forgiveness if the borrower reduces its amount of full-time equivalent employees as compared to the amount of such employees the borrower had in its “average monthly payroll expense” when calculating its maximum PPP loan amount. The amount by which the loan forgiveness is reduced for this reason is a calculation based on the amount of full-time equivalent employees (“FTE Employee”) terminated. An FTE Employee refers to a combination of employees, each of whom individually is not a full-time employee because they are not employed on an average of at least 30 hours per week, but who, in combination, are counted as the equivalent of a full-time employee. For example, two employees, each of whom works 15 hours per week, are the equivalent of one full-time employee. Second, there may be a reduction in loan forgiveness if employee compensation is reduced by more than 25% (however, this only applies if the reduction in compensation is applied to employees who earn $100,000 or less, annually). Here, forgiveness is reduced by the dollar amount of reduced employee compensation in excess of 25%.

If a borrower terminates some FTE Employees or reduces compensation, it is possible to escape forgiveness reduction with an exemption. For example, to encourage employers to rehire FTE Employees who have already been laid off due to the COVID-19 crisis, or reinstate salary cuts to employees making $100,000 or less, borrowers that re-hire FTE Employees or restore such employee compensation by June 30, 2020, may not be penalized for having a reduced payroll between February 15, 2020, and April 26, 2020. Please be aware that the articles we provide are non-comprehensive due to the extensive and complicated nature of the newly drafted legislation. As a result of the rapid pace at which this bill took form, government entities continue to make made changes to this program and there are still many unanswered questions. One cannot express the importance of having a legal professional perform a fact-specific analysis of a business’s situation in light of this evolving program.