Many employers that fought very hard to obtain Payroll Protection Program (PPP) funds (remember obtaining these funds was not an easy process for most) are finding when they offer to rehire laid off employees the response is less than enthusiastic. Employers are finding that some employees are turning down the rehire offers. The largest issue is that many workers, when the $600 per week of Pandemic Unemployment Assistance is added to their unemployment, are making more money on unemployment than they were when they were working. This causes a problem for the employer. The employer borrows the PPP funds from the SBA, which it is now supposed to be used for payroll costs (remember payroll costs must be at least 75% of total amount when calculating loan forgiveness) and for rent, utilities and mortgage interest.

There is a provision within the law that states if the number of full-time equivalent employees is reduced during the 8-week period of PPP loan disbursements, then the forgiveness amount will be reduced accordingly. This means that employers will lose part of the forgiveness, meaning they will have to repay part of the loan.

The SBA, which has been issuing guidance in the form of a Frequently Asked Questions (FAQs), added a question to address this situation on May 3, 2020. The new question is shown below:

 40. Question: Will a borrower’s PPP loan forgiveness amount (pursuant to section 1106 of the CARES Act and SBA’s implementing rules and guidance) be reduced if the borrower laid off an employee, offered to rehire the same employee, but the employee declined the offer?

Answer: No. As an exercise of the Administrator’s and the Secretary’s authority under Section 1106(d)(6) of the CARES Act to prescribe regulations granting de minimis exemptions from the Act’s limits on loan forgiveness, SBA and Treasury intend to issue an interim final rule excluding laid-off employees whom the borrower offered to rehire (for the same salary/wages and same number of hours) from the CARES Act’s loan forgiveness reduction calculation. The interim final rule will specify that, to qualify for this exception, the borrower must have made a good faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower. Employees and employers should be aware that employees who reject offers of re-employment may forfeit eligibility for continued unemployment compensation.

A couple of things to keep in mind here are that the employer must have made a good faith, written offer of rehire and must document the employee’s rejection. There is currently no guidance on what documentation is required, but obviously something in writing, if it all possible, would make sense. The good news is it does help employers by allowing them to exclude the employees to refuse to be rehired from a calculation that would reduce their loan forgiveness. It’s hard to calculate the total impact because even though number of full-time employees may not be reduced, if the employer does not utilize its PPP funds fully during the 8-week period, it will still have to return the money to the SBA. This is where it would be helpful to know if an employer can issue bonus payments to an employee. For example, let’s say an employer had 5 employees making $1,000 per week before closing down. The law states that the employer must maintain 5 employees and let’s also say they must spend $40,000 on payroll over the 8 weeks. If one employee refuses to be rehired, the other 4 would only make $32,000 over the 8 weeks. Can the employer bonus the $8,000 that would have been paid to the employee refused to be rehired to the remaining 4 employees instead of paying it back to the SBA? There is also a provision that states if the number of full-time employees declines but is restored by June 30, 2020, then the employer can avoid a reduction in forgiveness.

The SBA also addressed the fact that employees that turn down employment may forfeit their eligibility for unemployment benefits.

I also wanted to address the question of when the 8-week period begins for employers to calculate payroll costs. In the same FAQs discussed above, the SBA states “the eight-week period begins on the date the lender makes the first disbursement of the PPP loan to the borrower”. I know the AICPA has suggested changing that period to begin when businesses reopen. I have not heard anything about the SBA changing its position because of this suggestion. I will provide an update if anything changes.

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Hang in there and stay safe,

Jeff Skolnick, CPA, M.S. Taxation

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