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May 2020

PPP Loan Guidance on Employees Refusing Reinstatement

May 11, 2020

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) became law that included the Paycheck Protection Program, its expanded SBA 7(a) loan program to offer payroll protection loans (“PPP loans”). The SBA and Department of Treasury issued their Interim Final Rule on April 1, 2020, which can be found here. Additionally, the SBA and Department of Treasury have continuously posted their interpretation of the Interim Final Rule via a working Frequently Asked Questions document (“FAQ”) located here

As described in an earlier Legal Update, the PPP allows for certain expenses during the eight week “covered” period will be forgiven so long as Borrowers comply with the PPP rules.  Gordon & Rees has posted a detailed Legal Update on eligibility and forgiveness here.

As employers have been offering reinstatement to employees they had to previously layoff or furlough, a common problem has occurred - employees are not accepting reinstatement.  There are a number of factors that have given rise to employees refusing reinstatement including, but not limited to (i) the difficulty in getting their unemployment application processed the first time around; (ii) concern for their health and safety going back to work; and (iii) better compensation with the federal contributions to unemployment benefits.

The PPP program was designed to get employees off unemployment and back on payroll, and provides for a penalty to employers that do not reinstate their workforce to a level of full-time equivalent employees. Given the ongoing issue of employees refusing reinstatement, the SBA and Department of Treasury have issued FAQ guidance on this issue that states:

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.

Given this guidance, employers will not be penalized if they make a good-faith offer of reinstatement to former employees and they refuse to come back to work.  The offer must be in writing and be for the same compensation and same number of hours in order to qualify for the exception.  If the employer had previously made such an offer that was rejected, it needs to make a written offer that should also reference the prior conversation.  Finally, the employer must document the rejection as such evidence will need to be provided with a forgiveness application.

Visit our COVID-19 Task Force for ongoing updates.

This Article was authored by Jonathan Boulahanis.

Banking & Finance

Jonathan M. Boulahanis
W. Kent Carter
Craig S. Heryford

Banking & Finance
Business Transactions