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1, 2, 3 Strikes, You’re out With Your FTE

I really miss baseball. I know that there are much more pressing problems for humanity right now, and my longing for America’s pastime pales in comparison with the tremendous and heartbreaking sacrifices being made by numerous people all around the globe as a result of this terrible pandemic. While I know that I am extremely fortunate to say this, the most painful consequence I have realized as a result of COVID-19 is a terrible separation from my strongest addiction. It has gotten so bad that I have actually resorted to downloading Ken Burns’ 1990s documentary on the history of baseball, as well as taping Korean Professional Baseball games airing at 1:30 a.m. so that I can watch them in prime time. I even have a favorite Korean baseball team now, the Kia Tigers. Who knew, before the coronavirus, that Matt Williams now manages in South Korea?

A sad result of my painful withdrawal is that these days I find myself framing all things in the context of a baseball metaphor. When I read the Loan Forgiveness Application Instructions for Borrowers (Instructions) recently published by the Small Business Administration (SBA) with respect to the Paycheck Protection Program (PPP), I couldn’t help but do the same thing with respect to my analysis of the required full-time equivalent (FTE) reduction that must be applied to the forgiveness amount according to the Instructions.

Throughout the last few weeks, many people have focused intently on a requirement in the initial Interim Final Rule for the PPP published by the SBA and US Treasury website on dated April 2, 2020, which stated that 75% of the PPP loan amount must be spent on payroll costs in order to be forgiven. What people have focused less on, though, are a couple of other limitations actually included in Section 1106(d) of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, including one that required the amount of loan forgiveness to be reduced by a quotient calculated by dividing the average number of FTE employees (FTEs) per month employed by the PPP recipient during the covered period by, at the election of the borrower, either (a) the average number of FTEs per month employed by the recipient from February 15, 2020, to June 30, 2020; or (b) the average number of FTEs per month employed by the recipient from January 1, 2020, to February 29, 2020. Section 1106(d) of the CARES Act also provided for seasonal employers to use as a denominator of the quotient the average number of FTEs per month employed by the recipient from February 15, 2019, to June 30, 2019; however, in the Instructions, this alternate measurement period for seasonal employers magically, and arguably illegally, became May 1, 2019, to September 15, 2019. We’ll discuss that missed call in the later innings.

As for the required FTE reduction that is described in the Instructions, the borrower really has three opportunities, or “strikes,” before “striking out” on its request to receive the full forgiveness amount free of a required FTE reduction. First of all, between lines 10 and 11 of PPP Schedule A in the Instructions, the applicant is asked if it has reduced the number of employees or the average paid hours of employees between January 1, 2020, and the end of the Covered Period, which is defined as the eight-week period beginning on the date of first loan disbursement (or, at the borrower’s option, an Alternate Covered Period beginning with the first day of the first pay period beginning after the date of the first loan disbursement). If the answer is no, then you connected on a line drive over the shortstop’s head for a single, and there is no need for you to calculate the FTE reduction quotient.

If the answer is yes to that question, though, you still have two more swings and misses before you have to take the FTE reduction. Page 8 of the Instructions describes the FTE Reduction Safe Harbor, which exempts a borrower from the FTE reduction of forgiveness, even if it reduced the number of employees or average paid hours of employees after January 1, so long as both of the following conditions are met: (1) the borrower reduced its FTEs level in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the borrower then restored its FTEs level as of June 30, 2020, to its FTEs level in the pay period that included February 15, 2020. Therefore, even if you miss the first pitch, you have the opportunity for a bloop single over first base if the reduction occurred between February 15 and April 26 and you rehire your employees before June 30.

A common occurrence in this economy, though, is that employers are having a difficult time hiring back employees in some circumstances. Whether it is the low-wage workers who may be making more on the expanded unemployment benefits right now or the wait staff who have no desire to return without hope of tips from patrons, some employees would just rather stay home. The SBA has provided one more swing at the plate for those employers in the form of a final exception that first appeared in Question 40 of the Frequently Asked Questions (FAQ) published by the SBA and the Department of the Treasury on May 3, 2020. In the answer to FAQ 40, SBA and Treasury stated that they intended 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 required FTE reduction quotient. According to FAQ 40, the interim final rule to be issued will specify that to qualify for this exception, the borrower must make a good-faith, written offer of rehire, and the employee’s rejection of that offer must be documented by the borrower.

The Instructions followed up on this final chance on Page 8 in the explanation for the “FTE Reduction Exception” line that is included in Table 1 of the PPP Schedule A Worksheet. According to the Instructions, any FTE reductions where (1) the borrower made a good-faith, written offer to rehire an employee during the Covered Period (or Alternative Covered Period) that was rejected by the employee or (2) the employee was fired for cause, voluntarily resigned, or voluntarily requested and received a reduction in hours will not be considered for the purposes of the FTE reduction. Therefore, even if you miss the first two pitches, you still have a chance to reach first on the third cut if you properly document that it is the employees’ fault, and not yours, that the FTEs were not restored by June 30.

As for what kind of documentation is required, Page 10 of the Instructions states that the borrower must maintain in its files (but is not required to submit with its forgiveness application) documentation regarding any employee job offers and refusals, firings for cause, voluntary resignations, and written requests by an employee for a reduction in work schedule. This brief statement in the Instructions hardly seems to qualify as the detailed documentation instructions for offers of rehire promised by FAQ 40 to come in a later interim final rule; therefore, one must assume that further guidance on this point (and hopefully others) is still coming. As of now, though, if the borrower knows that it has swung and missed on strike one, and fears a swing and a miss on strike two because no one will come back to work, then that borrower would be wise to document as much as possible in writing with respect to its employees’ unwillingness to work. Please note that this final swing will only connect if the open position was not filled by a new employee, presumably because the new employee is already included in the FTE headcount.

As for the SBA’s missed call mentioned above with respect to the denominator of the FTE reduction quotient used for seasonal employers, we can only assume that the period of May 1, 2019, to September 15, 2019, is a carryover from the earlier Interim Final Rule issued by the SBA on April 30 whereby instructions for calculating the maximum loan amount for seasonal employers under Section 1102 of the CARES Act were provided; however, forgiveness is governed by an entirely different section of the CARES Act (i.e., Section 1106), and the period used in the April 30 Interim Final Rule for calculating employers’ loan amounts directly contradicts the language of that section. While missed calls have always been, and will always be, a part of baseball (despite the annoyance of instant replay), they have historically not allowed an agency interpretation to override a statute, which would seem to say that the denominator of the FTE reduction quotient required by the Instructions for seasonal employers must be wrong and subject to later revisions. We can only hope that clarity on that point, and numerous others with respect to forgiveness, will be provided before the lack of it causes more errors.

© 2020 Jones Walker LLP

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About this Author

Thomas Walker Jr Corporate Attorney Jones Walker Jackson, MS
Partner

Tom Walker is a partner in the Corporate Practice Group. He focuses on commercial and regulatory matters in the financial services industry, with a depth of experience representing financial institutions.


Prior to joining the firm, Tom served as executive vice president and director of a community bank in Forest, Mississippi. His experience as general counsel, chief operating officer, chief financial officer, and chief investments officer in the financial services sector enhances his ability to provide legal services to his clients.

Tom previously served as chairman of...

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