BUSINESS LAW 101 / Small Business Paycheck Protection Program

By Albert L. Kelley, Esq.

The Coronavirus is affecting business in a major way.  Whether large or small, businesses are losing money, employees, suppliers.  For large businesses, some will be able to weather the storm, others will turn to government bailouts.  History has shown us that government looks at certain players in the industry as too big to fail. Without a bailout, the layoffs that would occur if large companies fail will be drastic across the map.  These are not just local impacts but national impacts that politicians don’t want to campaign against. At the end of the day, most of the major companies will rebound and be just fine. Small businesses are another issue.

The vast majority of small businesses generally run on a shoestring budget.  They hopefully make enough to pay their employees, their rent, their suppliers and have enough for the owners to live on.  A week without income will hurt most businesses; two weeks will come close to bankrupting them. While the federal government does not consider any single small business as too big to fail, as a whole small businesses make up 54% of all US sales and are responsible for 75% of new employment.  As a market, small businesses are larger than big business. So, the federal government realized a need to provide a bailout for small business. That came out this month as the Paycheck Protection Program.

The Paycheck Protection Program (PPP) is a loan/grant program created by the Small Business Administration (SBA).  The program starts as a low interest (1%) loan with a term of two years. If guidelines are met, the loan is converted to a grant and the debt is forgiven. Under the guidelines, the funds are only to be used for payroll, rent, mortgage interest payments (not principle) and/or utilities. From these four, 75% of the funds must go to payroll, with no more than 25% going to rent, mortgage interest or utilities.  In addition, the company must keep their current employees on the payroll for eight weeks from the date of the loan. If the guidelines are met, the debt is forgiven and does not need to be repaid. However, if there is not a strict following of the guidelines, the loan must be repaid within 2 years.

One of the problems with the PPP is that it was written hurriedly to meet the coronavirus crisis, it is not fully thought out.  There is a lot of vagueness that leads to questions the law does not address. For example, the law states that the employer must keep the workers on payroll for eight weeks.  What if an employee quits? The statute is silent on that. Some advisors are stating that since the law is based on a headcount, not an actual employee lists, you should hire a new employee immediately so the headcount does not change.  Although, because the law is silent, there is no guarantee that this will be allowed.

As with many government programs, the devil is in the details.  So let’s look at those details.  

  1. Who is eligible to apply?  Only business with 500 or fewer employees who are US residents or if your business qualifies as a small business under SBA industry guidelines. The business must have been in operation on February 15, 2019, with either paid employees (including payment of payroll taxes) or paid independent contractors.  Applicants may be sole proprietorships, partnerships, corporations, or limited liability companies. This includes 501(C)(3) companies.
  2. What businesses are not eligible? The first category is easy: those businesses whose activities are illegal.  Also ineligible are people who merely hire domestic (household) workers, such as nannies or housekeepers.  Next, if any business owner who has at least a 20% interest is incarcerated, on probation or parole, or under indictment the entire business is ineligible. Lastly, any person who has already defaulted on an SBA loan is ineligible.
  3. How much can I borrow? Essentially, you may borrow 2.5% of your monthly payroll amount.  In other words, if your monthly payroll is $10,000, you can borrow $25,000 (10,000 x 2.5). There are some qualifications here. If any of your employees makes more than $100,000, the excess amount will not be allowed.  In that situation, you need to deduct the portion of their monthly salary that exceeds $100,000 from the calculation. Also, if any of your employees are not US residents, their salary cannot be included in the payroll calculation and cannot be paid from the loan proceeds.  If you have already received an Economic Injury Disaster Loan, that amount is added to the total.
  4. What payroll costs can you use the money to cover? Can you pay benefits, tips, etc.? The law specifically defines payroll costs as:
    1. salary, wages, commissions, or similar compensation; 
    2. cash tips or the equivalent (based on employer records of past tips or, in the absence of such records, a reasonable, good-faith employer estimate of such tips); 
    3. payment for vacation, parental, family, medical, or sick leave; 
    4. allowance for separation or dismissal; 
    5. payment for the provision of employee benefits consisting of group health care coverage, including insurance premiums, and retirement; 
    6. payment of state and local taxes assessed on compensation of employees”. 

If you are an independent contactor or are self-employed, the list is shorter: “wage, commissions, income, or net earnings”.  

  1. Can you pay independent contractors? No.  Independent contractors are allowed to apply on their own, but they are not deemed employees for the purposes of the loan.
  2. Is worker’s compensation include in payroll costs? This is an area that the law does not address.  While the law allows medical and sick leave, group health care and insurance premiums, it does not specifically state worker’s compensation.  As such, it is recommended that none of the loan proceeds are used to pay worker’s compensation.
  3. Are federal payroll taxes included in payroll costs? No. Federal taxes imposed or withheld between February 15, 2020 and June 30, 2020, including the employee’s and employer’s share of FICA are specifically excluded.
  4. Can you apply for more than one loan? No.  This is a one-time offer.
  5. When will I have to start repaying the loan?  The repayment period starts six months after the loan is made, unless the loan qualifies for forgiveness.
  6. What can you use the PPP funds for? The funds are ONLY allowed to be used for the following: 
    1. payroll costs;  
    2. costs related to the continuation of group health care benefits during periods of paid sick, medical, or family leave, and insurance premiums;   
    3. mortgage interest payments (but not mortgage prepayments or principal payments); 
    4. rent payments;  
    5. utility payments;  
    6. interest payments on any other debt obligations that were incurred before February 15, 2020; and/or 
    7. refinancing an SBA EIDL loan made between January 31, 2020 and April 3, 2020

If the funds are used for any other purpose, you will have to repay that money and may be charged with fraud.

  1. If a business fired their employees due to the business shut down, can they rehire the employees to apply for PPP? It appears so, although the law isn’t as clear as it should be.  If you laid off your employees after March 1, 2020 and they had worked no less than 30 of the last 60 days, the law implies you may rehire those employees and include them in your calculations.
  2. If I hire an attorney or accountant to assist with the loan process, can I use the funds to pay them? No, however, the law allows a business to hire an agent who will be paid by the bank, not the business, at a rate of 1% of the loan value for loans up to $350,000, 0.5% for loans between $350,000 and $2 million, or 0.25% for loans above 2 million.

Al Kelley is a Florida business law attorney located in Key West and previously taught business law, personnel law and labor law at St. Leo University.  He is also the author of four law books: (“Basics of Business Law” “Basics of Florida’s Small Claims Court”, “Basics of Florida’s Landlord/Tenant Law” and “Basics of Starting a Florida Business” (Absolutely Amazing e-Books)). This article is being offered as a public service and is not intended to provide specific legal advice.  If you have any questions about legal issues, you should confer with a licensed Florida attorney.

[livemarket market_name="KONK Life LiveMarket" limit=3 category=“” show_signup=0 show_more=0]