On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act into law. The Flexibility Act amends the Paycheck Protection Program (PPP) provisions of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) in several important ways, including by giving borrowers more time to spend loan funds and still obtain forgiveness, increasing the amount of non-payroll costs that may be forgiven, and creating two new “safe harbors” that allow borrowers to achieve full forgiveness despite reductions in employee headcount or wages.

Congress enacted the PPP provisions largely to allow small businesses to meet their payroll obligations and avoid layoffs during the pandemic. To encourage businesses to keep their workforces and payrolls intact, the CARES Act provides that employers who do not reduce headcount or wages and salaries during certain measurement periods may qualify for forgiveness of their PPP balances. However, under the CARES Act as originally enacted, forgiveness is reduced or eliminated if employers lay off workers or reduce their wages.

One of the new “safe harbors” allows employers who have been unable to operate at the same level of business activity as a result of compliance with COVID-19 related federal safety guidelines and closure orders to obtain full forgiveness even though they have reduced employee headcount. But if employers can fit within the Flexibility Act’s new safe harbor, is it really “safe” for them to do so? We offer insight below.

The Safe Harbor

In order to take advantage of loan forgiveness under the PPP, the CARES Act required that PPP borrowers maintain the same average number of full-time equivalent (FTE) employees as they had prior to the COVID-19 pandemic and pay employees at least 75% of the salary or wages they received in the last fiscal quarter prior to the company’s application for a PPP loan. Prior to the enactment of the Flexibility Act, a safe harbor gave a PPP borrower until June 30, 2020 to reverse any reduction in employment headcount and salary/wages. If the borrower could not restore employment or salary/wages prior to June 30, 2020, loan forgiveness would be reduced proportionately.

The Flexibility Act not only extends the deadline to restore headcount and wages to December 31, 2020, it also provides that PPP borrowers will not have their loan forgiveness reduced due to a decline in the FTE headcount during the Covered Period (which is, at the employer’s choice, either the 24 week period or the 8 week period following loan disbursement, see below) if the PPP borrower:

  1. in good faith
  2. can document an inability to operate between February 15, 2020 and the end of the Covered Period at the same level of business activity as before February 15, 2020
  3. due to compliance with requirements established or guidance issued by the Secretary of Health and Human Services (HHS), the Director of the Centers for Disease Control or Prevention (CDC), or Occupational Safety and Health Administration (OSHA)
  4. during the period beginning on March 1, 2020, and ending December 31, 2020
  5. related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID–19.

In other words, employers can disregard headcount reductions in calculating loan forgiveness during the Covered Period if they can meet the “safe harbor” against FTE reductions caused by the inability to operate under federal closure or shelter orders during the Covered Period-as long as employers can document this inability “in good faith.”

The Covered Period

The CARES Act provided that a PPP borrower must spend its loan proceeds within an eight-week Covered Period following the PPP loan disbursement date. Under the Flexibility Act, the PPP loan Covered Period is either (1) the 24-week (168-day) period beginning on the PPP loan disbursement date, or (2) if the borrower received its PPP loan before June 5, 2020, the borrower may elect to use either an eight-week (56-day) Covered Period or the 24-week period.  For example, if the borrower is using a 24-week Covered Period and received its PPP loan proceeds on Monday, April 20, the first day of the Covered Period is April 20 and the last day of the Covered Period is Sunday, October 4. In no event may the Covered Period extend beyond December 31, 2020.

Employer Considerations

What should employers consider before relying on the Flexibility Act safe harbor for reduced business activity?

  1. Read literally, the reduced level of business activity due to the federal guidance/restrictions must last for the entire Covered Period, and employers must be able to establish that they could not return to normal operation levels for the entirety of the Covered Period. This could be problematic for employers electing a 24-week Covered Period. If employers elect the 24-week covered period, and things change in the next three months that would allow them to operate at normal capacity, they may not be able to make the necessary showing. In addition, if employers elect the 24-week covered period, guidance could change during that time. Employers considering relying on the safe harbor should consider the likelihood that their business will be impacted for the entirety of their chosen Covered Period.
  2. A company must “document” its inability to return to pre-February level of business activity. Employers should draft a written policy requiring employees to adhere to the appropriate federal guidance/restrictions and submit the written policy with the forgiveness application; some commentators go as far as suggesting that employers will be required to provide such a policy to their lenders with the forgiveness application. The policy should explain the restrictions/guidance in place and their impact on activity levels. Employers will also need to demonstrate activity levels pre-February 15 and during the Covered Period to show activity levels were negatively impacted. Employers with reduced headcount but increased or maintained company output should not rely on the safe harbor.
  3. The safe harbor applies only to restrictions or guidance issued by three federal agencies-HHS, CDC, and OSHA-during the period beginning on March 1, 2020 and ending December 31, 2020. States, counties and cities have implemented their own restrictions and guidance, which in turn often incorporates or references federal guidance, but employers must be able to cite to specific federal directives from those three agencies that form the basis of the employer’s claim that the company could not return to pre-February 2020 activity levels.
  4. The federal guidance and restrictions are industry-specific. For instance, the CDC has guidance for employers in a range of industries, including the airline industry, agriculture, and construction. Employers must be certain that the specific guidance they rely upon applies to their particular business.
  5. Finally, the safe harbor does not impact the 25% salary reduction limitation on loan forgiveness. To take advantage of the safe harbor, the borrower cannot reduce salaries or wages by more than 25% during the Covered Period.

Though the Flexibility Act’s safe harbor for reduced activity levels will be attractive for those PPP borrowers whose operations have been hit hard by COVID-19, borrowers should be certain they can meet all of the requirements before relying on the safe harbor in seeking loan forgiveness. For assistance with these and other employment-related issues, contact your Baker McKenzie employment attorney.