As borrowers use their loan proceeds from the Paycheck Protection Program (PPP) to continue or restore payroll and call back laid-off employees, they may encounter reluctance or refusal by employees to return to work, which could impede borrower’s ability to obtain full forgiveness on their PPP loan. Borrowers looking toward full forgiveness of the loan amount must maintain a staffing level[1]during the eight-week period following the funding of the loan at the level maintained during a comparative period preceding the loan, as described in Section 1106(d)(2) of the CARES Act.[2]

For borrowers facing employee refusals to return to work, on April 29, 2020, the Small Business Administration (SBA) and Department of Treasury signaled relief, albeit informally, in an answer to Question 40 under the PPP Frequently Asked Questions. While promising formal guidance on the issue, the response stated the following.

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 excused 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.

To prepare for thisde minimisexemption,[3]the importance of documentation cannot be overstated. Borrowers reaching out to laid off employees should use atrackablemeans of written communication to present the offer to return, describe any change in conditions of the job other than in salary/wage and hours (which should match the pre-layoff terms), and require a response from the employee by a specific date. Communications may state that a failure to respond will be considered abandonment of the position or declination of the offer, but a final written termination of employment or offer to rehire should also be sent and recorded. Whether a person’s refusal to return to work absent a qualifying reason[4]terminates the right to unemployment benefits is state-determined, but these notices should include a caution that declining the recall could jeopardize their eligibility for continued unemployment benefits.

Some reasons for not returning to work must be addressed before terminating employment, such as a COVID-19 diagnosis or child care needs. In these cases, the employer could consider implementing accommodations to address the employee’s situation, such as permitting short-term telework or paying him or her a lower salary or wage that does not trigger the PPP loan forgiveness reduction relating to salary/wages reductions and would meet the two-thirds pay requirements of the paid leave provisions of the Families First Corona Response Act (FFCRA).[6]Additional SBA guidance may specifically address loan forgiveness and cases of delayed returns to work. In the interim, navigating these options should be done with the assistance of counsel.

Consistent with general advice to PPP loan recipients, borrowers’ careful documentation of all steps taken in applying for and using PPP loan proceeds and other COVID-19 emergency relief is more important now than perhaps ever, given the urgency with which the CARES Act and similar legislation were enacted and the absence of final guidance or precedence for applying the regulations.

For more information, please contact Alexis Schostak (248-203-0598 or[email protected]), Thomas Vaughn (313-568-6524 or[email protected]), Robert Boonin (313-568-6707 or[email protected]), Suzanne Johnson (313-568-6516 or[email protected]), or your Dykema relationship attorney.

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