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Should you include foreign affiliate employees in your employee count for the PPP?

Congress enacted the CARES Act to provide immediate assistance to individuals, families, and organizations affected by the COVID-19 emergency. Among the provisions contained in the CARES Act are provisions authorizing the Small Business Administration (SBA) to temporarily guarantee loans under the Paycheck Protection Program (PPP).

The SBA previously issued guidance that an entity is eligible for a PPP loan if it has 500 or fewer employees whose principal place of residence is in the United States. Initially, this statement led to uncertainty as to if PPP applicants must include employees of foreign affiliates in their employee counts. In this article, we will address some questions employers have had regarding PPP loan eligibility since the release of this guidance.

Should you include foreign affiliate employees in your employee count?

To start, let’s address basic eligibility. Under the CARES Act, an entity is eligible for a PPP loan if it has:

(1) a small business concern, or

(2) a business concern, nonprofit organization described in section 501(c)(3) of the Internal Revenue Code, veterans organization described in section 501(c)(19) of the Internal Revenue Code, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act that employs no more than 500 employees or, if applicable, SBA’s employee-based size standard for the industry in which the entity operates.

Existing SBA regulations generally include an entity together with its affiliates for purposes of determining eligibility for an SBA loan. SBA issued an interim final rule on affiliation (posted April 4, 2020) stating PPP applicants are subject to the affiliation rules in 13 C.F.R. 121.301. Another relevant ruling came on April 15, 2020: Business Loan Program Temporary Changes; Paycheck Protection Program.

These rules deem entities to be considered “affiliates” based on factors including stock ownership, overlapping management, and identity of interest. Of relevance here, SBA’s affiliation rules provide in determining an entity’s number of employees, employees of the entity include “all of its domestic and foreign affiliates.” As a result, a borrower is considered together with its U.S. and foreign affiliates for purposes of determining eligibility for the PPP in most cases.

Based on this methodology, the borrower application form, which all applicants must complete and submit, includes a certification the applicant “employs no more than the greater of 500 or employees or, if applicable, the size standard in number of employees established by the SBA in 13 C.F.R. 121.201 for the Applicant’s industry.” To provide further clarification, SBA issued guidance on May 5, 2020 stating an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the affiliation rules.

Other Eligibility Requirements

As described above, the generally applicable 500-employee size standard is subject to the application of SBA’s affiliation rules, as well as numerous other eligibility requirements (for instance 13 C.F.R. 120.110, which lists 18 types of ineligible businesses, or SBA Form 2483, which includes mandatory applicant representations regarding defaults on previous government loans or guarantees, federal suspension or debarment, and criminal backgrounds).

The reference in SBA guidance to employees whose principal place of residence is in the U.S. is relevant to a PPP applicant’s calculation of payroll for purposes of determining the PPP loan amount and to the calculation of loan forgiveness. If an applicant meets the employee count requirement for a PPP loan, it does not automatically make the applicant eligible for the program. An applicant still must meet all applicable eligibility criteria.

Conclusion & Clarifications

An entity must include all employees of its domestic and foreign affiliates, except in limited circumstances where the affiliation rules expressly do not apply to the entity, to calculate the total number of employees for PPP eligibility. Any entity that, together with its domestic and foreign affiliates, does not meet the 500-employee or other applicable PPP size standard is therefore ineligible for a PPP loan.

However, the SBA allows some discretion due to reasonable borrower confusion based on the original guidance. The SBA issued a clarifying FAQ on May 5, 2020. The SBA will not find any borrower who applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s potential original exclusion of non-U.S. employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the U.S. Such borrowers shall not be deemed to have made an inaccurate certification of eligibility solely on that basis. Under no circumstances may PPP funds be used to support non-U.S. workers or operations.

If you have questions, please contact your Blue & Co. advisor today.

Article written by Amy Sandlin from Blue & Co. and Sean King from McGuire Sponsel, an affiliate of Blue & Co.

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