The latest updates and analysis from Morrison Foerster
May 18, 2020 - International Public Procurement, Small Business, Coronavirus

Are Foreign Employees Included in Calculating Size for PPP’s 500-Employee Size Standard? New Guidance Makes the Answer Unclear

Another Ticking Clock: Additional District Court Preliminarily Enjoins EO 14042 | Increasing Need for OMB Update on GA Court Clarification Order

Updated May 18, 2020

As many companies are likely aware by now, Small Business Administration (SBA) loans under the Paycheck Protection Program (PPP) provide aid to qualifying small businesses in the form of loans with terms favorable to borrowers, including, in particular, provisions that allow potentially the entire loan amount to be forgiven if the proceeds are spent on payroll and other qualifying expenses. The PPP, which we have written about previously, is part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).  There are many paths to qualifying as a small business under the CARES Act, one of which is if the company (with its affiliates) has 500 or fewer employees.

Early guidance issued by both the SBA and the Treasury Department (the “Treasury”) after enactment of the CARES Act indicated that under this PPP-specific 500-employee size standard, only those employees whose principal place of residence is in the United States are included in the size calculation.[1]  Specifically, Interim Final Rule originally published on April 2, 2020, states the following:

2. What Do Borrowers Need to Know and Do?
a. Am I eligible?

You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States, or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry.

Additionally, FAQ #3 of the FAQs[2] published by the SBA and the Treasury on April 6, 2020, states the following:

3. Question: Does my business have to qualify as a small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP?

Answer: No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable). Similarly, PPP loans are also available for qualifying tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, and Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act that have 500 or fewer employees whose principal place of residence is in the United States, or meet the SBA employee-based size standards for the industry in which they operate

In other words, the rule and previous FAQ guidance both suggest that only employees whose principal place of residence is in the United States will count toward the size of a concern under the PPP’s 500-employee size standard.  However, on May 5, 2020 (a month after the above guidance had been published), the Treasury and the SBA added the following FAQ #44:

44. Question: How do SBA’s affiliation rules at 13 C.F.R. 121.301(f) apply with regard to counting the employees of foreign and U.S. affiliates?

Answer:  For purposes of the PPP’s 500 or fewer employee size standard, 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.  13 C.F.R. 121.301(f)(6).  Business concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same.

Although this Answer doesn’t explicitly state that concerns have to count the foreign employees of the applicant and those of its foreign affiliates, the statement that all employees must be counted without inclusion of the clarifying “whose principal place of residence is in the United States” language seems to suggest that foreign employees count toward PPP’s “500 or fewer” size standard.  Such a position would be completely inconsistent with the SBA’s and Treasury’s earlier guidance, which still appears in the current FAQs.

Recognizing this inconsistency, earlier today SBA issued a new rule on eligibility for companies with foreign affiliates.  SBA has now made clear that all employees of foreign affiliates (not just those employees in the U.S.) need to be counted in determining eligibility for a PPP loan.  Importantly, however, because SBA acknowledges that its guidance on this point has been inconsistent, SBA has provided yet another safe harbor.  If a company with foreign affiliates applied for its loan prior to May 5 and only included U.S.-based employees in the employee count, it will not be deemed to have made an inaccurate certification:

However, as an exercise of enforcement discretion due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020), SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s 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 United States. 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.

In other words, if the company’s application pre-dates May 5, this should not be a concern, but if later, and the company has foreign employees or foreign affiliate employees that bring it over the 500 employee threshold, the company is ineligible for a PPP loan.

[1] Note that for companies electing to use the employee-based size standard set by their primary NAICS code, all employees (not just those employees residing in the United States), must be included in the size calculation.

[2] All prior FAQs were consolidated into a single document on the Treasury CARES Act website on May 6, 2020.  Importantly, the FAQs do not carry the force and effect of law independent of the statute and regulations on which they are based.