Paycheck Protection Program FAQ: What If a Furloughed Employee Refuses to Return to Work?

May 09, 2020

A number of clients that have applied for a loan under the Paycheck Protection Program (“PPP”) have expressed some concern over their ability to qualify for forgiveness of the loan at the end of the eight-week period (beginning with receipt of the loan proceeds) during which the loan proceeds are to be expended for permitted purposes.

The basis for their concern? The requirement that the borrower not have reduced its workforce in response to the economic downturn or, having done so, that the borrower “eliminate such reduction” no later than June 30, 2020.

The statute allows a borrower to apply to their lender for forgiveness of the PPP loan. In general, the application submitted must demonstrate that the borrower has retained its workforce and maintained salary levels. A reduction in either figure will result in a reduction in the amount of loan forgiven.

The problem facing borrowers: What if a furloughed employee refuses to return to work?

Turns out this is not an unfounded concern. Many employers who have already received their loans, and have offered to rehire furloughed employees, have been greeted with a “No thanks, I’m actually making more being unemployed.”

“WTF?” you ask. Well, between State unemployment benefits and the $600 per week provided by the Federal government pursuant to the CARES Act, many individuals are, in fact, economically better off being unemployed – at least in the relative short-run (as currently drafted, the Federal largesse lasts between 39 and 58 weeks).

Where does this leave the employer? It can certainly hire new employees to eliminate the reduction in workforce – there is no requirement to rehire the same individuals who were let go.

Last week, the SBA and the Treasury went one step further by issuing the following FAQ # 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 reduced 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.