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1. Client Question: “Can you provide an example of how to calculate the new 40 hr FTE for the PPP loan? I’m confused if an employer needs to look at each week separately first (capping 40 hours first) and then averaging them; or does the company add all hours during the period and divide by the number of weeks? Can you walk me through 2 examples? What FTE count are each of these?” Answered by Aria Eckersley
The new PPP loan forgiveness application released by the SBA on Friday night (linked here) clarified certain points about eligibility for forgiveness, including how to count full-time equivalent employees (FTE) during the Covered Period (or the Alternative Payroll Covered Period (each defined below)).
- Note: the Alternative Payroll Covered Period provided a favorable clarification about the timing of payroll – essentially (and as discussed below), borrowers with a biweekly (or more frequent) payroll schedule can choose to calculate their eligible payroll costs using the 8 week period that starts on the first day of their first pay period after the loan disbursement date
To calculate average FTEs, for each employee, you enter the average number of hours paid per week, divided by 40 and then rounded to the nearest tenth. The maximum count for each employee is 1.0 (so any hours paid over 40 hours will still count as 1.0) (option #1). A simplified calculation method that borrowers can choose to use assigns a 1.0 for employees who work 40 hours or more per week and 0.5 for employees who work fewer hours (option #2). Many of the calculations provided in the forgiveness application are difficult to grasp without examples, so we updated the chart below to run the numbers for these two options. You should run both calculations for your specific facts to determine which method is preferable.
This calculation is used to determine if a borrower’s loan forgiveness amount must be reduced because of a reduction in full-time equivalent employees. Remember, a borrower is exempt from this reduction if both (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.
*Add the hours per week for each employee over the 8 weeks and divide by 8 to get their average hours per week during the applicable period (number reflected in column 2). For example, from Example 1, Employee A:
Definitions from the Forgiveness Application:
- Alternative Payroll Covered Period: For administrative convenience, Borrowers with a biweekly (or more frequent) payroll schedule may elect to calculate eligible payroll costs using the eight-week (56-day) period that begins on the first day of their first pay period following their PPP Loan Disbursement Date (the “Alternative Payroll Covered Period”).
- For example, if the Borrower received its PPP loan proceeds on Monday, April 20, and the first day of its first pay period following its PPP loan disbursement is Sunday, April 26, the first day of the Alternative Payroll Covered Period is April 26 and the last day of the Alternative Payroll Covered Period is Saturday, June 20. Borrowers who elect to use the Alternative Payroll Covered Period must apply the Alternative Payroll Covered Period wherever there is a reference in this application to “the Covered Period or the Alternative Payroll Covered Period.”
- However, Borrowers must apply the Covered Period (not the Alternative Payroll Covered Period) wherever there is a reference in this application to “the Covered Period” only.
- Covered Period: Enter the eight-week (56-day) Covered Period of your PPP loan. The first day of the Covered Period must be the same as the PPP Loan Disbursement Date. For example, if the Borrower 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, June 14.
- Eligible payroll costs: Borrowers are generally eligible for forgiveness for the payroll costs paid and payroll costs incurred during the eight-week (56-day) Covered Period (or Alternative Payroll Covered Period) (“payroll costs”). Payroll costs are considered paid on the day that paychecks are distributed or the Borrower originates an ACH credit transaction. Payroll costs are considered incurred on the day that the employee’s pay is earned. Payroll costs incurred but not paid during the Borrower’s last pay period of the Covered Period (or Alternative Payroll Covered Period) are eligible for forgiveness if paid on or before the next regular payroll date.
- Otherwise, payroll costs must be paid during the Covered Period (or Alternative Payroll Covered Period). For each individual employee, the total amount of cash compensation eligible for forgiveness may not exceed an annual salary of $100,000, as prorated for the covered period. Count payroll costs that were both paid and incurred only once. For information on what qualifies as payroll costs, see Interim Final Rule on Paycheck Protection Program posted on April 2, 2020 (85 FR 20811).
- FTE Reduction Safe Harbor: A safe harbor under applicable law and regulation exempts certain borrowers from the loan forgiveness reduction based on FTE employee levels. Specifically, the Borrower is exempt from the reduction in loan forgiveness based on FTE employees described above if both of the following conditions are met: (1) the Borrower reduced its FTE employee levels in the period beginning February 15, 2020, and ending April 26, 2020; and (2) the Borrower then restored its FTE employee levels by not later than June 30, 2020 to its FTE employee levels in the Borrower’s pay period that included February 15, 2020.
2. Our litigation team has been closely tracking the lawsuits being filed across the country related to COVID-19. Though employment lawsuits are not being filed at the rate of other commercial and consumer lawsuits, it is expected there will be an uptick in those claims in the coming months. Recently, OSHA has reported a significant increase in worker safety claims related to COVID-19 exposure. Although OSHA does not enable private lawsuits, employers should be equipped with proper responses to safety claims to avoid retaliation lawsuits, claiming that even where there were no violations, an employer retaliated against the employee for making a complaint. Additionally, employers should assess their risks for discrimination and wage and hour claims as they aim to reopen and/or further reduce employee hours and salaries. And finally, employers with over 100 full-time employees considering mass layoffs or plant closures will want to stay aware of their notice obligations under the federal WARN Act and their state’s mini-WARN Act, to the extent there is one. Read our analysis of the employment litigation trends we’re seeing. Authored by Erin Mayer
3. Keep these three things in mind about fiduciary duties during this time of crisis. The COVID-19 pandemic has caused unprecedented disruption and challenges for businesses large and small, public and private, across most industries. That, in turns, means added stress and scrutiny for the directors, officers, managers and partners charged with navigating the unchartered waters of doing business during a pandemic. Authored by George Spathis
The COVID-19 pandemic has caused unprecedented disruption and challenges for businesses large and small, public and private, across most industries. That, in turns, means added stress and scrutiny for the directors, officers, managers and partners charged with navigating the unchartered waters of doing business during a pandemic. Here are THREE THINGS to keep in mind about fiduciary duties during this time of crisis.
- Invoking the Business Judgment Rule. Those who hold positions of control and authority over a business entity owe that entity (and its owners) fiduciary duties of care and loyalty. Those duties are tempered, however, by the “business judgment rule,” which shields decision-makers from liability for decisions that ultimately turned out wrong or imprudent so long as the decision was the product of sound business judgment at the time, and decision-maker acted in good faith, based upon the available information, and without any undisclosed conflict of interest or ulterior motive. To reasonably ensure that important decisions during COVID-19 are not challenged with the comfort of hindsight, gather as much current information from the sources that are relevant to the type of decision you are making, meet or confer as a decision-making body as frequently as practicable under the circumstances, and go the extra mile to document the depth and breadth of your research and deliberations.
- Consider the interests of ALL stakeholders. In making decisions, the law generally recognizes that the best interest of the entity may not be tightly tethered to a capitalist profit motive, particularly over the short term. Decision-making during COVID-19 should also take into equally important considerations such as employee safety and welfare, public interest, community impact, image and reputation, and long-term strategic objectives.
- Special considerations when the entity is or may be insolvent. When a company is at or nearing the point of insolvency—when its debts and liabilities are overwhelming it or when it lacks the ability to pay debts as they come due--a fiduciary may (depending on the state) also owe duties outside the company to lenders and creditors. In times of financial distress, it is particularly important to seek and obtain guidance from legal and accounting professionals that can advise on restructuring options and how to avoid personal liability to such third-parties.
Given the unprecedented nature of the times, including fact scenarios that have never before been analyzed, and legal questions that have never before been adjudicated, it is more likely than not that those charged with overseeing and managing the operations of a business will be given the benefit of the doubt so long as they utilize their best judgment, based on the best available information. As such, and in terms of officer and director liability, how you go about making a decision may be just as important as the decision you ultimately make.
For more resources and LP's response to COVID-19, visit this webpage.