See end for a May 4 update to guidance.
The federal Paycheck Protection Program (PPP), a $349 billion part of the CARES Act which ran out of funding on April 15, was designed to keep people employed by small businesses during the economic downfall caused by COVID-19. But for some businesses, the sweeping legislation many hoped would keep the U.S. economy afloat in this cataclysmically difficult time came too late to prevent layoffs and furloughs.
The loss of revenue that came along with the public-safety-focused Stay-at-Home order left many businesses throughout the Capital Region with little to no incoming revenue, and little to no choice but to furlough or layoff. While the PPP requires rehiring to prior staffing and salary levels to take advantage of the loan’s forgiveness terms, another part of the CARES Act, expanded and more generous Unemployment Insurance (UI) benefits, has complicated matters markedly.
The legislation was designed to ease economic problems. The reality is that while the aid is both necessary and appreciated, the problems have actually only shifted, not disappeared.
Just here in the Capital Region, more than 64,000 people have filed for unemployment insurance between the weeks of March 16 and April 4, 2020. On March 29, 13 weeks of federally supplemented benefits kicked in. Maximum weekly unemployment benefits now top $800 a week; or $44,000 a year if annualized, in a state with a $46,000 median income.
Many businesses in the Capital Region have applied for and received a PPP loan; almost $4 billion of the loans have been approved for businesses in Louisiana. But with no set end date for the Stay-at-Home order, businesses thinking about rehiring their workers to secure forgiveness of their PPP are also weighing the long-term cashflow problems they may experience, and having to decide what is best both for their business and for their individual employees.
To help explain the timing, BRAC overlaid the availability of benefits (PPP and UI) with a hypothetical PPP loan application. The perverse consequence of the generous federal UI supplement is that it could incentivize both some workers to stay home and some employers to hold off on rehiring, in direct opposition to the motivation behind the PPP. Although the forgiveness terms of the PPP were meant to incentivize employers to hire back employees, the uncertainty of the Stay-at-Home order’s end date (and the lack of actual work it creates) is potentially enough to outweigh the forgiveness terms for many employers. In the long term, it could be more financially beneficial for small business owners to leave employees on the unemployment insurance payroll, rather than bring them back to their own, regardless of free money from the U.S. Treasury.
There are many considerations at play and walking the tightrope through them will be difficult. Business owners should engage in consultation with mentors, bankers, accountants, lawyers, and peers, as they thoughtfully plan their actions and determine the best path forward. Things to consider include:
- PPP loans are only forgivable if spent on eligible expenses in the eight-week period after the first draw on the loan.
- Employers may want, or feel obligated, to support their employees collecting UI if those benefits are higher than wages – especially if the Stay-at-Home order is extended.
- Refusal of work is disqualifying for unemployment insurance, putting those who decline paychecks funded by PPP at risk of losing (possibly higher) unemployment benefits.
- The state has not yet provided a reporting mechanism for refusal of work.
- Bringing back employees too early may mean furloughing them again if the Stay-at-Home order is extended. That second furlough may happen after the federal UI supplement ends.
- PPP loans have a 1 percent interest rate for their non-forgivable portion, which is paid by the SBA for the first six months of the loan, and there is no penalty for pre-payment.
- Six months of low-cost working capital may prove more valuable to long-term business recovery than the full forgiveness provided by immediately re-hiring and paying employees.
Lifting the Stay-at-Home order is the third leg of the stool needed to truly address the problem of lost customers and revenue. Of course, that’s not a simple proposition, and it must be done at the right time with the right medical, safety, and other infrastructure to ensure we don’t end up right back under another similar order. But until the Capital Region reopens for commerce, the problems faced by our area’s business will continue, and the staggering level of federal aid spending will be a comfort, but not a cure.
Update: May 4, 2020
On April 29, the Small Business Administration (SBA) offered some guidance that will provide borrowers facing this UI/PPP conundrum with a little comfort. The guidance (see Question 40) will not make the generous federal unemployment supplement less economically attractive than potentially lower wages, but it also will not allow that generous supplement to penalize businesses that try unsuccessfully to bring furloughed or laid off employees back onto their payroll.
The guidance states that SBA and the Department of Treasury will issue an interim final rule for the PPP to exclude from the PPP forgiveness reduction calculation any laid-off workers who refuse a rehiring offer. The rule, which had not been published as of May 4, will specify that an offer to rehire must:
- have been made in good faith;
- be in writing; and
- have documented rejection from the employee.
It also states plainly that refusal of re-employment may mean forfeiture of eligibility for continued unemployment compensation.
BRAC is monitoring the PPP’s interim final rules and will provide deeper guidance and analysis when this new information becomes available.