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By:  Diva Bole, Esquire

On May 22, 2020, the SBA issued some guidelines intended to clarify some ambiguities from the CARES Act as to how to calculate full-time equivalent employees and what to do if employees did not return to work when re-employment was offered by the employer.  Per such guidance, full-time equivalent employees are those working 40 hours or more, each week.  Employees who work less than 40 hours a week are calculated as a partial full-time equivalent employee based on the hours they work per week, or, at the borrower’s election, are calculated as half of a full-time equivalent employee (regardless of how much they work per week). The guidance also clarified certain situations that involved a reduction in employee headcount that would not affect loan forgiveness: (1) an employee is fired for cause, (2) an employee resigns voluntarily, (3) an employee voluntarily requests a reduced schedule, and (4) an employee voluntarily chooses not to return to work if the requirements below are met:

  • The offer was for the same salary or wages and same number of hours as earned by such employee in the last pay period prior to the termination or reduction in hours of the employee;
  • The employee rejected the offer;
  • The borrower kept records documenting the offer and its rejection;
  • The borrower informed the relevant state unemployment insurance agency that the employee rejected the offer (within 30 days of the employee rejecting the offer).

On June 5, 2020, President Trump signed the Paycheck Protection Program Flexibility Act (the “Act”).  The Act amends the CARES Act, which as discussed in our previous “CARES Act – Paycheck Protection Program – Q&A”, established the Paycheck Protection Program.  The Paycheck Protection Program offered loans at low interest rates which could be partially or totally forgiven if certain requirements regarding use of loan proceeds during an eight-week window were met. Importantly, 75% of the forgiven amount were required to be used to fund payroll expenses in an eight-week period.  The remaining 25% could be spent on other permitted uses of loan proceeds (including rent and utilities). The total amount able to be forgiven was also reduced by reductions in the number of full-time equivalent employees and in salaries or wages offered to employees, unless such reductions were corrected by June 30, 2020.  Many were unwilling or unable to return to work during stay-at-home orders or guidance imposed by state and local government, which meant that rent, utilities, and other permitted uses of loan proceeds accounted for a larger portion of employers’ costs during the eight-week period following their receipts of loan proceeds.  Payments on Paycheck Protection Program loans were deferred for at least six months, but no more than one year.

In response to a number of  concerns regarding implementation of the CARES Act, the Act amends the CARES Acts requirements in the following ways:

  • The “covered period” in which loan proceeds must be used is extended to 24 weeks from the date the borrower receives loan proceed or by December 31, 2020 (whichever is earlier). A borrower may, at its election, use the original eight-week covered period.
  • The portion of loan proceeds that must be used for payroll costs in order to qualify for loan forgiveness is reduced to 60% (rather than 75%). Per a joint statement from the Department of Treasury and the SBA, a borrower who uses less than 60% of loan proceeds for payroll costs will be eligible for partial forgiveness based on the amount of proceeds used for payroll costs.
  • The deadline to correct reductions in headcounts of fulltime equivalent employees is extended from June 30, 2020 to December 31, 2020.
  • A reduction in full-time equivalent employees would not reduce loan forgiveness for reductions because a borrower could not rehire former employees and could not fill those positions with similarly qualified replacements, or because a borrower could not return the same level of business activity it had before February 15, 2020 because the borrower was complying with guidance from the Department of Health and Human Services, the CDC, or OSHA regarding sanitation, social distancing, and other COVID-19 related safety requirements. Borrowers who elect to rely on these safe harbors should make such elections in good faith and should have documentation supporting these determinations.
  • To avoid a situation in which the payment deferral period expired prior to a determination as to loan forgiveness being made, the Act ties deferral time periods to the forgiveness of the loan. Payments are deferred until the date on which the forgiveness amount is sent to the lender, or ten months after the end of the covered period, if a borrower does not request forgiveness.
  • The maturity date on the loan is extended from two years to five years.
  • Borrowers who have loan proceeds forgiven are entitled to use deferrals of employment taxes.


Diva Bole is an Attorney in PK Law’s Corporate and Real Estate Group. She focuses her practice on business formation, mergers and acquisitions, joint ventures, commercial lending, financing and leasing, complex contracts, and corporate restructuring.  Diva can be reached at 410-938-2645 or