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Congress Revises Paycheck Protection Program—More Flexibility, But Also More Questions

June 8, 2020Client Alert

Believe it or not, it was only about two months ago that Congress created the Paycheck Protection Program (PPP), one of the flagships of the coronavirus stimulus bill (the CARES Act). While the PPP has helped many businesses stay afloat during the past turbulent months, it has also faced criticism for its convoluted requirements and the changing regulatory guidance coming from the Small Business Administration (SBA).

The Paycheck Protection Program Flexibility Act of 2020, which contains several key revisions to clarify and simplify the PPP, was signed into law on June 5, 2020. Some of these revisions raise more questions than they answer, and we will be continuing to monitor guidance from the SBA and advising clients on the shifting landscape over the coming months.

Extension of “Covered Period”

As borrowers know, the original PPP loans were intended to be used exclusively on covered expenses during the so-called “covered period,” which previously was ending June 30, 2020. But many borrowers were not in a position to fully reopen during that period, as some businesses remained subject to local or state “stay at home” orders. For companies largely shut down during that time period, using loan proceeds on covered expenses could prove challenging.

Recognizing that the economic slowdown caused by the COVID-19 pandemic may not neatly disappear right on June 30, Congress has extended the covered period for use of loan proceeds until December 31, 2020. In other words, borrowers now have until the end of the year to use PPP loan proceeds on covered expenses (including payroll, rent, certain mortgage obligations, and utilities).

Limitations on Loan Forgiveness

While the CARES Act broadly allows borrowers to use PPP loan proceeds on non-payroll expenses like rent and utilities, the SBA promulgated rules after the fact that limited a borrower’s eligibility for forgiveness based on the amount of PPP funds used on payroll vs. non-payroll expenses. Under the old rule, a borrower would be eligible for forgiveness for non-payroll expenses only up to 25% of the total forgiveness amount.

The Flexibility Act dramatically changes that rule. Most simply, Congress has opted for a 60/40 ratio (rather than the SBA’s 75/25 ratio), allowing borrowers to receive more forgiveness for non-payroll expenses.

As written, the Flexibility Act makes the 60/40 rule an absolute prerequisite to receiving any forgiveness at all. The Act states that an eligible borrower “use at least 60 percent of the covered loan amount for payroll costs, and may use up to 40 percent of such amount for any payment of interest on any covered mortgage obligation (which shall not include any prepayment of or payment of principal on a covered mortgage obligation), any payment on any covered rent obligation, or any covered utility payment.” The Flexibility Act indicates that this requirement applies to all previously issued loans as well.[1]

In a joint statement issued the day after the Flexibility Act’s passage, the SBA Administrator and U.S. Treasury Secretary clarified that partial forgiveness will still be available and that the 60% rule will be applied based on the forgiveness amount, rather than the total loan amount. It is unclear how the SBA will implement this interpretation given that it conflicts with the text of the Flexibility Act. Borrowers should continue to monitor SBA guidance and, in any event, endeavor to meet the 60% payroll threshold to maximize their loan forgiveness.

Given that the “covered period” for the loan has been extended—for loan forgiveness purposes, it is now either six months from receipt of loan proceeds (rather than the two months under the old rule) or until the end of the year, whichever is earlier—it should now be easier for employers to use loan proceeds primarily on payroll. Failure to do so may jeopardize loan forgiveness.

Employee Retention Requirements

The PPP is intended to incentivize employers experiencing economic hardship to retain their employees. To that end, the CARES Act reduces a borrower’s eligibility for loan forgiveness proportionally by the amount that the borrower reduces their full-time equivalent employee numbers. For example, if a borrower reduces staffing by 50%, then whatever forgiveness they would ordinarily be entitled to under the CARES Act is reduced by 50% as well.

The PPP Flexibility Act changes that requirement in two key ways. First, the relevant period for employee retention now spans until the earlier of six months after receipt of loan proceeds or December 31, 2020. This means that, for a business to maximize its forgiveness eligibility, it should keep employee levels at or above the reference period[2] for at least the six months after it receives loan proceeds. That said, the preexisting “safe harbor period” for employee reductions that occurred between February 15, 2020, and April 26, 2020, and were corrected by June 30, 2020, has now been extended through December 31, 2020.

But the Flexibility Act also creates a new exemption for employee reductions. Borrowers will not be penalized for any reduction in full-time equivalent employees if the borrower is able to document in good faith either (a) that they were unable to rehire previously laid off employees and were also unable to rehire similarly qualified employees by December 31, 2020; or (b) that they were unable to return to their pre-COVID levels of business activity “due to compliance with” health and safety guidance related to COVID-19 put out by HHS, CDC, and/or OSHA.

It is unclear exactly how this exemption will work in practice, and further guidance from the SBA will be useful in understanding a company’s obligations going forward. One can imagine a scenario where a restaurant that needs to operate at reduced capacity in order to comply with social distancing guidelines may be able to excuse any reduction in its staffing that occurs as a result. Borrowers should therefore carefully assess the health and safety guidance put out by the federal government and determine whether such guidance has caused reductions in their levels of business activity.

Additional Provisions

Under the CARES Act, loan repayment was deferred for at least six months and up to a year. The Flexibility Act has extended the deferral all the way through the time that the borrower’s loan forgiveness amount is determined and paid by the SBA to the lender. In other words, if there is any portion of the loan that is not forgiven, the borrower will not be responsible for repaying it until the SBA has repaid the lender for whichever portions are forgiven. If the borrower fails to apply for forgiveness within 10 months of the end of the covered period, then the borrower is obligated to repay the loan 10 months after the end of the covered period.

The Flexibility Act also now allows borrowers to claim the employer payroll tax deferral, which was previously foreclosed to anyone applying for forgiveness under the PPP. More details about the payroll tax deferral may be found here.


Should you have any questions, please do not hesitate to contact our attorneys at Greenberg Glusker.


[1] The Flexibility Act allows borrowers who have already received a PPP loan to continue to use the eight-week period after receipt of loan funds as the “covered period” for purposes of the forgiveness calculation. But there is no limitation on the applicability of the new 60/40 rule, and the Flexibility Act states that its changes “shall be effective as if included in the CARES Act.”

[2] Under the CARES Act, the reference period for calculating reductions in full-time equivalent period is either (a) February 15, 2019, to June 30, 2019, or (b) January 1, 2020, to February 29, 2020. The borrower can choose which period to use.