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The Paycheck Protection Program (PPP) is a loan initiative created by the CARES Act that targets aid to small businesses dealing with losses resulting from the coronavirus pandemic. The big appeal of the program is that the portion of the PPP loan funds used for certain “allowable purchases” is fully forgivable.

Firstly, what are the requirements for achieving PPP loan forgiveness? The SBA guidelines state that PPP loan funds will be forgiven (1) if an employer keeps all employees on payroll for eight weeks from the date that the funds are disbursed and (2) for the money that is used for allowable purposes, such as payroll, rent, mortgage interest, and/or utilities.

Prior to the enactment of the CARES Act, many employers had to make the hard decision to lay off employees due to lack of business, or even closure. As businesses now receive PPP loans, many are seeking to rehire their laid-off employees in order to qualify for loan forgiveness. However, an unintended consequence of another CARES Act provision is making it difficult for some employers to bring workers back—in many cases, laid-off employees are earning more through unemployment (bolstered by the CARES Act) than they would if they returned to work. Subsequently, many are turning down employer requests to come back onto the workforce.

This circumstance is quite concerning for PPP loan recipients who want to maintain their employment levels in order to qualify for loan forgiveness. In a recent update to their PPP FAQ, the Small Business Administration (SBA) addressed this issue.

In regards to the impact of a laid-off employee refusing to be rehired on a borrower’s PPP loan forgiveness amount, the SBA made the following clarification. If the borrower attempts to rehire laid-off employees at the same salary/wages and number of hours but the employees refuse, those employees may be excluded from the CARES Act’s loan forgiveness reduction calculation. Both the proposal for rehire and the employees’ rejections of the offer must be documented in writing.

It is worth noting that the rejection of the rehire may void the employees’ eligibility for unemployment. For further guidance on this matter, look for an additional issuance from the SBA and Treasury that is forthcoming.