The paycheck protection program (PPP) loans, which are generally available to businesses or charities with not more than 500 employees, have resulted in questions about who counts towards that figure. Previous FAQs issued by the Small Business Administration (SBA) stated that only employees who are U.S. residents count, but the SBA’s latest, FAQ 44, possibly suggests foreign employees may also need to be included in the count.
As discussed in this article, on April 26, the SBA updated the “Paycheck Protection Program Loans Frequently Asked Questions (FAQs)” to add FAQ 36. FAQ 36 provides guidance on determining the number of employees a business has for both eligibility and forgiveness purposes. FAQ 36 provides, in part, “a borrower must therefore calculate the total number of employees, including part-time employees, when determining their employee headcount for purposes of the eligibility threshold.”
Despite the use of the phrase “total number of employees” in the FAQ, we generally understand that a business only counts those employees whose principal place of residence is in the U.S. This is because, pursuant to Section 2(a) of the Interim Final Rule (IFR): “you are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States . . .” (emphasis added) (the Residency Qualifier). FAQ 3 also includes the Residency Qualifier and FAQ 33 provides guidance on applying the Residency Qualifier.1
Because (a) FAQs cannot override a regulation (or IFR) and (b) the SBA did not modify FAQ 3 or FAQ 33, we thought FAQ 36 should be read in a manner that incorporates the Residency Qualifier — that is, as if it provided: “a borrower must therefore calculate the total number of employees [whose principal place of residence is in the United States], including part-time employees, when determining their employee headcount for purposes of the eligibility threshold.”
But, on May 5, the SBA added FAQ 44 to provide guidance for applicants that have foreign affiliates:
Question: How do SBA’s affiliation rules at 13 C.F.R. 121.301(f) apply with regard to counting the employees of foreign and U.S. affiliates?
Answer: For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S. and foreign affiliates, absent a waiver of or an exception to the affiliation rules. 13 C.F.R. 121.301(f)(6). Business concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same.
The Residency Qualifier is noticeably absent from FAQ 44, which refers to “all” employees. Although this is similar to the omission of the Residency Qualifier from FAQ 36, the omission is harder to explain in FAQ 44 because that FAQ clearly focuses on foreign affiliates, which presumably have employees who reside outside of the U.S. Accordingly, it is possible that FAQ 44 means that the Residency Qualifier does not apply to foreign affiliates.
Nevertheless, we continue to believe that the Residency Qualifier has continued vitality for several reasons, including:
- The SBA has not amended IFR 2(a), and we are not aware of any authority that would allow FAQs to overturn published regulations.
- The SBA did not make any changes to FAQ 3 or FAQ 33, so the only way to harmonize those FAQs with FAQ 36 and 44 is to assume the Residency Qualifier applies equally in the later FAQs.
- There has been no suggestion that FAQ 36 negated the Residency Qualifier.
- The answer refers to “all” of the employees of both the applicant and foreign affiliates. If FAQ 44 turns off the Residency Qualifier for foreign affiliates, it also would do so for U.S. affiliates.
- We assume the SBA would be clearer if it were changing the rules in the middle of the game.
Accordingly, we think that FAQ 44 essentially serves as a reminder that an applicant must obtain a count of the employees of foreign affiliates (and U.S. affiliates) who reside in the U.S. Based on our experience, we know that obtaining this kind of information can sometimes be difficult, especially where the applicant is a subsidiary of a foreign parent and the subsidiary operates with no information about other U.S. operations of the parent, foreign affiliates or even U.S. affiliates. Still, we encourage the SBA to add the Residency Qualifier to FAQ 44 (and FAQ 36) in its next update to the FAQs. Absent such a change, there is a risk that FAQ 44 could be interpreted as overturning the Residency Qualifier.
Long ago and far away, Congress enacted the Administrative Procedures Act (the APA). That law provided a thoughtful roadmap for developing administrative interpretations to guide the implementation of Congressional action. Sometimes the APA seems overly bureaucratic and cumbersome, but its wisdom of providing notice and opportunity for comment has never been more apparent to many of us working with the stimulus laws.
1 For most of the intended beneficiaries of PPP loans (U.S. small businesses), this is a distinction without a difference because all of their employees reside in the U.S.. However, the Residency Qualifier is relevant for businesses with employees who live outside the U.S.