SBA this morning released a new IFR on Treatment of Entities with Foreign Affiliates (IFR 12), which tries (and completely fails, IMHO) to reconcile its previous, conflicting guidance from May 5 on the treatment of foreign affiliates and foreign employees, which we noted in the email below. In one of its more comical statements to date (and that is saying something!), IFR 12 refers to the May 5 FAQ 44 as a “clarifying FAQ” that “resolved,” rather than created, confusion.

In short, IFR 12 doubling down on the May 5 FAQ 44 guidance that a businesses must count its own employees and, unless the business is exempt from the affiliation rules, all employees, foreign and domestic, of its affiliates, foreign and domestic.  So, no, FAQ 44 did not mean only that you must count US-resident employees of foreign affiliates, as some had hoped.

In recognition of “reasonable borrower confusion” caused by this, SBA has created yet another “safe harbor,” by effectively grandfathering in any borrower who applied for a PPP loan prior to May 5 and who excluded non-US employees in determining its size eligibility, as long as that borrower together with its affiliates actually has 500 or fewer employees whose principal place of residence is in the US.  Note that borrowers who excluded foreign employees while using a NAICS-based size standard with a >500 threshold are NOT grandfathered into the safe harbor.

This is now the second safe harbor needed to deal with SBA’s self-inflicted confusion stemming from its own conflicting guidance. There are also two safe harbors mentioned in the Forgiveness Application. Somewhere, Judge Smails, the man worthwhile, is smiling down at us, feeling quite at home with this nautically-minded, bumbling jurisprudence.

On a more serious note, IFR 12 also expressly clarifies in plain English that “Under no circumstances may PPP funds be used to support non-US workers or operations”, which is another good reason to remind borrowers to keep careful track of how proceeds are being used. Borrowers with non-US workers on payroll (such as foreign residents on temporary work visas) should take extra care to ensure that they deposit non-PPP funds into their payroll accounts to cover costs for such workers.

Unfortunately, in less clear language, IFR 12 also says, in the introduction, but not in the rule itself:  “The fact that an applicant might be eligible for a PPP loan if it has 500 or fewer U.S. employees does not mean that the applicant is not also subject to the other requirements applicable to the PPP.”  All of the references in IFR 12 to non-US employees are in the context of the affiliates of the business.  This leaves open the question of whether a business with no affiliates is eligible if it has fewer than 500 US employees, but more than 500 total employees when counting non-US employees, such as foreign residents on temporary work visas in the above example.   Because the US-employee standard is not repeated in the body of the rule, it appears for now that such an employer would be ineligible for a PPP loan because it has more than 500 employees.  However, if it applied for its PPP loan prior to May 5, such a business would be grandfathered into the safe harbor. 

Finally, IFR 12 also has some rather bizarre, confusing and defensive language which apparently tries to justify the US-employee standard created in IFR 1 and FAQ 3 by stating that “The reference in SBA guidance to employees whose principal place of residence is in the United States is relevant to a PPP applicant’s calculation of payroll for purposes of determining the PPP loan amount and to the calculation of loan forgiveness.”    Well, ok, but Section 2(a) of IFR 1 and FAQ 3 had NOTHING to do with payroll costs.  Sigh.  

Stay tuned for a webinar on Wednesday on the Forgiveness Application, featuring benefits and employment specialists to answer some of the open questions there.  Thanks.

BACKGROUND AND TEXT OF PRIOR GUIDANCE:

For those who haven’t been following this as closely:  the CARES Act provides that businesses with 500 or fewer employees are eligible recipients of PPP loans.   In IFR 1 and FAQ 3, SBA apparently modified this standard to be “500 or fewer employees whose principal place of residence is in the United States.” On May 5, SBA issued FAQ 44 which appeared to contradict IFR 1 and FAQ 3 by saying that businesses must count “all of its employees and the employees of its U.S and foreign affiliates.”  

IFR 1

2. What do borrowers need to know and do? 

a. Am I eligible? You are eligible for a PPP loan if you have 500 or fewer employees whose principal place of residence is in the United States, or are a business that operates in a certain industry and meet the applicable SBA employee-based size standards for that industry,

https://home.treasury.gov/system/files/136/PPP–IFRN%20FINAL.pdf

FAQ 3

3. Question: Does my business have to qualify as a small business concern (as defined in section 3 of the Small Business Act, 15 U.S.C. 632) in order to participate in the PPP?

Answer: No. In addition to small business concerns, a business is eligible for a PPP loan if the business has 500 or fewer employees whose principal place of residence is in the United States, or the business meets the SBA employee-based size standards for the industry in which it operates (if applicable). Similarly, PPP loans are also available for qualifying tax-exempt nonprofit organizations described in section 501(c)(3) of the Internal Revenue Code (IRC), tax-exempt veterans organization described in section 501(c)(19) of the IRC, and Tribal business concerns described in section 31(b)(2)(C) of the Small Business Act that have 500 or fewer employees whose principal place of residence is in the United States, or meet the SBA employee-based size standards for the industry in which they operate. https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf

FAQ 44

44. 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 countall 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. https://home.treasury.gov/system/files/136/Paycheck-Protection-Program-Frequently-Asked-Questions.pdf