Borrower's Payments to Third Party for Third Party Payer Employees are Payroll!!!
On June 13, 2023, the U.S. Small Business Administration (SBA) updated its FAQs for the Payroll Protection Program (PPP). Specifically, the SBA added FAQ #72 which clarifies FAQ #10 confirming a management company is a “similar payroll provider” AND payroll costs of the similar payroll provider’s employees (to be clear those are employees of the management company) are includable as eligible payroll costs of a PPP borrower and eligible payroll costs for forgiveness.
Through this FAQ the SBA recognizes the PPP borrower ultimately incurred the payroll expense, and when the management company did not apply for or receive a PPP loan, these amounts should be included as eligible payroll costs for PPP borrower. The SBA goes on to recognize that some businesses, such as hotels, routinely structure their business operations to remit payroll costs to a management company that operates the business and provides workers, or the business may lease employees or use staffing agencies to operate their business and pay those entities’ employees to operate the business. When such a business structure is in place, the borrower is ultimately responsible for the payroll expense and such payroll expense should be and are payroll costs as defined under PPP of a borrower. As a result, payroll cost documentation which shows that a borrower paid a third-party payer, such as a management, leasing or staffing company, for the employees of the third-party to operate the borrower’s company will be permitted to support eligible payroll costs for the purpose of calculating the maximum loan amount (and forgiveness) as long as the employees were not counted towards payroll costs on another PPP loan.
What Happens Next with This Clarification?
While this is a welcomed clarification, many PPP borrowers may have already been denied a PPP loan or later denied forgiveness of a PPP loan due to a bank or the SBA incorrectly interpreting FAQ 10 and excluding payroll of a management company, leasing company or staffing agency as payroll of the PPP borrower. It is unclear what recourse a company that was denied a PPP loan may have as there is no longer any PPP money to disburse and highly unlikely that anything can be done to assist these businesses.
On the other hand, if a PPP borrower was denied forgiveness of a PPP loan received and denial cited ineligibility due to a lack of employees or lack of payroll costs of employees, it is expected that the SBA will reconsider the denial of forgiveness of these PPP loans. The SBA has the authority to modify and withdraw a final SBA loan review decision and may undertake a review of a PPP loan of any size “at any time in SBA’s discretion.” With that said, a PPP borrower that was denied forgiveness for circumstances relevant to FAQ #10 and newly issued FAQ #72 should be proactive and request reconsideration from the SBA. There is no reason to wait on the SBA and hope they pick up your denied forgiveness application.
While a PPP lender may be the first place to start to seek reversal, the OHA appeals website or counsel who have been appealing PPP decisions and are familiar with the process would also be a resource to seek reversal of forgiveness denial based on this newly issued FAQ.