Affiliation Rules and Foreign Employees: Regulations Issued

Under the Paycheck Protection Program (PPP) provisions of the CARES Act, generally a business is eligible for a PPP loan if the business, together with its affiliates, has 500 or fewer employees or operates in a certain industry and meets the applicable Small Business Administration (SBA) employee or revenue based size standard for that industry. Using the SBA permitted size standards, in some circumstances, a business (when considered together with its affiliates) could still be eligible for a PPP loan with greater than 500 employees.

In connection with eligibility standards and determination of headcount, the SBA issued FAQ 3 on April 6, 2020, which stated that a business is eligible for a PPP loan if the business, together with its affiliates, has 500 or fewer employees whose principal place of residence is in the United States. This FAQ clarified, as of April 6th, which employees (only those whose principal residence is the US) were to be counted towards the eligibility head count. Further, this was supported by the fact that, as provided in the PPP provisions of the CARES Act, only payroll compensation to employees with a principal residence in the United States could be counted towards maximum loan value and/or forgiveness.

Based on this guidance, many borrowers, with foreign affiliates who have foreign resident employees, applied for a PPP loan (and some borrowers have received funds), and did not count foreign resident employees, whose inclusion would have made them ineligible for a PPP loan. This was appropriate and reasonable until May 5th when the SBA issued additional guidance.

On May 5th, the SBA issued/added FAQ 44 which was to answer questions as to how to apply the affiliation rules of the SBA with regard to counting employees of foreign and US affiliates. In that guidance, the SBA neither confirmed nor denied FAQ 3 or that a borrower is required to count foreign resident employees of an affiliate. With the failure of the SBA to confirm FAQ 3 on May 5th and generally state in FAQ 44 that “an applicant must count all of its employees and the employees of the US and foreign affiliates,” the concern arose again as to if an applicant/borrower is required to count for determinations of eligibility employees of foreign affiliates whose principal place of residence is OUTSIDE OF the United States.

In FAQ 44, the SBA did provide a work around for this uncertainty related to application of “affiliation rules” and head count of foreign employees for determination of eligibility. Specifically, FAQ 44 provides that an applicant may obtain a waiver of the affiliation rules. A waiver must be obtained directly though the SBA. With the exhausted resources of the SBA, an applicant/borrower may find any request directly submitted to the SBA will go unanswered; preventing them from timely obtaining a waiver or the confirmation needed to either receive a PPP loan and/or feel comfortable in not returning funds already received. Thus, the work around may simply lead to a dead end for many businesses.

However, finally, on May 18th, the SBA issued an Interim Rule to address the issue as to whether an applicant was required to count employees of foreign affiliates whose principal place of residence is outside of the United States.  The rule confirms any borrower that applied for a PPP loan prior to May 5, 2020 may have excluded non-US employees from the borrower’s calculation of its employee headcount, and that such borrowers shall not be deemed to have made an inaccurate certification of eligibility solely on that basis.  Any applicants/borrower that applied for a PPP loan after May 5, 2020, should consider obtaining a waiver if they would be ineligible for a PPP loan with the inclusion of foreign based affiliate employees.

co-written with Christina Moore, Partner at Taylor English