SBA: foreign employees and employees of foreign affiliates count toward thresholds under Paycheck Protection Program

During the rollout of the Paycheck Protection Program (PPP) of forgivable loans administered by the U.S. Small Business Administration (SBA), SBA released guidance implying that would-be borrowers may be able to exclude their and their affiliates’ foreign based employees in calculating certain employee-based eligibility thresholds for borrowing under the PPP (see our March 30 bulletin on the PPP here).

However, in guidance issued on May 18, SBA clarified that applicants for PPP loans seeking to qualify under the 500 or fewer employee size standard or, if applicable, SBA’s employee-based size standard for the industry in which an applicant operates, must count all of their employees and all of the employees of their U.S. and foreign affiliates, absent a waiver or an exception to the affiliation rules.

In the May 18 guidance, SBA acknowledged that its prior FAQs and other guidance may have created borrower confusion but asserted that an FAQ released on May 5 should have resolved this confusion. The May 18 guidance goes on to provide that as an exercise in enforcement discretion, SBA will not find any borrower that applied for a PPP loan prior to May 5, 2020 to be ineligible based on the borrower’s exclusion of non-U.S employees from the borrower’s calculation of its employee headcount if the borrower (together with its affiliates) had no more than 500 employees whose principal place of residence is in the United States. In addition, any such borrowers will not be deemed to have made an inaccurate certification regarding their eligibility solely on that basis. The guidance reiterates that PPP funds may not be used to support non-U.S. workers or operations.

For private equity backed borrowers, the new guidance means that, to the extent that the private equity sponsor or its other portfolio companies are “affiliates” of the borrower under the SBA’s affiliation rules, their respective domestic and foreign employees will be counted in determining the borrower’s eligibility absent an exemption or exception.

PPP loan eligibility

Under the CARES Act, an entity is eligible for a PPP loan if it is:

1. a small business concern; or
2. a business concern, nonprofit organization described in section 501(c)(3) of the Internal Revenue Code, veterans organization described in section 501(c)(19) of the Internal Revenue Code, or Tribal business concern described in section 31(b)(2)(C) of the Small Business Act

that employs not more than the greater of 500 employees, or, if applicable, SBA’s employee-based size standard for the industry in which the entity operates.

Under SBA regulations, applicants are generally considered together with their affiliates when determining eligibility for SBA loans. Under the CARES Act, businesses within the “accommodation and food services” sector, franchises (in any industry) in the SBA’s Franchise Directory and businesses that receive financial assistance from a small venture investment company that has been licensed under the Small Business Investment Act are exempt from SBA’s affiliation rules.