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Alerts and Updates

Small Business Administration Releases Interim Final Rule on Counting Foreign Affiliate Employees under the Paycheck Protection Program

May 19, 2020

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The SBA also reiterates in the interim final rule that PPP funds may not be used to support non-U.S. workers or operations.

On May 18, 2020, the Treasury Department and Small Business Administration (SBA) released a new interim final rule regarding how to count employees of foreign affiliates of Paycheck Protection Program (PPP) loan borrowers for application of the 500-employee limit provided under the Coronavirus Aid, Relief and Economic Security Act (CARES Act). The interim final rule provides a safe harbor for applications submitted prior to May 5, 2020, that did not include non-U.S. resident employees in the headcount determination, notwithstanding the prior guidance that was issued requiring that they be included. This Alert discusses the interim final rule and its impact on businesses with foreign affiliates.

Overview of Interim Final Rule on Foreign Affiliates

The interim final rule confirms that employees of foreign affiliates of a business are included for the purpose of determining whether a PPP loan borrower has more than 500 employees. The interim final rule restates that a business is eligible for a PPP loan if it is (i) a small business concern or (ii) a business concern or other eligible entity that employs no more than 500 employees or, if applicable, the SBA’s employee-based size standard for the relevant industry.

Prior to the interim final rule, FAQ 3 provided that borrowers were to include employees whose principal residence was the United States for purposes of the headcount or alternative size determination. The SBA then issued additional guidance in FAQ 44, providing that for purposes of determining the 500 or fewer employee size standard, applicants must include: (i) all of their own employees and (ii) all employees of their U.S. and foreign affiliates, absent a waiver of or an exception to the affiliation rules. Separately, businesses seeking to qualify as “small business concerns” under section 3 of the Small Business Act on the basis of the applicable employee-based size standard must likewise do the same. This created confusion for borrowers with non-U.S. affiliates. The CARES Act, prior guidance and the interim final rule make clear that the SBA’s affiliation rules apply to PPP loan borrowers, as provided for in 13 C.F.R. 121.301(f), unless a business is specifically exempted from the affiliation rules under the CARES Act. The interim final rule reiterates that “to calculate the number of employees of an entity for purposes of determining eligibility for the PPP, an entity must include all employees of its domestic and foreign affiliates.” Any business that has more than 500 employees after including all employees of its domestic and foreign affiliates, or that otherwise does not meet the applicable SBA size standard, is not eligible for a PPP loan.

Limited Safe Harbor for Application of FAQ 3 for Foreign Affiliates Rule

The interim final rule acknowledges that there may have been confusion created by FAQs 3 and 44 concerning whether to count employees of foreign affiliates. Accordingly, per the interim final rule, the SBA will not find any PPP loan borrower that applied for a loan prior to May 5, 2020, to be ineligible based on the borrower not counting non-U.S. employees. Such borrowers will be deemed by the SBA to not have made an inaccurate certification of the borrowers' eligibility for a PPP loan solely on that basis. However, to be eligible for the safe harbor, the borrower, together with its affiliates, must have had no more than 500 employees whose principal place of residence is in the U.S.

The SBA also reiterates in the interim final rule that PPP funds may not be used to support non-U.S. workers or operations.

About Duane Morris

Duane Morris has created a COVID-19 Strategy Team to help organizations plan, respond to and address this fast-moving situation. Contact your Duane Morris attorney for more information. Prior Alerts on the topic are available on the team’s webpage. 

For More Information

If you have any questions about this Alert, please contact Nanette C. Heide, Sandra G. Stoneman, Stephen Morrissey, Mark Zhuang, any member of the COVID-19 Strategy Team or the attorney in the firm with whom you are regularly in contact

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.