The Benefits and Risks of the CARES Act Small Business Paycheck Protection Program

The recently passed “Third” Coronavirus Bill, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), contains substantial aid for small business, including government guaranteed, low interest, fully-forgivable “loans” to small businesses to cover payroll and other current expenses.

Businesses¹ with 500 or fewer employees² are eligible for the “Paycheck Protection Program.” (“PPP”) PPP loans provide up to (1) 2.5 months of payroll³ or (2) $10 million, whichever is less. Businesses may use PPP proceeds toward payroll, health insurance, mortgage interest, rent, utility payments, and other debt service.4 PPP loans are forgiven to the extent they are actually used for the permitted purposes during the period after the origination of the loan.5 If an employer uses the loan proceeds for other purposes, fires employees, or substantially6 reduces their salaries, then it loses the benefit of loan forgiveness to the extent the proceeds were not used for eligible purposes.

In its website section on the program, under Loan Details and Forgiveness, the US Small Business Administration (SBA) states:

The loan will be fully forgiven if the funds are used for payroll costs, interest on mortgages, rent, and utilities (due to likely high subscription, at least 75% of the forgiven amount must have been used for payroll). Loan payments will also be deferred for six months. No collateral or personal guarantees are required. Neither the government nor lenders will charge small businesses any fees. Forgiveness is based on the employer maintaining or quickly rehiring employees and maintaining salary levels. Forgiveness will be reduced if full-time headcount declines, or if salaries and wages decrease.

Unlike most typical SBA loans, the PPP Loans are unsecured loans requiring no collateral, no personal guarantee, and no showing that credit is unavailable elsewhere. Instead, underwriting is based simply on whether the borrower was in operation on March 1, 2020 and had employees for whom the borrower paid salaries and payroll taxes. Although the “covered period” for loans is February 15, 2020 to December 31, 2020, all available funds will soon be allocated and exhausted unless Congress acts to increase the amount of funds available.

Only employees who are United States residents may be counted in the payroll calculations of the PPP. Independent contractors are independently eligible for the forgivable loans, and they should not be included in calculating an employer’s loan. Payroll costs exclude amounts over $100,000 a year for any employee, prorated for the covered period. 15 U.S.C. 626(a)(36)(A)(viii). Lastly, if an employer receives a forgivable loan under the Paycheck Protection Program, then it is not eligible for certain other benefits under the CARES Act, including the Employee Retention Credit (for businesses that pay employees who are not working), CARES Act Section 2301, and the delay of payment of employer payroll taxes. CARES Act Section 2302.

The PPP requires a business to certify “that the uncertainty of current economic conditions makes necessary the loan request to support the ongoing operations of the eligible recipient . . . .” 15 U.S.C. 636(a)(36)(G)(i)(I). The real purpose of this certification7 is unclear. Nearly any business can reasonably argue that it is experiencing “the uncertainty of current economic conditions.” In fact, the subsection providing deferment for impacted borrowers presumes that any eligible borrower is impacted by Coronavirus. 15 U.S.C. 626(a)(36)(M)(i).8 Even businesses operating relatively normally are subject to general economic conditions, including the medium and long-term solvency and strength of their suppliers, counterparties, clients, customers, and the like.

However, whether the loan request is “necessary” may be a closer call. The SBA fails to provide any standard or guidance on interpretation of this requirement. If the company would request a loan even if it were at a market interest rate and not forgivable, then the company probably needs the loan. However, if the company has experienced an increase in revenue and profitability as a result of the market conditions created by the pandemic, and therefore the company is requesting the forgivable loan simply because it is “free money,” then the company should consider whether it really needs the loan. The employer should consider how it would respond in the event the need for the loan is questioned, determine whether that is an adequate justification, and then either determine not to proceed, or create specific and contemporaneous documentation of that reasoning. This documentation should be kept confidential and created either internally or in an opinion letter from counsel.

At the very least, employers should be careful about referring to any loan as “free money” in oral and written communications, and most importantly, should be diligent in using the money for the purposes for which it is intended. Companies requesting and receiving a forgivable loan should adopt an “austerity policy” during the time period applicable to the subsidy and avoid even the appearance that loan monies are being used for bonuses, perks, travel, parties, new capital improvements, etc. Companies should also seek accounting advice regarding these spending and documentation issues.

Even more important, employers must ensure that their representations regarding their payroll cost, number of employees, and responses to any questions, inquiries, or audits are completely accurate. Regardless of the question of whether the loan was “necessary” to deal with the economic conditions, an investigator can easily identify an inflated payroll or employee roster, or inaccurate statements about the intended or actual use of loan proceeds. Companies should ensure that their representations in applications for PPP loans are consistent with other public and private communications and documents, including social media posts, press releases, marketing materials, financial statements, tax returns, customer and investor communications, and the like.

The Federal False Claims Act (“FCA”) governs filings (such as a PPP application) that are designed to obtain funds from the federal government. The FCA provides for criminal penalties, including incarceration and fines, as well as civil (including whistleblower) actions where liability is three times the amount obtained, plus attorney fees and civil penalties. Because the whistleblower provision of the FCA is applicable to claims for the PPP, businesses must not only be concerned about scrutiny from SBA auditors and bank loan officers, they must also be concerned about disgruntled employees, executives, and even customers and investors who might learn about the company’s eligibility, request, or use of PPP funds and file a whistleblower claim regarding any impropriety. Whistleblowers are entitled to a portion of any recovery pursuant to the FCA and are well-incentivized to report improper claims.

The simple act of requesting a PPP loan appears to fall within the definition of a claim under the FCA, which states that:

the term “claim”-
(A) means any request or demand, whether under a contract or otherwise, for money or property and whether or not the United States has title to the money or property, that-
(i) is presented to an officer, employee, or agent of the United States; or
(ii) is made to a contractor, grantee, or other recipient, if the money or property is to be spent or used on the Government’s behalf or to advance a Government program or interest, and if the United States Government—

(I) provides or has provided any portion of the money or property requested or demanded; or
(II) will reimburse such contractor, grantee, or other recipient for any portion of the money or property which is requested or demanded; . . .

31 U.S.C. 3729(b)(2). A PPP application likely falls within the definition of a “claim” under the FCA because it is a “request . . . for money . . . that is made to a . . . recipient . . . to advance a Government program . . . and . . . the United States Government . . . will reimburse . . . [the] recipient for any portion of the money or property which is requested or demanded.” Id.

Even if the request for a loan does not in itself constitute an FCA “claim” the risk of an FCA claim from a PPP loan is likely higher than under a conventional SBA loan. Most SBA loans, even if fraudulent, do not necessarily result in FCA liability, much less discovery and litigation, because such loans are usually repaid and the government guarantee is not invoked. See e.g. United States v. McNinch, 356 U.S. 595 (1958). An FCA case arises from a conventional SBA loan only upon a default, when the lender files a claim with the government for reimbursement pursuant to the guarantee. If the loan did not conform to the requirements of the program, and the lender claims reimbursement, the lender is subject to FCA liability. However, in the case of forgivable loans under the CARES Act, it is clearly contemplated that the loan will be forgiven if the employer maintains its workforce throughout the covered period. (This is the purpose of the program.) That is, unlike the traditional SBA financing situation, where a borrower receives a loan from a bank, which is guaranteed by the SBA, and which is expected to be repaid by the borrower in full with interest to the bank, under the CARES Act, it is virtually certain that the “guarantee” will be invoked and that the government will re-pay the bank for the funds loaned to the borrower. Thus, arguably, nearly every loan under the CARES Act is expected to result in a “claim” against the United States government.

Caselaw recognizes borrower liability for SBA-backed loans when a lender seeks payment from the government. United States v. Van Oosterhout, 96 F. 3d 1491 (D.C. Cir. 1996) (noting that even an innocent third party lender can effectuate a “claim” against the government when the lender demands payment from the government when a guaranteed loan defaults.) A forgiven PPP loan is treated the same as a conventional SBA loan when the borrower defaults and the lender claims under the government guarantee. CARES Act Section 1106(c). Because a “claim” under the forgivable loans in the PPP program is almost inevitable (unless the borrower fires employees or misuses the money), the likelihood of borrower FCA liability for fraud under the PPP is much higher than with an ordinary SBA loan.

The legislation contains many provisions applicable to particular businesses and situations, and before applying, receiving, and using a loan, readers are urged to speak to a lawyer and an accounting professional about their particular situation.

A copy of the PPP loan application is available here:


¹Independent contractors, sole proprietors, and self-employed individuals are also eligible. 15 U.S.C. 626(a)(36)(D)(ii).

²Businesses in the Accommodation and Food Services Industry with more than 500 employees in multiple locations can avail themselves of the PPP loan program if they have 500 or fewer employees per location.

³“Payroll costs” include costs related to payments of (1) salary, wage, commission, or similar compensation; (2) cash tips or equivalent; (3) vacation, parental, family, medical or sick leave; (4) employee severance; (5) group healthcare benefits, including insurance premiums; (6) retirement benefits; and (7) state and local employment taxes. 15 U.S.C. 626(a)(36)(A)(viii)

4The debt must have been incurred prior to February 15, 2020.

5Businesses may not count sick and family leave paid pursuant to the FFCRA for which the business receives a tax credit.

6Employees making more than $100,000 are not protected from salary reductions through a reduction in the employer’s loan forgiveness. Reduction of pay by more than 25% for employees paid under $100,000 of prorated annual pay results in a reduction of loan forgiveness for the employer.

7The certification is under penalty of false statement and the civil and criminal provisions of the False Claims Act, as detailed below.

8Elsewhere in the CARES Act, furthermore, Congress states that “It is the sense of Congress that—(1) all borrowers are adversely affected by COVID–19 [and that] relief payments by the Administration are appropriate for all borrowers . . .” CARES Act Section 1112(b).

9The SBA website itself lists various issues arising from Coronavirus, including, capital access, workforce capacity, inventory and supply chain shortfalls, facility remediation/cleanup costs, changing market demand, and the like.