SBA Issues New Interim Rule on Foreign Affiliates

May 18, 2020

By: Perry MacLennan

The U.S. Small Business Administration (SBA) published a new interim final rule on Monday, May 18, 2020, which addresses the question of whether U.S. companies must include employees of foreign affiliates for purposes of measuring their number of employees for program eligibility.

The new rule states that any entity that, together with its domestic and foreign affiliates, exceeds 500 employees worldwide is not eligible for a Paycheck Protection Program (PPP) loan. This is despite the fact that the prior guidance referred to the threshold as 500 employees whose principal place of residence is the United States. This apparent reversal is obviously concerning to many companies that relied upon previous guidance and that have affiliates overseas.
Fortunately, a safe-harbor exception protects certain companies that relied on the prior guidance. The safe harbor provides as follows:
However, as an exercise of enforcement discretion due to reasonable borrower confusion based on SBA guidance (which was later resolved through a clarifying FAQ on May 5, 2020), 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.

Therefore, a company that applied prior to May 5 will not be ineligible based on the new rule so long as it had no more than 500 employees (including employees of affiliates) whose principal place of residence is the United States.  Borrowers that submitted applications on or after May 5 will have to contend with this new ruling and consider whether to repay the loan or to challenge the validity of the new rule.[1]

Please contact a member of our Employment Law team with any questions about the Paycheck Protection Program. 

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[1] The Treasury Department’s FAQs provide that “Borrowers and lenders may rely on the laws, rules, and guidance available at the time of the relevant application.”  While the new rule suggest that the clarifying FAQ on May 5, 2020 resolved the confusion over the issue, we vigorously disagree.  The FAQ on May 5, 2020 created considerable confusion given its direct inconsistency with other statements in the initial PPP interim final rule as well as other FAQs.