I received an interesting call from a client last week about PPP loans and how they impact employees of businesses that receive the loans.
Just as a refresher: last year, shortly after the nation shut down and the economy became a fully-loaded bullet train filled with restaurant and gym owners headed toward a bridge abutment, Congress took its collective heads off its seats and passed legislation opening up capital markets for business owners.
The PPP loan program was put in place essentially so that employers could continue to pay workers while their businesses were forced to shut down. Under the program, business owners would be given governmental grants in the form of low-interest loans that would ultimately be forgiven if the loan proceeds were used to cover varied expenses including, most importantly, salaries and benefits for employees.
The program worked too. Employees continued on payrolls even though revenues dropped precipitously for many businesses and the economy continued operating at a low hum. Some businesses have thrived during the pandemic. Others used the PPP loans as a life preserver that has allowed many of them to continue in operation as we approach a summer that many think will look like the Roaring 20s of yesteryear.
So getting back to the call I received.
My client works for an employer that was the recipient of a generous PPP loan. When the employer obtained the loan, the employees breathed a collective sigh of relief. The income spigot was going to stay on. It wouldn’t be a gusher, but it would be more than a trickle.
The employer told the employees that the loan was going to allow employees to continue to earn their wages up to the maximum allowable wage amount of $100,000 annually.
But then a strange thing happened: the employer did not pay its employees like it was supposed to. Instead, it made promises of future payments. Then it recalculated wage amounts that should be paid. Then it stopped answering phone calls and emails. And finally, it just shrugged its shoulders and told the employees “it’s very complicated.”
Here’s one thing I have learned in my nearly 30 years of professional life. When someone tells you “it’s very complicated,” they are scamming you. Hardly anything is too complicated for a person of average intelligence to understand. You’re not dumb; you’re getting scammed. Remember that.
Under the PPP program, employees could receive their average wages for the preceding year up to a maximum of $100,000. The actual loan amount provided by the program is based on actual wages paid in the preceding year. So, for example, if an employee earned $120,000 in the previous year, the employer could use up to $8,333 of loan proceeds to pay the employee each month.
If the employer used the $120,000 in making the loan application and received proceeds based on that amount, then it should have paid the employee the maximum allowable amount under the program.
An employer who failed to pay its employees the same wages as the employee earned in the previous year would likely lose its eligibility for loan forgiveness. That penalty could be crippling for many businesses that relied on the loan to carry them through the lost revenue of the pandemic.
I told the employee to remind the employer of its obligations under the program and to request full payment. If the employer refuses, the employee is likely going to be in touch with the SBA to seek redress and hold the employer accountable.