If you managed to get a Paycheck Protection Program loan under the CARES Act, you can and should be concerned about loan forgiveness. You may already know that the amount of forgiveness may be reduced if you reduce your workforce or your employees’ pay, but many people I’ve spoken to don’t know exactly how the forgiveness works.

How does the forgiveness work?

If you maintain your staff and their pay, your loan will be forgiven in full so long as the proceeds are used for payroll, rent, and utilities. However, if you lay off any of your employees or reduced their wages by more than 25%, your loan will not be forgiven 100%.

If you reduce your full-time staff, your forgiveness will be reduced to a fraction where the numerator is the number of full-time employees during the 8-week covered period and the denominator is the number of full-time employees between January 1, 2020, and February 29, 2020.

If you run a seasonal business, you can opt for the denominator to be equal to the number of employees you had between February 15, 2019, and June 20, 2019. Essentially you are matching your workforce from last year.

Let’s use an example. Let’s assume you had 10 full-time employees prior to February 29, 2020. You laid off five of them. Your forgiveness would be reduced to 5/10 or 50% (the numerator would be the number of employees during the covered period and the denominator would be the number of employees prior to the period). If you only kept two employees, your forgiveness would be reduced to 20%.

The forgiveness reduction is similar for a reduction in wages. Your forgiveness will be reduced by a percentage equal to the percentage below 25% you reduced wages. Therefore, if you cut wages by 50%, your forgiveness will be reduced by 25%.

Confused? The SBA will be issuing additional guidance. Nothing like accepting a loan without knowing exactly how the forgiveness will work, right?

What happens if you laid-off workers before accepting the loan?

If like many businesses, you laid off workers prior to receiving PPP funds, your loan can still be forgiven so long as you rehire your employees before June 30, 2020. Note, you do not need to hire the same employees. You just need to have the same number of full-time employees as before the covered period.

But that brings me to an interesting point. What happens if you can’t afford to rehire employees? The requirement to rehire does not consider whether your business will be open or earning money. The PPP funds will only cover you for 8 weeks, and realistically, they may not cover all of a business’s expenses. The PPP loan expects that your rent expense will be about 1/4 of your payroll, hence the 2.5 times your payroll expense. But that’s not true for many businesses. There are plenty of situations where companies may not receive enough money to pay their people and pay rent, meaning at the end of the 8-week period, they may have considerably less than when the period began. How, then, are they supposed to hire their employees back?

Similarly, how long do you have to hire those employees back for? Couldn’t an employer hire the full-time employees as of June 30, 2020, and then fire them a few days later? There is no word on whether this is allowed, but I have seen nothing that would prevent it. I’m sure that the SBA won’t want that to happen, but for businesses who aren’t even open yet, I’m not sure there are other solutions.