By Jon Hill

Law360 (May 18, 2020, 10:00 PM EDT) -- Language tucked into the House Democrats' proposed $3 trillion coronavirus relief package could alter the scope of the Paycheck Protection Program from helping workers at small businesses to supporting their employers more generally.

Passed Friday by a 208-199 vote, the Heroes Act would make several changes to the $659 billion forgivable loan program for small businesses struggling to stay afloat during the COVID-19 pandemic, including giving borrowers more time to use their loan money, eliminating a minimum payroll spending requirement and adding a forgiveness safe harbor for businesses that can't quickly rehire or replace laid-off workers.

A set of amendments to the Health and Economic Recovery Omnibus Emergency Solutions Act late last week before the vote widened the safe harbor from the one initially proposed, inserting a provision that would allow borrowers to shed workers and still receive full loan forgiveness if they can show their businesses haven't been able to recover from the pandemic.

The legislation faces a tough road in the Senate, where terms like "dead on arrival" are already being thrown around. But if enacted, that wider safe harbor provision would represent a notable change for a program that was originally pitched as a way to help millions of small-business workers stay employed.

"It is a significant expansion at a conceptual level," said Michael Torosian, a partner in Baker Botts LLP's corporate practice. "This goes beyond paychecks and payroll."

Created by the previously enacted Coronavirus Aid, Relief and Economic Security Act, the PPP enables small businesses to take out low-interest loans of up to $10 million each that can be forgiven if the money is used to pay workers and cover certain other costs, like rent and utilities, while large parts of the U.S. economy are shuttered because of the pandemic.

Under the program's current rules, borrowers must spend at least 75% of their loan proceeds on payroll in order to receive full forgiveness. They can also be penalized if they cut workers or don't hire back employees they've already laid off. The further a business shrinks below its prepandemic headcount, the less loan forgiveness it will receive, although exceptions can be made in cases where a laid-off employee declines to be rehired. 

These aspects of the program were intended to create strong incentives for businesses to channel their loans into keeping and paying employees, but as the economic fallout from the pandemic has deepened, there have been growing concerns that the program needs more flexibility.

The Heroes Act responds to those concerns in part by doing away with the 75% payroll threshold, freeing businesses to use more of their loans for basic overhead expenses. The bill also expressly provides for multiple circumstances in which a business won't be penalized for reduced headcount when it comes time to seek loan forgiveness.

Two such exceptions were initially included in this safe harbor: one for when a business was "unable to rehire" a former employee and another for when a business couldn't "find similarly qualified employees."

But a third exception was added late in a manager's amendment, this time covering cases where a small business borrower can "demonstrate an inability to return to the same level of business activity such business was operating at prior to February 15, 2020," the date that marks the start of the program's covered period.

The provision doesn't specify how business activity would be measured, what documentation would need to be provided, or how much of a recovery a business can have before it's deemed to be at "the same level" as it was before the pandemic.

Although ambiguities like these could be narrowed through guidance and rulemaking, the pandemic's severe and widespread impact means the provision nevertheless has the potential to cover a large number of small businesses, according to attorneys following the program.

"This absolutely would expand the pool of potential borrowers who would otherwise have a reduction in their forgiveness amount, effectively providing greater support for their business as a whole rather than more narrowly just for paycheck protection," Torosian said.

Roscoe Jones Jr., a former House Democratic staffer who is now counsel with Gibson Dunn & Crutcher LLP, agreed that the net effect of the provision would be to enable more small businesses to get their PPP loans forgiven, calling it a "commonsense change."

"It is a recognition of the reality on the ground: that for many small businesses it may take years, if ever, before business will return to normal and that fact alone should allow small businesses to have their loans forgiven," Jones said in an email.

Coming on the heels of last week's announcement that federal officials won't be giving additional scrutiny to borrowers whose PPP loans are less than $2 million, Seyfarth Shaw LLP corporate partner John Shire described the proposed legislative tweak as "equally big news."

"It's material," Shire said. "It's a huge, positive outcome for businesses in America."

Given that much of the country is likely to remain under some form of public health restrictions for months, it's easy to imagine a scenario where a business just doesn't have enough demand to need as many employees as it used to and could get more mileage out of its PPP loan by using it on rent and other fixed costs.

In these circumstances, the added exception to the loan forgiveness requirements would work in concert with the bill's elimination of payroll spending minimums to give small businesses much more flexibility to concentrate on their longer-term survival.

But by weakening the imperative to put loan money toward paychecks, that flexibility could be in tension with the program's originally stated intent of keeping workers on the job.  

"This will just highlight the question of what the purpose of the PPP is," Torosian said. "Is it to protect paychecks and employees or to support business? Both have very good reasons to get support, and I think they're very viable for getting support from this program. It's just a question of what is this particular program intended to be doing."

In Torosian's view, giving companies the ability to get full forgiveness even with reduced headcount would shift the program to a footing more favorable to employers than employees, a reorientation he said could be perfectly justifiable from a business perspective but is the sort of tough choice that Congress needs to make affirmatively.

As the COVID-19 crisis drags on, Michael Bell, a partner in Hogan Lovells' global regulatory practice group, said it's possible that providing program participants with additional latitude to adjust their payrolls now could leave workers better off later.

"It may allow businesses to survive that may not have been able to survive otherwise so that, in the long term, they can rehire employees even if they aren't able to do it immediately because they don't have the same level of business activity," Bell said. "You can see policy arguments going in both directions."

It could wind up being something of an academic debate, at least as far as the Heroes Act is concerned. The bill, in which the proposed changes to the PPP are only a small part, is widely seen as doomed in the Senate, where members of the Republican majority have assailed it as wasteful, partisan and full of provisions unrelated to the pandemic.

Still, Bell noted there is appetite among lawmakers for revisiting the PPP to refine its structure and implementation. Although there is no broad consensus in Congress yet about what those refinements should be, the proposals included in the Heroes Act will serve as a starting point for negotiations.

"It's hard to say which provisions would make it into a negotiated bill, but I do expect that we will see some changes to the program over time," Bell said.

Some small-business groups have also expressed support for the overall thrust of the PPP changes contemplated by the legislation passed Friday, although the wider forgiveness safe harbor has received scant attention as a last-minute addition to the bill.

Torosian said he expects that many small businesses would appreciate its additional flexibility, however.

"They need their business operations to continue, and that means they may need to reduce headcount," he said. "While they may not love doing that, it's certainly better than the alternative of potentially going out of business. So I could see businesses absolutely wanting this flexibility to do what they need to with their workforces."

--Editing by Jill Coffey and Emily Kokoll.

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