New Guidance Resolves Confusion over Counting Foreign Employees for PPP Loan Eligibility

On May 5, 2020, SBA/Treasury finally answered the important question of whether a small business located in the US needed to count the number of employees of its “foreign affiliates” in its size standard eligibility determination.  Although the CARES Act indicated that it did, the interim final rules and at least one Frequently Asked Question (“FAQ) created confusion, appearing to suggest instead that a small business need not count the number of employees of its foreign affiliates. FAQ No. 44 has now resolved the confusion, tracking the CARES Act and concluding that the number of employees of its foreign affiliates must indeed be counted.

FAQ No. 44: How do SBA’s affiliation rules at 13 C.F.R. 121.301(f) apply with regard to counting the employees of foreign and U.S. affiliates?

Answer: For purposes of the PPP’s 500 or fewer employee size standard, an applicant must count all of its employees and the employees of its U.S and foreign affiliates, absent a waiver of or an exception to the affiliation rules. 13 C.F.R. 121.301(f)(6). Business concerns seeking to qualify as a “small business concern” under section 3 of the Small Business Act (15 U.S.C. 632) on the basis of the employee-based size standard must do the same. (emphasis added).

The second sentence makes clear that, even where a company’s size standard eligibility is based on a North American Industry Classification System (“NAICS”) Code allowing for a higher number of employees in determining whether it  qualifies as a “small business,” (for example, an automobile manufacturing business is considered small if it has fewer than 1,500 employees), it still must include the employees of both its U.S. and foreign affiliates in that determination.

Based on this guidance, a small business located in the U.S. can now determine its eligibility with more certainty.  And, more importantly, a small business in the U.S. which has already  received PPP funds, but did not count the employees of its foreign affiliates in reliance on the interim final rules and earlier FAQ, can decide whether to return its PPP funds by May 14, 2020, and thereby avoid any payment of interest on the loan, and/or civil or criminal penalties for making a false certification of eligibility.