PPP Loans: How Treasury and the SBA Screwed Microbusinesses (Part 1)

On March 31, 2020, the Treasury Department issued guidance documents (available here) to assist banks and business owners in accessing the CARES Act Paycheck Protection Program (PPP)(for my guide to the CARES Act, go here). The SBA issued interim regulations on April 2nd (available here). 

 On March 31st, when I first read Treasury’s guidance, I thought to myself “Oh no! These guidance documents will influence the SBA’s regulations and micro businesses will suffer.” Sure enough, I was right. 

Though definitions vary, micro businesses generally have fewer than five employees and revenue under $250,000 annually as compared to small businesses that have fewer than 500 employees and under $1 million in assets annually. Microbusinesses tend to be younger than small businesses and owners of microbusinesses tend to hail from historically disadvantaged groups: women, racial and ethnic minorities, veterans, or they operate in rural or underserved areas. Microbusinesses struggle to access capital even in good economies. They also tend to rely heavily on independent contractors because micros don’t have the human resources bandwidth or sufficient capital to support employees. They are badass bootstrappers whose tenacity and resilience are drawn from the deep ancestral well of American ingenuity. 

 I’ve got a dog in this fight because my little law firm is a microbusiness too. In 2008, at age 40, I left teaching for law school. After a stint in Big Law, in 2015, I started Dunlap Law with $13,000 in savings. I am now 51 years old. Dunlap Law is my life’s work and my future. It is the sum total of untold hours of work, worry, scrapping, and striving. I throw my heart into it every day, representing and advocating for my fellow bootstrappers.

 That’s why I’m pissed. Even though Congress intended for micro businesses to be at the front of the line for PPP loans, we got screwed by Treasury and the SBA.

 Here’s one thing Treasury and the SBA got wrong. For the other six errors, see the longer post on my website, https://dunlaplawplc.com/:

Incorrect Definition of “Payroll Costs”

How “payroll costs” is defined is a very big deal because it determines: (i) how much money a business can get under the PPP loans; (ii) what businesses can spend the loan funds on; and (iii) how they qualify to have a portion of the PPP loan forgiven.

The CARES Act Sec. 1102(a)(viii)(I) defines "payroll costs" to include "the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment or similar compensation . . . " (that's at paragraph (bb)).  Here’s that section:

Breaking that down, here’s how it should be read:

"the sum of payments of any compensation to or

Income of a

Sole proprietor or

independent contractor [and]

That is a wage, commission, income, net earnings from self-employment or similar compensation . . .”

 Therefore, the CARES Act includes payments from a small business to independent contractors in its definition "payroll costs." This is a VERY big deal for micro-businesses that often rely on independent contractors. It's likely to reduce our loan amounts by thousands or tens of thousands of dollars.

Yet, Treasury’s Information Sheet for Borrowers does not include payments to independent contractors in its definition of payroll costs. Instead, Treasury says: "For a sole proprietor or independent contractor: wages, commissions, income, or net earnings from self -employment, capped at $100,000 on an annualized basis for each employee.” This is just flat wrong. 

In its regulations, SBA asserts that payroll costs should not include payments to independent contractors because those independent contractors are themselves eligible for PPP loans. But the SBA fails to understand that under its rule, microbusinesses won't have resources to pay their contractors. The inevitable result is painful disruptions in operations and profound impairment of the micro’s ability to recover and spool up operations once the crisis abates. Elsewhere in the SBA regulations, SBA asserts that the "overarching focus [of the CARES Act is] on keeping workers paid and employed."  By carving payments to contractors out of payroll costs, the SBA undermines the CARES Act’s ability to achieve its mission.