‘500-employee path’ for PPP loans includes temp workers

A regulation of the Small Business Administration requires that businesses count temporary employees from staffing agencies when seeking to qualify for a loan under the Payment Protection Plan, the U.S. District Court for the Eastern District of Virginia has ruled in an issue of first impression.

The plaintiff alleged in a qui tam lawsuit that its former employer fraudulently omitted temporary workers to qualify for a PPP loan under the 500-employee path provided by the federal Coronavirus AID, Relief and Economic Security, or CARES, Act. The defendant claimed that statutory ambiguities should be resolved in its favor.

However, Judge David J. Novak held that an SBA regulation applies to the PPP loan program’s 500-employee path because “the statutory and regulatory framework clearly establish that, unless ‘otherwise provided’ for in the CARES Act, § 121.106(a) governs PPP eligibility.”

“Even assuming arguendo that the CARES Act’s definition of ‘employee’ superseded § 121.106(a) for purposes of the 500-employee path, the Court finds that temporary workers would still require counting for purposes of PPP eligibility,” Novak wrote.

The opinion is Bloomfield v. Engineered Structures Inc. (VLW 025-3-443).

The plaintiff was represented by attorneys from Miller Shah in New York, as well as Patricia Ryan of Maryland, Rachel Rose of Texas, and Glenn Chappell of Tycko & Zavareei in Washington, D.C. The defendant was represented by lawyers from Crowell & Moring in Washington, D.C. None of the lawyers responded to a request for comment.

Statutory disagreement

Karen Bloomfield filed a qui tam suit accusing her former employer, Engineered Structures, of violating the False Claims Act when it certified having no more than 500 employees to qualify for a PPP loan during the COVID-19 pandemic.

Throughout trial, the parties disagreed on whether businesses applying for PPP loans on the basis that they employed no more than 500 people needed to include temporary workers obtained from staffing agencies in their employee headcount.

Prior to issuing jury instructions, Novak requested briefing on the applicability of 13 C.F.R. §121.106, an SBA regulation that predates the passage of the CARES Act, to 15 U.S.C. §636(a)(36)(D)(i) and (v), the statutory provisions setting forth PPP loan eligibility requirements.

No conflict

Novak explained that the CARES Act’s definition of “employee,” for purposes of the 500-employee path, restates verbatim a portion of §121.106(a) and does not “otherwise provide,” since it employs identical language to that used in the SBA regulation.

“Thus, given the lack of any conflict between the two provisions, and given the governing statutory and regulatory framework under Section 7(a), § 121.106(a) applies to the 500-employee path,” Novak wrote.

But even if the CARES Act’s definition of “employee” superseded §121.106(a) for purposes of the 500-employee path, Novak found that temporary workers would still require counting for purposes of PPP eligibility.

“The CARES Act’s definition expressly includes persons employed on an ‘other basis,’ an ambiguous term that the statute fails to define,” he noted.

To resolve that ambiguity, Novak looked to the statutory and regulatory framework, which clarified in §121.106(a) that “other employees” included “employees obtained from a temporary employee agency, professional employee organization or leasing concern.”

The CARES Act’s definition expressly includes persons employed on an ‘other basis,’ an ambiguous term that the statute fails to define.”

— Judge David J. Novak

The defendant argued that the definition of employees in the CARES Act as “individuals employed on a full-time, part-time, or other basis” deviated from and superseded §121.106(a) by creating a “straight-forward method for counting employees.”

Novak was unpersuaded.

“Both provisions state, using the exact same words, that individuals ‘employed on a full-time, part-time, or other basis’ constitute employees for purposes of loan eligibility,” Novak said, adding that Congress’s decision “hardly evinces an intent to ‘explicitly diverge.’”

Congress expressly manifested its intent to expand eligibility for PPP loans by adding the 500-employee path, thereby enabling larger businesses to qualify, Novak explained.

“By contrast, nothing in the CARES Act’s text evinces Congressional intent to achieve such an expansion by altering the way that employees are classified or counted,” Novak wrote.

“If anything, Congress’s choice to reuse existing language from old SBA regulations — particularly in the face of explicit and express changes to other eligibility criteria — demonstrates a desire to keep things consistent and avoid confusion on the important threshold issue of how businesses should classify and count their employees,” he added.

Guided by U.S. Supreme Court Justice Antonin Scalia’s “wide admonition against ascribing weight to statements by legislators that stand unsupported or contradicted by statutory text,” Novak found no congressional intent to modify the SBA’s criteria for counting employees.

Technically correct

The defendant also argued that Congress must have intended to sideline §121.106(a) when it decided to include an additional definition of “employee” in the CARES Act, since any other interpretation would render the latter provision redundant.

Novak said that argument was technically correct but unpersuasive, given the greater context at issue: “the rushed legislative process that gave rise to the CARES Act” and “the well-known realities of Congressional drafting and its imperfections.”

“It also fails to comport with common sense, which strongly favors a reading that Congress injected § 121.106’s language into the CARES Act to extend that regulation’s applicability to the 500-employee path, but that it did so in an imprecise way,” he added.

Novak looked to the U.S. Supreme Court’s acknowledgement in Marx v. Gen. Revenue Corp., that the canon of surplusage is a “useful tool of statutory interpretation, particularly where a contrary interpretation of a newer provision renders an older provision superfluous[.]”

But the Marx court “also emphatically pronounced that this canon is ‘not an absolute rule,’” Novak noted.

Thus, Novak found that §121.106(a) governed headcount calculations for businesses applying for PPP loans under the 500-employee path.

Ambiguity resolved

The Supreme Court held in Robinson v. Shell Oil Co. that the broader context provided by other sections of a statute may provide considerable assistance in resolving an ambiguous term within that statute.

And if a government agency has interpreted the ambiguous statute, the 4th U.S. Circuit Court of Appeals advised in Valladares v. Ray that “courts ‘exercise their independent judgment’ to determine the ‘single, best meaning’ [of the statute,] but do so ‘with the agency’s body of experience and informed judgment at their disposal.’”

“The extent to which a court may look to an agency for guidance depends on a variety of factors, including ‘the thoroughness evident in [the agency’s] consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade,’” Novak pointed out.

The CARES Act “expressly authorizes the SBA administer PPP-related provisions ‘under the same terms, conditions, and processes as a loan made under this subsection,’ unless ‘otherwise provided in this paragraph,’” the judge said.

Whereas nothing in the CARES Act otherwise provided a definition of “other basis,” Novak found that “the ‘terms, conditions, and processes’ normally governing SBA loans remain applicable to this provision and stand available to the Court in resolving this ambiguity.”

Here, §121.106(a) not only set forth the processes for how the SBA counts employees but was incorporated in the CARES Act’s statutory scheme.

“That regulation expressly clarifies that employment on a full-time, part-time or other basis ‘includes employees obtained from a temporary employee agency, professional employee organization or leasing concern,’” Novak wrote.

Looking to that broader statutory context, the judge found that the ambiguous provision required PPP applicants under the 500-employee path to include temporary workers obtained from staffing agencies in their calculation of persons employed on an “other basis.”

The SBA’s interpretation of the CARES Act supported that conclusion and tracked the SBA’s position in several recent cases concerning issues surrounding PPP eligibility.

“While the Court did not rely on this guidance in arriving at its ‘independent judgment,’ the ‘thoroughness evident’ in SBA’s analysis — particularly in its aforementioned briefs in related cases — along with the ‘validity of its reasoning’ and its ‘consistency’ with its own pronouncements, all serve to fortify the court’s confidence in its own analysis,” Novak wrote.