[co-author: Matt Macia]

The SBA has made clear that businesses with 500 or fewer employees can apply for PPP funds, with certain exceptions. The number of employees for a business is generally determined by the average number of people employed for each pay period over the business’s latest 12 calendar months. For this determination, any person on the payroll must be included as one employee regardless of hours worked or temporary status.

However, for businesses with greater than 500 employees, there are still three possible ways qualify for PPP funds. This post analyzes the three additional methods for a business to qualify for PPP funds, based on the latest guidance from the SBA as of April 15, 2020.

Method 1: SBA Employee-Based Size Standards

Under the CARES Act, the SBA requires borrowers to have 500 or fewer employees or the number of employees specified per the SBA’s Size Standards table. Thus, a business with greater than 500 employees may still be eligible if it meets applicable SBA employee-based size standards for its primary industry. A business’s primary industry is denoted by its North American Industry Classification System (NAICS) Code. A list of all NAICS codes is available here.

For example, a business in the in the primary industry of natural gas extraction (NAICS Code 211130) with 1,000 employees would still be eligible for PPP funds because the applicable SBA employee-based size standard is 1,250.

The CARES Act provides that a business in an industry with a NAICS code beginning in 72 (hospitality, hotels, restaurants) is eligible for PPP funds even if it has more than 500 employees, so long as it has 500 or fewer employees at each physical location. Additionally, businesses in such industries with 500 or fewer total employees are exempt from the SBA affiliation and aggregation rules discussed in this post. This means that, if each hotel or restaurant location owned by a parent business is a separate legal business entity, each hotel or restaurant location that employs 500 or fewer employees is eligible to apply for a separate PPP loan provided it uses its unique Employer Identification Number.

Method 2: SBA Revenue-Based Size Standards

The SBA’s Office of Size Standards also publishes revenue-based size standards for certain industries. A business with greater than 500 employees may still be eligible if it meets applicable SBA revenue-based size standards for its primary industry – again designated by its NAICS code. Revenue is calculated pursuant to 13 CFR § 121.104.

For example, a business in the wheat farming industry (NAICS Code 111150) with 1,000 employees, but revenue of $500,000 would still be eligible for PPP funds because the applicable SBA revenue-based size standard is $1 million.

Method 3: Alternative Size Standard

The final option for businesses with greater than 500 employees to qualify is through the Alternative Size Standard. In its recent “Frequently Asked Questions” regarding the PPP, the Treasury Department confirmed that an applicant may be eligible if it meets the requirements of the Alternative Size Standard. This “Alternative Size Standard” was created by the Small Business Jobs Act of 2010 as a temporary standard until the SBA adopted a new rule.  However, the SBA has not adopted a new rule, and the temporary statutory standard is still in place.

To be eligible under the Alternative Size Standard, an applicant must:

1. Be an operating business;
2. Be located in the U.S.;
3. As of March 27, 2020, have maximum tangible net worth of not more than $15 million, and
4. Have average net income after Federal income taxes (excluding any carry-over losses) for the two full fiscal years before the date of the application not more than $5 million.

We note the affiliation rules detailed in this post still apply, meaning the businesses attempting to use the Alternative Size Standard will have to aggregate the annual receipts of their affiliates to see if they qualify.

Conclusion

Although businesses with more than 500 employees may feel locked out of the PPP, these alternative methods offer potential avenues for them to be qualified for a PPP loan.

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