SBA Issues Subsequent Interim Final Rule Regarding Affiliation Rules Under the PPP to Supplement Initial Rule

The U.S. Small Business Administration (SBA) issued an Interim Final Rule (the “Initial Rule”) to implement sections 1102 an 1106 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) on April 2, 2020. Subsequently, the SBA issued an additional Interim Final Rule (the “Subsequent Rule”) to supplement the Initial Rule with guidance regarding affiliation rules applicable under the Paycheck Protection Program (PPP).

To be eligible for the PPP, an entity, combined with its affiliates, must have 500 or fewer employees. The Subsequent Rule confirms that for the vast majority of businesses, the SBA will rely on its normal, pre-existing affiliation rules under 13 C.F.R. § 121.301 (e.g., entities may be considered affiliates based on the following factors: stock ownership, overlapping management and identity of interest). These affiliation rules will determine whether the number of employees employed by two or more entities should be combined when determining whether each of those entities is under the 500-employee limit. Note that the CARES Act waived those affiliation rules for certain franchises and food service industry businesses.

The Subsequent Rule also waives affiliation rules for any faith-based organization that claims, in good-faith, that application of the affiliation rules would burden its free exercise of religion. This waiver of affiliation rules is based, in-part, on the Religious Freedom Restoration Act (RFRA), which provides the government shall not substantially burden a person’s exercise of religion unless it can demonstrate such a burden is in furtherance of a compelling government interest. The intended purpose of this exclusion is to permit local faith-based organizations to seek PPP loans even if affiliated with a larger denomination.

Please note that the Subsequent Rule does not specify whether a healthcare entity may claim and/or benefit from the faith-based exception. While some healthcare entities may be affiliated with a faith-based health system, such entities should seek legal advice whether they may potentially rely on this exemption prior to claiming and/or relying on it.

For more information regarding the SBA Interim Final Rules or other questions, please contact your regular HLP attorney, or Partners@thehlp.com, or call (212) 734-0128 or (248) 996-8510.