Can my employees file for unemployment benefits if my business gets a PPP loan? (2021 update)

Important PPP update for 2021

On December 22, 2020, Congress passed a bill renewing funding under the CARES Act, including an additional $284 billion earmarked for America’s struggling small businesses. The rules and application process for PPP loans and forgiveness have been modified, with more businesses eligible for PPP loans, more expenses forgivable, and a simplified application process.


In this 3-minute read:

  • Important updates for 2021 PPP loan forgiveness
  • What your employees need to be aware of if you get PPP funding
  • Unemployment benefit have changed due to COVID-19
  • How to maintain PPP loan forgiveness if you lose employees

With the crush of millions of businesses scrambling to get Paycheck Protection Program loans, many business owners may assume that their employees would prefer to receive their normal paychecks, or a portion thereof, rather than file for unemployment.

However, this is not always the case. Let’s go over some circumstances in which your employees may prefer to file for unemployment rather than their current (or former) paychecks, and what you can do to maintain your PPP loan forgiveness if you do lose some employees.

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IMPORTANT FORGIVENESS UPDATE: On June 3, 2020, the Senate passed updates to PPP loan forgiveness requirements, extending the covered period to 24 weeks, reducing the minimum loan funding that must be spent on payroll to 60%, and easing requirements for maintaining staffing and compensation levels for loan forgiveness. Please read the details here.

If I get a PPP loan can my employees file for unemployment benefits?

If your business receives a PPP loan and you make an offer to retain your employees, they will likely not be eligible for unemployment benefits.

This worldwide crisis has created the circumstances for a potentially very problematic situation: suppose you struggle and sacrifice to maintain your loyal workers’ employment and paychecks even though you have been closed down due to COVID-19 or have taken a severe cut in revenue. And you are fortunate enough to obtain a Paycheck Protection Program loan to help ease the financial burden of paying your employees despite very difficult business circumstances.

However, rather than your employees thanking you for being so concerned about their welfare, they are furious that you reinstated their employment and paychecks. Think this can’t happen? This exact situation happened to this business owner.

Due to new modifications to requirements to apply for unemployment, as well as an increase of $600 per week in state unemployment benefits (which vary widely by state), in some cases workers are actually able to take unemployment and earn more than their full wages, depending on their pay level.

This is obviously not the intent of federal assistance, but due to the emergency relaxation of the rules, it does seem to be the case for now.

This is one reason why your employees may possibly be upset if you get a loan to keep them on your payroll. 

angry worker during COVID-19

This is a very problematic situation and every business owner should carefully weigh their options, ideally consulting legal counsel and a reputable business financial advisor.

What if my employees would rather take unemployment benefits than remain employed with my business after a PPP loan? How do I get my loan forgiven?

If your employees elect to “stay unemployed” rather than remain on your payroll, this can create a sticky situation for you. 

Under the terms of the PPP loan, 60% (formerly 75%) of the money must be spent on payroll during the “covered period” (the 8 or 24 weeks following the receipt of your funds), and the remainder spent on approved expenses like business rent, mortgage interest, and utilities, in order to have your loan fully forgiven.

This makes many business owners fear they will be unable to get their loans forgiven if their employees quit or refuse to have their jobs reinstated upon receipt of a PPP loan. However, this doesn’t appear to be the case. 

Under the terms of the PPP loan, you just need to demonstrate that you maintained the levels of employment and compensation as of the time you receive your loan funds, not necessarily that you keep the same employees.

Therefore, you can restore your former headcount and payroll, or rehire within the parameters of the PPP requirements, or hire new employees, or simply maintain the levels of staff and compensation as of the time you receive your PPP funds, and still have your loan forgiven. 

You are not required to bring back employees who are on unemployment. You can use your PPP funds to either hire back previous employees, hire new employees, or maintain existing staffing levels.

Some additional points about loan forgiveness: Your loan forgiveness will be reduced if you decrease salaries and wages by more than 25% for any employee that made less than $100,000 annualized in 2019.

Learn how to apply for PPP loan forgiveness.

Can I use my PPP loan to pay new employees if my old employees want to stay on unemployment?

Yes. To receive forgiveness for your PPP loan, you must spend at least 60% of your funds on payroll costs. This can include hiring new employees, hiring back old employees, or simply maintaining your current staffing levels.

What if I couldn’t keep my employees, they quit, or refused to be rehired? Can I still qualify for loan forgiveness? (important 2021 update)

There are certain exceptions to the “maintaining employees levels and compensation” rule.

 If you received a PPP loan of $50,000 or less

If you received a PPP loan that was $50,000 or less, you are exempt from having to maintain your employee and compensation levels in order to receive loan forgiveness. Your loan must still be spent on approved costs and you will still need to document that you spent at least 60% of your funds on payroll expenses. 

When you’re ready to apply for loan forgiveness, you will want to contact your lender to receive the simplified loan forgiveness form. 

An employee quit, retired, or was fired (with just cause), or refused your offer to be rehired

If you are over the $50,000 loan threshold but couldn’t maintain employee levels due to someone quitting or being fired with just cause, then you can still qualify for full loan forgiveness. You can also get full loan forgiveness if you have written proof that you offered to rehire employees who refused your offer (if your offer was at their former pay). But, it’s very important that you document each of these instances so that you can verify this when you apply for loan forgiveness. 

You’ll need documentation to explain why your employee was fired or other supporting documents to verify an employee’s termination or refusal to be rehired.

I got my First Draw PPP Loan after December 27, 2020, do I still need to restore payroll or headcount to previous levels in order to receive forgiveness?

No. PPP Loans received after December 27th, 2020 are not required to “rehire” any employees in order to receive forgiveness. You will, however, need to maintain current payroll levels during the forgiveness period. (Exceptions to this would include employees who resign or are terminated with cause).

Will there be fallout for businesses who get PPP loans unnecessarily? Or for workers who file for unemployment when they have other options?

The main thing to remember is the government is providing this emergency assistance and guidance, and is expecting participants to follow in good faith.

Business owners need to show legitimate need in order to qualify for a PPP loan, and in order to have those funds forgiven, they must provide documentation that they used the funding in accordance with the treasury department’s directives. 

We’re already seeing the fallout for some very successful businesses that accepted large PPP loans (when they had various other means of support) and are bowing to social pressure and returning the funding.

business owner being accused and social shaming

By the same token, individuals who are considering filing for unemployment benefits during this crisis rather than accepting legitimate offers of employment may be opening themselves up to liability when the government decides to make a full reckoning and make an example out of any bad actors.

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