Helping individuals, companies, and organizations understand key legal and practical considerations for promoting compliance and making better business decisions in these types of federal, state, and local government contracting matters MORE

The Paycheck Protection Program Flexibility Act of 2020, H.R. 7010 (PPPFA) recently passed by Congress and signed by the president on June 5, 2020 makes significant changes to the Paycheck Protection Program (PPP) in an effort to provide greater flexibility and benefits to borrowers. The implementation of these changes will depend in part upon further rule-making from the Small Business Administration (SBA), as a number of the rules enacted by the SBA now contain inconsistencies with the statutory framework of the PPP as set forth in the CARES Act (as amended).

Minimum Maturity for New Loans Extended to Five Years. Previously, the CARES Act provided that PPP loans would have a maximum maturity of 10 years, and did not provide for a minimum maturity. In its Interim Final Rule 1 published in the Federal Register on April 15, 2020 (85 Fed. Reg. 20811), the SBA determined that the maturity of PPP loans would be two years. The PPPFA now provides that PPP loans will have a minimum maturity of five years. However, this change only automatically applies to loans made on and after the enactment of the PPPFA, and does not change the maturity of PPP loans originated prior to enactment of the PPPFA. The PPPFA provides that lenders and borrowers may mutually agree to modify PPP loans originated prior to enactment of the PPPFA to be consistent with the minimum five year maturity. However, it is unclear whether lenders will have an appetite for engaging in these amendments, since it will extend the period during which they would have to carry these low interest loans, without receiving any additional fees.

Extension of “Covered Period” for Provision of Loans. The definition of “covered period” in Section 1102 of the CARES Act previously referred to the period from February 15, 2020 to June 30, 2020. The PPPFA extends the covered period in Section 1102 to December 31, 2020. The term “covered period” is used in different contexts in the CARES Act. In Section 1102 the term is used in the definition of certain terms, and is used to establish the period during which the SBA may guaranty PPP loans and to define certain parameters of the PPP. This change in the definition of covered period in Section 1102 appears to permit the SBA to continue making PPP loans until December 31, 2020, or until the current funding runs out, but a bipartisan letter of congressional intent, “to make sure the terms of the program and its legislative intent are properly understood,” was incorporated into the Congressional Record at the time the Senate voted on the PPPFA. That letter stated that Congress did not intend that the PPPFA extend the time period for accepting PPP loan applications beyond June 30, 2020. As with many provisions relating to PPP loans, this change when read in conjunction with the use of the term “covered period” throughout Section 1102 of the CARES Act raises several questions. The term was used in connection with the $100,000 compensation cap, expansion of loan eligibility to borrowers other than “small business concerns,” waiver of affiliation rules for some borrowers, waiver of certain SBA fees, waivers of the “credit elsewhere” and guarantee requirements, and the provisions relating to permitted uses of PPP loan proceeds. Perhaps the only meaningful result of the change to the covered period definition in Section 1102 is that borrowers may now have through December 31, 2020 to spend PPP loan funds. Borrowers should keep in mind that even though they can use PPP loan funds through December 31, 2020, only amounts spent within the “covered period” under Section 1106 of the CARES Act (discussed below) are eligible for loan forgiveness.

Change to the 75% Payroll Cost Requirement. The CARES Act previously did not provide guidance on the proportion of PPP loan proceeds that must be spent on the various categories of eligible expenses, but in Interim Final Rule 1 the SBA imposed a requirement that at least 75% of the PPP loan proceeds must be spent on payroll costs and at least 75% of the amount of forgiveness must relate to payroll costs. Notably, the PPPFA increases the proportion of PPP loan funds that can be used to pay for non-payroll expenses during the covered period from 25% to 40%. In addition, the PPPFA provides that at least 60% of the PPP proceeds must be used to pay payroll costs “to receive loan forgiveness.” Although not entirely clear, this language appears to establish an all-or-nothing rule for forgiveness, which is in contrast to the previously existing forgiveness application that allowed proportional forgiveness even if the 75% payroll cost threshold was not met. The SBA may assert authority to impose the more restrictive 75% payroll cost threshold and we will await SBA guidance as to whether the SBA will permit application of this expansion to current PPP loan recipients seeking forgiveness.

Rehire and Salary Restoration Safe Harbor. Section 1106 of the CARES Act provided that a borrower’s forgiveness amount could be reduced if its average FTE level for the covered period had decreased from the selected reference period, and if any of its employees were subject to greater than 25% reductions in salary during the covered period as compared to the specified reference period. However, the CARES Act provided a safe harbor that allowed a borrower to escape this reduction in forgiveness if the borrower could eliminate salary reductions or restore its employee count to reference period levels by June 30, 2020. The PPPFA now extends the June 30, 2020 deadline to December 31, 2020. Given that certain borrowers will seek forgiveness before this date, it is not clear precisely how this will this work in practice as the forgiveness application has to be filed within 90 days after the end of the covered period.

The PPPFA also adds exceptions which prevent a borrower from having its forgiveness amount reduced (i) if the borrower can document that the borrower was unable to rehire individuals who were employees of the borrower as of February 15, 2020 and that the borrower was also unable to hire similarly qualified employees for unfilled positions on or before December 31, 2020, or (ii) the borrower can document an inability to return to the same level of business activity as it was operating at before February 15, 2020 as a result of compliance with federal guidelines (from the Secretary of Health and Human Services, the Centers for Disease Control and Prevention, or the Occupational Safety and Health Administration) “related to the maintenance of standards for sanitation, social distancing, or any other worker or customer safety requirement related to COVID-19.” Note, however, that many businesses will be primarily impacted by state and local guidelines regarding such matters, which are not covered by this exception.

Questions remain about the manner in which a borrower will be required to “document” these circumstances. The exception relating to an inability to re-hire workers was already set forth in the SBA’s Interim Final Rule on Loan Forgiveness published in the Federal Register on June 1, 2020 (85 Fed. Reg. 33004). That rule includes specific steps borrowers must take in order to document the inability to rehire employees and may serve as a guide; however, since the June 1 Interim Final Rule will need to be substantially updated as a result of the PPPFA, it is possible the existing guidance on that point will change. We will also need to await SBA guidance on how a borrower can document an inability to hire similarly qualified individuals or its inability to return to its prior level of business activity.

Extension of Deferral Period. The CARES Act allowed for full payment deferment on PPP loans for up to one year, and the SBA’s Interim Final Rule 1 established a six-month deferral. The PPPFA extends the deferment period to the date on which the lender is reimbursed by the SBA for the forgivable portion of the loan, provided that the deferment period must be at least six months and not more than one year. However, if a borrower has not applied for forgiveness within 10 months after the end of its covered period, then the borrower will be required to begin making payments at that time.

Delay of Payment of Employer Payroll Taxes. The CARES Act provided that employers could delay payment of payroll taxes otherwise due in 2020 as long as 50% of such delayed payments were made by December 31, 2021 and the remaining 50% of the delayed payments were made by December 31, 2022. However, Section 2302(a)(3) of the CARES Act had provided that any borrower who received PPP loan forgiveness would be ineligible for the payroll tax delay. The PPPFA removes Section 2302(a)(3) from the CARES Act, thus making PPP borrowers who receive forgiveness eligible for the payroll tax delay. This change is retroactive, effective as if included in the CARES Act, and therefore should be applicable to loans made either pursuant to Section 1102 or Section 1109 of the CARES Act. Note that this change does not amend Section 2301 of the CARES Act, which provides that borrowers who receive a PPP loan are not entitled to the Employee Retention Tax Credit.

Overall, the PPPFA seems to provide additional benefits for some borrowers to take full advantage of their PPP loans, although the PPPFA may have come too late for many borrowers. However, despite these changes, additional uncertainties remain. Such uncertainties may be addressed in subsequent rulemakings or guidance by the SBA, as we have seen in the past. We will continue to monitor and report on developments in this area.

For more information on the Paycheck Protection Program Flexibility Act of 2020, please contact Judith Araujo, Susan Warshaw Ebner, David Jenson, Johnny Wang, Gerald Weidner or the Stinson LLP contact with whom you regularly work.

During the COVID-19 pandemic the construction industry has, for the most part, been able to continue field operations on existing projects. Of course, regulations have varied from state to state, and in some regions operations have been restricted or curtailed. For the last several weeks construction trade associations such as Associated General Contractors and Associated Builders and Contractors have done a great job keeping their members informed about measures to keep their jobsites safe by preventing and limiting exposure to the virus.

At the same time, many contractors have shut down their offices, and their office staff has been working remotely. They have done an amazing job adapting to the new environment, but most are looking forward to reopening their offices and returning to some semblance of normalcy. The Stinson Coronavirus Task Force recently held a two-hour webinar that explored in-depth the issues that every company, contractors included, should consider when contemplating a return to work. View the materials used during the webinar.

For those looking for an essential to-do list, we have boiled things down to the top 10 action items for contractors reopening their offices:

1. Appoint a person, or better yet a team, to get up to speed on all of the laws, orders and regulations applicable to the jurisdictions in which you do business. Hopefully you have done this already, but it’s an ever-changing landscape that must be monitored on a weekly, if not daily basis. Important sources of information include guidance from the White House, CDC, OSHA, EEOC, states, counties and municipalities. It’s your responsibility to be up to speed on all applicable laws and regulations.

2. Assess your facilities and operations to determine what physical structures and operational protocols need to be changed in order to operate safely.

3. Create a plan for returning to work, and update it regularly as circumstances change. There is no one-size-fits-all plan, but any plan should, at a minimum, address:

  • Means of access to the workplace, such as doors, elevators, garages, etc.
  • Whether and how to do medical screening and contact logging
  • Social distancing in the workplace, including spacing and physical barriers and best practices for in-person meetings
  • Personal protective equipment (PPE), including whether and how to require face coverings or masks
  • Cleaning and sanitizing
  • Procedures for work-related travel
  • Quarantining and/or temporarily prohibiting the return of workers who have been exposed to or infected with the virus, or have traveled outside of the region. This includes deciding if and when employees should be paid during quarantine.
  • Staggering work times for employees and requirements for visitors
  • Protocol for employees who need medical accommodations or leave benefits, including the FFCRAThe plan should be flexible and take into account that second and third waves of infection are likely. The long-term interests of the company should be taken into account, not simply getting employees back to the office quickly.

Consider the interests of all stakeholders – employees, customers, subcontractors, vendors, and visitors, and make sure that the plan addresses the needs of each. Survey your employees to solicit their input, and allow them to self-identify if they need any accommodations for returning to work. Do not make any assumptions about who will need accommodations or what accommodations they might need.

5. Be careful about any medical information that you obtain by whatever means. Preserve confidentiality in compliance with all laws and regulations.

6. Create a process for handling complaints promptly and professionally, and follow it. Do not discourage employees from submitting complaints if they have concerns about their safety.

7. Provide clear and comprehensive training to your employees about appropriate safe practices, and update your training program regularly.

8. Before reopening your offices, and frequently thereafter, provide clear, uniform and accurate information to ensure that all stakeholders understand how you are planning to reopen safely and what is expected from them.

9. If you rent your office space, consult your lease to determine the respective obligations that you and your landlord have.

10. Consult legal counsel to help you create and maintain a plan that best suits the needs of your business.

Stinson recommends that you consult with a trusted advisor to create a return to work plan that aligns with your business goals, protects the health and safety of your employees, and mitigates your risk of exposure to claims and lawsuits.

Stinson’s Coronavirus Task Force has worked diligently to create and maintain a database of best practices. The task force, a cross-disciplinary team of attorneys who advise clients on a wide variety of COVID-19 business-related subjects, serves to provide both legal and best practice information.

 

Companies doing business in the United States are required to act honestly in their business dealings. Companies that have affirmative compliance and reporting requirements may suffer significant penalties if they are determined to violate applicable laws, rules and regulations. The U.S Sentencing Guidelines (USSG) provide for reduced sentencing for companies that have an effective compliance program. The Department of Justice (DOJ) Manual’s “Principles of Federal Prosecution of Business Organizations,” outlines those factors that DOJ will consider in determining whether to investigate, prosecute, and/or settle charges against a company. The Manual includes provisions on whether and to what extent a company has a working compliance program.

This week, the DOJ Criminal Division issued updated evaluation factors for the evaluation of corporate compliance programs when considering what penalties to assess against a wrongdoer. Under the updated guidance, DOJ will consider “the adequacy and effectiveness of the corporation’s compliance program at the time of the offense, as well as at the time of a charging decision,” and the corporation’s “remedial efforts to implement an adequate and effective corporate compliance program or to improve an existing one.”

The new guidance confirms that prosecutors are to consider whether (1) the compliance program is well designed (providing a clear message that misconduct is not tolerated; having appropriate policies and procedures to detect and prevent the most likely types of misconduct given the company’s line of business and applicable laws, rules and regulations; and ensuring integration of the compliance program into the company’s operations and workforce); (2) the compliance program is applied earnestly and in good faith (it is not just a paper process; senior and middle management are committed to a compliance culture and the company has provided adequate resources, incentives and disciplinary measures to permit effective functioning of the program and updating as necessary to address changing situations and lessons learned); and (3) the compliance program actually works in practice (misconduct alone does not mean that the program does not work and where there is actual or suspected misconduct, the company effectively identifies and investigates the misconduct, conducts a root cause analysis of the causes of the problem, and then effectively remediates and self-reports; the company also self-audits and addresses identified issues).

Government contractors are held to high standards of ethics and integrity. Under the Federal Acquisition Regulation (FAR), contractors are required to have compliance programs suitable to the size of the company and its level of involvement in government contracting. Contractors’ compliance programs should include a written code of business ethics and conduct, as well as an employee business ethics and compliance training program and internal control system. Under the program, contractors are required to timely discover and disclose improper conduct in connection with government contracts and subcontracts, and ensure that they take prompt corrective measures. FAR 3.1003 also provides for mandatory disclosure where the company, its officers or directors, become aware of credible evidence of actual or suspected violations of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations under Title 18 of the U.S. Code or a violation of the civil False Claims Act. A contractor as well as its principals may be suspended or debarred from government contracting if they fail to timely report credible evidence of such violations, or a significant overpayment. This means that, not only may a contractor suffer criminal or civil penalties for violations but its failure to timely report also may cause it to lose the right to have the government exercise options under existing government contracts as well as receive awards of new contracts.

Given this background, the Department of Justice’s amendment of the factors it looks at to evaluate company compliance programs and to determine whether to investigate, prosecute and/or settle a matter of alleged misconduct is highly relevant to government contractors of all sizes, engaged in all types of work. Contractors, and their subcontractors, should review the amended guidance against their current compliance programs to assess (i) their level of compliance and risks, and (ii) what is causing and what should be done to remediate any identified deficiencies or risk areas.

The more contractors engage in government contracting, the greater the risk that something may go awry at some point. No contractor is always perfect. Having an effective compliance program can make a difference to your ability to compete, win and retain business.

If you have questions about the content of this article, or government contractor compliance programs and issues, contact Susan Warshaw Ebner, Stinson’s Government Contracts & Investigations practice group, or your Stinson counsel.

If you were somehow still wondering whether small businesses really need to be concerned about the affiliation rules in the Small Business Administration (SBA) regulations, the answer is a resounding “Yes.” Furthermore, running afoul of those rules can easily lead to liability under the False Claims Act (FCA), as most recently demonstrated by an Oklahoma contractor’s settlement with the Department of Justice (DOJ).

The DOJ announced in early June that Tulsa, Oklahoma-based contractor The Ross Group Construction Corporation (Ross Group), and its corporate affiliates, have agreed to pay over $2.8 million to settle allegations that they violated the False Claims Act (FCA) by improperly obtaining federal set-aside contracts reserved for disadvantaged small businesses. Set-aside contracts serve an important function by allowing small businesses to participate in federal contracting and gain valuable experience to help them compete for future economic opportunities. Announcing the settlement, the DOJ made clear (again) that it “will pursue those who knowingly obtain set-aside contracts to which they are not entitled and thereby prevent deserving small businesses from receiving the assistance that Congress intended.”

The case against Ross Group alleged that the company fraudulently induced the government to award certain small business set-aside contracts to several affiliated entities that did not meet eligibility requirements relating to size, ownership, and operational control. According to DOJ, Ross Group was ineligible for the small business set-aside opportunities but created two companies, PentaCon LLC and C3 LLC, to obtain the set-aside contracts in question. The United States further alleged that Ross Group maintained operational control over the day-to-day and long-term management decisions of the two purported small businesses, including controlling their financial affairs and business operations, and that, as a result, neither PentaCon nor C3 satisfied the size and eligibility requirements to participate in the set-aside programs. DOJ further alleged that Ross Group, PentaCon, and C3 concealed their affiliation from the United States and knowingly misrepresented the eligibility of PentaCon and C3 for the set-aside contracts.

The lawsuit, United States ex rel. Southwind Construction Services, LLC v. The Ross Group Construction Corporation, et al., Case No. 15-0102-R (W.D. Okla.), was filed in federal district court in the Western District of Oklahoma under the whistleblower provision of the FCA. That provision permits private parties to file suit on behalf of the United States for false claims and share in a portion of the government’s recovery. In this case, the whistleblower will receive approximately $520,000.

The DOJ is not the only part of the Government that takes this type of procurement fraud seriously. The Ross Group settlement is the result of a coordinated effort among the Civil Division’s Commercial Litigation Branch, the U.S. Attorney’s Office for the Western District of Oklahoma, DCIS, the Inspector General Offices of the SBA, the General Services Administration, the Department of Veterans Affairs, and the Army Criminal Investigation Division Major Procurement Fraud Unit.

The lesson? Contractors seeking to pursue small business set-aside contracts must first make sure they understand the affiliation rules—and all other requirements set forth in the SBA regulations. Then they must take actions to ensure they are fully compliant with those rules. Doing otherwise risks whistleblowers and knocks on your door from government investigators.

A lie may be a lie, but false representations and certifications on SAM may not necessarily be a proper protest ground. As the recent Government Accountability Office (GAO) decision in Phoenix Environmental Design, Inc. (Phoenix), B-418473, B-418473.2 (May 20, 2020) suggests, “minor” inaccurate statements may fall short of sustaining a protest.

Through the underlying solicitation, the Department of the Interior issued a sources sought notice and sought responses from vendors that were qualified and authorized to distribute an aquatic herbicide for canal and irrigation uses.

A few months after issuing the solicitation, the agency concluded that Alligare LLC (Alligare) was the only responsible source able to perform the requirements of the solicitation. The agency executed a justification and approval (J&A) to this effect. Further, as relevant here, the agency reviewed Alligare’s Federal Acquisition Regulation (FAR)/Defense Federal Acquisition Regulation Supplement (DFARS) Report in the System for Award Management (SAM), including verifying that Alligare identified its immediate and highest-level owner, as required under FAR 52.204-7, Ownership or Control of Offeror.

Following the J&A, the agency amended its solicitation to convert it from a sources sought notice to a sole-source synopsis inviting vendors to respond. One day after this amendment, Phoenix brought the instant protest. Though the award had not yet been made at the time of the protest, while the protest was pending with GAO, the agency cited urgent and compelling circumstances and made the award to Alligare.

Phoenix protested on the ground that Alligare lacked a valid SAM registration due to Alligare’s failure to accurately identify its immediate and highest level owners pursuant to FAR 52.204-7. According to Phoenix, this meant that Alligare had not complied with the requirements of the FAR clause incorporated in the SAM registration and that the agency should cancel its sole-source award.

The agency responded by arguing that it had investigated Phoenix’s allegations and subsequently requested and received information from Alligare regarding its ownership, which ultimately confirmed that the information in Alligare’s SAM registration was accurate.

Notably, in its discussion, GAO pointed to its precedent wherein even if an offeror does provide inaccurate information in its SAM registration, which may then mean an agency’s award was improper, this will not sustain a protest in some instances: “With respect to allegations that an offeror’s SAM registration is inaccurate or incomplete, our Office has generally recognized that minor informalities related to SAM (or its predecessor systems) registration generally do not undermine the validity of the award and are waivable by the agency without prejudice to other offerors.”

GAO found that it was permissible for the agency to waive the SAM registration requirement since there was no prejudice, as Alligare had not received a competitive advantage, nor had Phoenix shown that it would have done anything differently in its proposal had it known that the agency would relax the SAM registration requirement.

While it may be important for offerors to maintain accurate SAM registrations for their own dealings with the government, this decision highlights that an alleged misstatement must be more than “minor” – even with regard to SAM representations and certifications – in order to translate into a valid protest ground. And remember, as we’ve advised before, when selecting protest grounds, don’t forget to assert how you were prejudiced by the alleged violation.