Summary
The Third Circuit reversed a district court judgment holding that the Small Business Administration violated the Administrative Procedure Act by declining to fully forgive Essintial Enterprise Solutions’ Paycheck Protection Program loan. The court held that the CARES Act’s definition of “payroll costs” does not include payments made by a traditional business to independent contractors, reasoning that the statutory structure instead addresses compensation received by sole proprietors or independent contractors themselves. The court also rejected Essintial’s retroactivity and government “bait-and-switch” arguments.
Topics
Practice areas
Questions Presented
- Whether payments made by a traditional business to independent contractors qualify as payroll costs under the CARES Act's PPP provisions.
- Whether the SBA's interpretation excluding those payments was arbitrary, capricious, or contrary to law under the Administrative Procedure Act.
- Whether the SBA improperly applied its Interim Final Rule retroactively.
Holdings
- Payments made by a traditional business to independent contractors are not payroll costs under 15 U.S.C. § 636(a)(36)(A)(viii)(I). Subsection (aa) addresses compensation paid to employees, while subsection (bb) addresses compensation received by or income of a sole proprietor or independent contractor, including amounts that the contractor pays himself or herself.
- The SBA's interpretation of payroll costs was not arbitrary, capricious, or contrary to law under the Administrative Procedure Act.
- The SBA did not retroactively apply the Interim Final Rule, and the Third Circuit afforded the Rule neither retroactive effect nor deference.
Key quotations
“We hold that the SBA’s interpretation of “payroll costs” under the CARES Act did not violate the Administrative Procedure Act.” (6)
“Identifying a disputed term’s single, best meaning in the context of a justiciable controversy is one of our main jobs.” (7)
“Finally, our interpretation of “payroll costs” prevents the absurd scenario where a business and the independent contractor that the business paid both get PPP loans based on the same payments.” (13)
“The text and structure of the CARES Act persuade us that Essintial’s payments to independent contractors were not “payroll costs” for purposes of a PPP loan.” (20)
Factual background
Essintial Enterprise Solutions, LLC obtained a $7,028,800 PPP loan after reporting an average monthly payroll based on payments associated with its workforce. When Essintial sought complete forgiveness, the SBA determined that payments to independent contractors were ineligible payroll expenses and forgave only $3,703,011.60. The SBA's Office of Hearings and Appeals affirmed, leading Essintial to challenge the determination under the Administrative Procedure Act.
Procedural history
Essintial obtained a PPP loan and later sought complete loan forgiveness. After reviewing the loan, the SBA forgave $3,703,011.60 but disallowed amounts attributed to payments to independent contractors; the SBA's Office of Hearings and Appeals affirmed. Essintial sued in the Middle District of Pennsylvania, which granted summary judgment to Essintial and held that the SBA's interpretation of payroll costs was arbitrary and capricious. The Third Circuit reversed and remanded.
Remand instructions
Remand for further proceedings consistent with the opinion.