Reed Smith Client Alerts

Recent guidance from the Small Business Administration (SBA) clarifies those circumstances in which student workers are not employees for purposes of determining whether eligible recipients meet the participation limits set forth in the CARES Act. Prior to release of this interim final rule, it was unclear if students who receive work assignments as part of the federal Work-Study program would be included as employees or full-time equivalent employees for purposes of the Paycheck Protection Program (PPP). 

Pursuant to this guidance, student workers will not be included as employees if the eligible recipient is an institution of higher education, and the student worker’s services are performed as part of a Federal Work-Study Program or a substantially similar State program. Additionally, institutions of higher education must accordingly exclude work-study students when determining the number of employees for PPP loan eligibility, and must exclude payroll costs for work-study students from the calculation of payroll costs used to determine their PPP loan amount. 

While this guidance is welcome news for institutions or higher education, colleges and universities should remain mindful of the Frequently Asked Questions (FAQs) released after the enactment of the CARES Act. These FAQs highlight the importance of all applicants for PPP loans to take the time now to review their applications to make sure they are consistent with recent SBA pronouncements, and make any necessary corrections by the “safe harbor” date of May 14, 2020. A careful review of the application now in light of these new pronouncements and a written record of that review could itself offer substantial support for the good-faith basis supporting an applicant’s application, regardless of whether any corrective action is deemed appropriate.


Section 1102 of the Coronavirus Aid, Relief and Economic Security (CARES) Act sets forth the rules for the PPP. The PPP allows eligible recipients (as defined in Section 1102(a) (2) (A) (iv) to include nonprofit organizations), to receive a loan, a portion of which may be forgiven under Section 1106 of the CARES Act, provided that the funds borrowed are used to pay payroll costs, payments of interest on certain mortgage or rent obligations, and certain utility costs (see, Section 1106(a) (7)). 

In order for an eligible recipient, which includes nonprofit organizations, to qualify for a PPP loan, it must employ no more than the greater of 500 employees or, if applicable, the size standard established in number of employees established by the SBA. (Section 1102(a) (2) (D) (i) (I) (II)) Section 1102(a) (2) (D) (v) provides the following definition of employee: 

For purposes of determining whether a business concern, non-profit organization, veterans organization, or Tribal business concern described in section 31(b)(2(C) employs not more than 500 employees under clause (i)(I), the term ‘employee’ includes individuals employed on a full-time, part-time, or other basis. 

Based on the CARES Act definition of the employee, it was unclear as to whether or not student workers would be included in employee for purpose of meeting the 500 employees or less threshold. This confusion grew in light of federal precedents under both Internal Revenue Service (IRS) and Department of Treasury (Treasury) guidance distinguishing employees from student workers.