Labor & Employment Law Daily Wrap Up, COVERAGE, LIABILITY—6th Cir.: Construction company’s payments to independent contractors were not payroll costs under PPP, (Jul 14, 2025)

By Jason Albright, J.D.

“[S]ubsection (bb) allows sole proprietors and independent contractors to get a loan based on their own earnings, the closest thing to a ‘payroll’ they have, and does not allow other businesses to bolster their own loans based on how much they happen to pay self-employed individuals.”

Payments to six independent contract workers made by Veltor Underground LLC, a construction company based in the outskirts of Detroit, did not qualify as “payroll costs” under the pandemic-era Paycheck Protection Program, the Sixth Circuit affirmed. Veltor had no employees, leaving it no expenses to claim under 15 U.S.C. § 636(a)(36)(A)(viii)(I)(aa), and it is not a sole proprietorship and does not argue that it is an independent contractor, leaving it no expenses to claim under subsection (bb), which does not allow businesses other than sole proprietors and independent contractors to bolster their own loans based on how much they happen to pay self-employed individuals. “Text and context thus resolve this case,” the appeals court observed. “Without paychecks to protect, Veltor was not entitled to have its loan forgiven.” Judge White concurred (Veltor Underground LLC v. U.S. Small Business Administration, No. 24-2025 (6th Cir. July 11, 2025)).

Construction business. Veltor is a construction business located in the suburbs of Detroit, Michigan. It focuses on “[u]nderground [d]rilling,” and it earned $4.8 million in revenue in 2019 and delivered a profit of $400,000 to its sole member.

Global pandemic and CARES Act. Then came March 2020, and a global pandemic. The federal government responded, and by the end of the month, Congress passed, and the President signed into law, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), a $2.2-trillion boost to the U.S. economy. Pub. L. No. 116-136, 134 Stat. 281 (2020). Of that sum, $349 billion—later increased to $813 billion—was devoted to the Act’s Paycheck Protection Program, which promised forgivable loans to small businesses that pledged to maintain their payrolls over the next several months.

Federal economic intervention through private lenders. The federal spending program “promised the same loans to sole proprietors and independent contractors,” according to the court, “again to ensure they could maintain their income streams despite the pandemic.” CARES Act loans, however, did not come directly from the federal government. Private lenders offered the loans, and the federal Small Business Administration (SBA) guaranteed them.

Bank of America and Veltor. One such private lender was Bank of America, and one such borrower was Veltor, which applied for a loan a week after the CARES Act’s passage through a form created by the SBA to determine borrowers’ “eligibility” for the program. Interim Final Rule for the Paycheck Protection Program, 85 Fed. Reg. 20811, 20812 (2020).

PPP form and qualification. The Payroll Protection Program (PPP) form required Veltor to state the “[n]umber of employees” on staff and calculate its “[a]verage monthly payroll,” capped at $8,333 per employee. Veltor said it had six employees and calculated its monthly payroll as $50,000, the maximum amount a business with six employees could claim. These answers qualified Veltor for a $125,000 loan—2.5 times its average monthly payroll—at a one-percent interest rate.

Conditions. Veltor accepted the funds and with them the loan conditions. It acknowledged that the loan would be forgiven only if it spent at least 75 percent of the funds on “payroll costs.”

Loan forgiveness? Then, when Veltor sought forgiveness in 2021, it tried to show that it had so spent the funds. It told Bank of America that it had spent all $125,000 “on [p]ayroll [c]osts” for its—now five—“employees.”

Independent contractors. When the bank reviewed Veltor’s records, however, it realized that Veltor paid independent contractors, not employees. The bank denied Veltor’s application for loan forgiveness, as did the SBA. The agency told Veltor that payments made “via 1099’s”—that is, to independent contractors—do not qualify as “payroll cost[s]” under the CARES Act, making Veltor “ineligible” for forgiveness. And Veltor fared no better on internal agency’s appeals.

The company then sued the agency in federal district court, the court granted summary judgment for the agency, and Veltor appealed.

Definition of “payroll costs.” At issue, observed the appeals court, is the CARES Act’s definition of “payroll costs,” the key criterion for determining the size of a borrower’s loan and for gauging how much of it the lender and federal government would forgive.

The CARES Act, in relevant part, defines “payroll costs” as “(aa) the sum of payments of any compensation with respect to employees that is a—(AA) salary, wage, commission, or similar compensation; (BB) payment of cash tip or equivalent; (CC) payment for vacation, parental, family, medical, or sick leave; (DD) allowance for dismissal or separation; (EE) payment required for the provisions of group health care or group life, disability, vision, or dental insurance benefits, including insurance premiums; (FF) payment of any retirement benefit; or (GG) payment of State or local tax assessed on the compensation of employees.” A second type of “payroll costs” under the Act is “(bb) the sum of payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation and that is in an amount that is not more than $100,000 on an annualized basis, as prorated for the [applicable] period.” 15 U.S.C. § 636(a)(36)(A).

Two types. The first type of payroll cost, the Sixth Circuit clarified, (aa), addresses “payments of any compensation” to “employees,” while the second type, (bb), addresses “payments of any compensation to or income of a sole proprietor or independent contractor that is a wage, commission, income, net earnings from self-employment, or similar compensation.”

Role of subsection (bb). “That,” according to the appeals court, “prompts this question: Does subsection (bb) allow only self-employed individuals—sole proprietors and independent contractors—to apply for a loan based on what they pay themselves? Or does it also allow businesses that pay them to count those payments as part of their ‘payroll’ when they apply for a loan?”

Text, context, and structure, the Sixth Circuit said, point to the former: “[S]ubsection (bb) allows sole proprietors and independent contractors to get a loan based on their own earnings, the closest thing to a ‘payroll’ they have, and does not allow other businesses to bolster their own loans based on how much they happen to pay self-employed individuals.”

Text. Starting with the text, the appeals court observed that subsection (bb)’s text applies only to “payments” of “compensation” that are “a wage, commission, income, net earnings from self-employment, or similar compensation.” “The terms naturally describe the money sole proprietors and independent contractors obtain from (or reinvest into) their businesses.” Adopting the perspective of a sole proprietor or independent contractor, the subsection’s terms “ask how much he pays himself. They do not extend to the payments made to sole proprietors and independent contractors by their customers. Subsection (bb), then, allows sole proprietors and independent contractors to determine their own payroll costs; it does not allow their customers to do so, too.”

Context. And what the terms of the statute suggest, context confirms, the Sixth Circuit added. “A number of the Act’s provisions show how subsections (aa) and (bb) work in tandem—the former for businesses that pay employees, the latter for sole proprietors and independent contractors who pay themselves.” “The payment universes do not overlap, as subsection (aa) covers businesses applying on their employees’ behalf, and subsection (bb) covers a single self-employed individual applying on his own behalf.”

“Never the twain shall meet.” “Never the twain shall meet,” the appeals court concluded. “Otherwise, a business could count not only its payments to employees under subsection (aa) but also its payments to sole proprietors and independent contractors under (bb), meaning that the Small Business Administration would guarantee the same loan twice—once in the business’s accounts payable and once in the vendor’s accounts receivable.” That possibility, the Sixth Circuit reasoned, is “a poor fit for a law with limited funds that elsewhere required applicants to certify that their loan applications were not ‘duplicative’ of other credits.” 15 U.S.C. § 636(a)(36)(G)(i)(IV), (a)(36)(A)(viii)(II)(dd), (ee).

Upshot. Text and context thus resolve the case, concluded the court. “Veltor had no employees, leaving it no expenses to claim under subsection (aa). And Veltor is not a sole proprietorship, and does not argue that it is an independent contractor, leaving it no expenses to claim under subsection (bb). Without paychecks to protect, Veltor was not entitled to have its loan forgiven. It must repay the loan.”

Concurrence. In her concurrence, Judge White said, “It is unclear to me what Congress intended with respect to payments to independent contractors.” Agreeing with the majority that the primary purpose of the CARES Act’s eligibility-considerations provision “is to ensure that a prospective borrower is a bona fide business that was in operation before the pandemic affected the national economy and that it had covered payroll costs, as evidenced by the payment of wages verified through payroll taxes paid,” Judge White took issue with the fact that, under the government’s interpretation of that provision, “a prospective borrower that employs only independent contractors and issues only 1099s has no payroll costs and thus is eligible for neither a loan nor loan forgiveness.” This interpretation, she said, was at odds with the fact that the CARES Act, at 15 U.S.C. § 636(a)(36)(F)(ii)(II), “require[s] lenders to consider such payments ‘[i]n evaluating the eligibility of a borrower’ for a loan.”

The case is No. 24-2025.

Judge: Sutton, J.

Attorneys: Lawrence D. Rosenberg (Jones Day) for Veltor Underground, LLC. Adam C. Jed, U.S. Department of Justice, for U.S. Small Business Administration.

Companies: Veltor Underground, LLC

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