Labor & Employment Law Daily Wrap Up, FEDERAL LEGISLATION—5th Cir.: CARES Act’s definition of ‘payroll costs’ does not include payments to contractors, (Jul 16, 2025)

By Jason Albright, J.D.

The Act aimed to protect payrolls by creating the Paycheck Protection Program.

The COVID pandemic-era CARES Act’s definition of “payroll costs” does not entitle businesses to count money paid to independent contractors, the Sixth Circuit held. Affirming the same conclusion of a federal district court in a case in which an oil and gas business applied for and received a PPP loan to cover “employees” who were independent contractors, the federal appeals court found that, on the front end, the company improperly counted its payments to independent contractors and borrowed too much money, but “[c]ome forgiveness season, only the loans based on genuine payroll costs shall be redeemed” (Seville Inductries, L.L.C. v. United States Small Business Administration, No. 24-30170 (5th Cir. July 15, 2025)).

Oil and gas business. Seville Industries, LLC is based in Abbeville, Louisiana. It provides “products, services, and work crews to businesses operating in the oil and gas sector.” The company employed 58 W-2 employees and 111 independent contractors when the COVID-19 pandemic started.

PPP loan application. In April 2020, Seville applied for a PPP loan from Loan Source Inc., a private lender approved by the Small Business Administration (SBA). On its application, Seville stated that it had 53 employees and an average monthly payroll of $1,271,193. This apparently yielded a loan amount of $2,578,351, according to the record.

Payroll calculation included contractors. The payroll calculation on Seville’s application included compensation it paid to independent contractors, whom it did not count among its “employees.” Two days after Seville applied, the SBA approved the application, and on April 17, Loan Source disbursed the money to Seville.

Application for loan forgiveness. Just over a year later, in August 2021, Seville applied for full forgive-ness of its PPP loan. The SBA notified Loan Source that it was reviewing Seville’s PPP loan three days later because the maximum loan for 53 employees should have been $1,104,149—about $1.5 million less than Seville had received.

SBA’s request for copy of application. The SBA requested a copy of Seville’s loan application, along with supporting documentation and analysis. That September, the SBA requested additional information. After receiving that information in February 2022, the SBA notified Loan Source that it was considering a full denial of Seville’s PPP loan forgiveness application because Seville included payments to independent contractors in its calculation of payroll costs.

Final loan review decision. Then, in March 28, the SBA issued to Seville its PPP Final SBA Loan Review Decision. The agency determined that Seville was entitled only to partial forgiveness for the amount of the PPP loan based on money paid to employees rather than to independent contractors as well. The next day, the SBA reimbursed Seville $687,508.64 in principal and $13,392.29 in interest.

Denial of administrative appeal. Seville appealed the SBA’s decision to the SBA’s Office of Hearings and Appeals (OHA), which denied the appeal. Seville then petitioned for reconsideration, which the OHA also denied.

Appeals in federal court. In December 2022, Seville timely appealed the SBA’s final agency decision to a federal district court in Louisiana. See 13 C.F.R. § 134.1211(g). The district court granted summary judgment to the SBA, and Seville then timely appealed to the Fifth Circuit.

Issue. The question in the case, the appeals court found, was whether the CARES Act’s reference to “payroll costs,” 15 U.S.C. § 636(a)(36)(A)(viii), allowed Seville to borrow a federally guaranteed loan for $1.5 million at 1 percent interest on the basis of money it paid to the independent contractors, “spend not a single cent of it on keeping independent contractors working during the pandemic,” and then have those loans forgiven on the back end.

The answer, the Fifth Circuit found, was no.

Statute’s text and structure. Considering first the CARES ACT’s text and structure, the appeals court found that 15 U.S.C. § 636(a)(36)(A)(viii), Subsection (bb) defines payroll costs as the money earned by independent contractors or sole proprietors, not as the money paid to them by businesses.

This reading, according to the Fifth Circuit, comports with the rest of the CARES Act’s statutory scheme. First, the court noted, the statute excludes from payroll costs “compensation of an employee whose principal place of residence is outside of the United States.” 15 U.S.C. § 636(a)(36)(A)(viii)(II)(cc). But it does not make the same exclusion for payments to sole proprietors and independent contractors. “Though not impossible, it would be freakish for the statute—which was aimed at ‘help[ing] small businesses keep workers employed during the crisis,’” to make such an exclusion for foreign resident employees but to include foreign resident independent contractors. “The commonsense reading,” the appeals court concluded, “is that the statute does not exclude payments to foreign resident independent contractors because it does not contemplate including payments to any independent contractors at all.”

Based on payroll costs. Second, the Fifth Circuit’s reading “also squares with the conditions of the loan forgiveness program.” The amount of forgiveness to which a PPP borrower is entitled is based on its payroll costs. See 15 U.S.C. § 636m(b)(1). The forgiveness provision incentivized businesses to use at least some PPP money to keep their employees on the payroll, as opposed to using it all on mortgage interest or rent.

To do so, the statute proportionately limits the amount of loan forgiveness available to a business based on its “reduction in number of employees,” 15 U.S.C. § § 636m(d)(2), or cuts it made to the “salary or wages of any employee” beyond 25 percent. Id. § 636m(d)(3)(A). In other words, if small businesses fired too many employees or reduced wages during the pandemic, then the amount of their PPP loans eligible for forgiveness was reduced.

The statute, however, provides no corresponding limitation for cuts to independent contractors. Again, the court found, “Seville has no explanation for this incongruity. It would make no sense for the statute to provide PPP loans at the outset based on a business’s outflows to independent contractors, but then give full forgiveness on that borrowed money even if the business fired every single independent contractor.” And, in fact, “that is what happened here.”

Front end and back end. “A careful, commonsense reading of the CARES Act,” the Fifth Circuit concluded, “shows that Congress’s design for the PPP was clear: ‘Payroll costs’ do not include payments that small businesses made to independent contractors.” Instead, the statute made low-interest loans available during the pandemic for small businesses to maintain their payrolls and for independent contractors to make up lost income as well. Thus, on the front end, Seville improperly counted its payments to independent contractors and borrowed too much money. “Come forgiveness season,” said the appeals court, “only the loans based on genuine payroll costs shall be redeemed.”

The case is No. 24-30170.

Judge: Oldham, A.

Attorneys: Thomas F. Allen, Jr. (Frost Brown Todd) for Seville Industries, L.L.C. Adam Craig Jed, U.S. Department of Justice, for U.S. Small Business Administration.

Companies: Seville Industries, LLC; U.S. Small Business Administration

Cases: CoverageLiability EmployeeStatus Covid19 FederalLegislation FederalRegulations AgencyNews LouisianaNews MississippiNews TexasNews