Many if not most independent schools in the United States are non-profit organizations and rely primarily on tuition dollars and community fundraising efforts—and not financing from the federal government—in order to balance the books. One advantage to avoiding federal financial assistance is also avoiding the compliance obligations that accompany grants from the federal government. Concern has been raised in the independent school community that receipt of a loan from the Small Business Administration under the new Payroll Protection Program (“PPP”) or as an Economic Injury Disaster Loan (“EIDL,” a $10,000 grant) would be considered “federal financial assistance” and thus trigger compliance obligations not otherwise imposed on independent schools.
An SBA loan or grant under either of these programs is authorized by the CARES Act, is open to non-profit organizations (a change from the usual SBA rules), and involves funneling federal dollars to local banks, which in turn administer the loans. Is a grant from the SBA considered “federal financial assistance”? On its face, the answer is yes. From the SBA website: “The Small Business Administration works with different organizations to provide federal financial assistance (grants) community resources for certain small businesses” (emphasis added). https://www.sba.gov/funding-programs/grants Further, pursuant to the regulations governing the SBA, “[t]he term Federal financial assistance includes: (1) Grants and loans of Federal funds…” 13 CFR § 112.2(b).
For now, we must assume that participation in the PPP and accepting an EIDL grant will impose additional compliance obligations on independent schools. On April 3, 2020, the SBA issued an interim final rule covering the Payroll Protection Program. There is no reference to “federal financial assistance” in the interim final rule (which is 31 pages long and describes how the PPP will operate). The rule also states that the “SBA may provide further guidance, if needed, through SBA notices and a program guide, which will be posted on the SBA’s website, www.sba.gov.” Thus, the SBA may clarify whether a PPP loan is considered federal financial assistance for independent schools or other non-profit organizations on the receiving end of the loan, but so far, the SBA has not addressed that topic.
In order to obtain an SBA loan under the Payroll Protection Program, borrowers are required to complete a Borrower Application Form, which requires borrowers to certify the following:
- I will comply, whenever applicable, with the civil rights and other limitations in this form.
- To the extent feasible, I will purchase only American-made equipment and products.
- Occupational Safety and Health Act (15 U.S.C. 651 et seq.) – The Occupational Safety and Health Administration (OSHA) can require businesses to modify facilities and procedures to protect employees. Businesses that do not comply may be fined, forced to cease operations, or prevented from starting operations. Signing this form is certification that the applicant, to the best of its knowledge, is in compliance with the applicable OSHA requirements, and will remain in compliance during the life of the loan.
- Civil Rights (13 C.F.R. 112, 113, 117) – All businesses receiving SBA financial assistance must agree not to discriminate in any business practice, including employment practices and services to the public on the basis of categories cited in 13 C.F.R., Parts 112, 113, and 117 of SBA Regulations. All borrowers must display the "Equal Employment Opportunity Poster" prescribed by SBA.
If a PPP loan is considered federal financial assistance, the good news is that these requirements are significantly pared down from those included in the Borrowers Information Form 7(a), required of businesses in the normal course when applying for a loan from the SBA. Independent schools should already be in compliance with civil rights and OSHA laws. The mention of purchasing only American-made equipment and products is phrased as a request. Independent schools should also already be complying with the Americans with Disabilities Act (the “ADA”) (unless they are a religious school) and U.S. and state Department of Labor wage and hour laws, even though these laws are not specifically mentioned in the Borrower’s Application Form; and because the funding source for the PPP and EIDL is not the U.S. Department of Education, the Family Educational and Privacy Rights Act (FERPA) will not apply.
The bad news is that Title IX of the Education Amendments Act of 1972 will likely apply, given that the text of the law plainly states, “No person in the United States shall, on the basis of sex, be excluded from participation in, be denied the benefits of, or be subjected to discrimination under any education program or activity receiving Federal financial assistance” (emphasis added). Even for schools that have adopted robust policies addressing sexual harassment and sexual misconduct (which Title IX also encompasses), there will be additional requirements imposed by the federal law, including designating a Title IX Coordinator.
The Department of Education under Secretary DeVos is poised to issue its final rule amending many of the guidelines issued by the Obama administration under Title IX, and until the new guidance is issued, compliance is confusing. Many are anticipating rules that will require students to file formal, written complaints of harassment or sexual misconduct (as opposed to confiding in someone at the health center) and permit cross-examination of students reporting sexual misconduct. Unfortunately for independent schools, it is hard to argue that this new guidance will not apply, even if—another challenge—the guidance is geared more toward institutions of higher education and thus feels like a poor fit for the K-12 environment.
Independent schools should also note that Section 504 of the Rehabilitation Act of 1973 will apply (and unlike the ADA, Section 504 also applies to religious schools). Section 504 has requirements similar to the ADA in terms of accommodating students and employees with disabilities, but includes different procedural safeguards and also requires naming a coordinator in charge of such services.
A potential silver lining: schools would only have to comply with these additional obligations imposed by the loan for the duration of the loan, which could be as brief as eight weeks or significantly longer (potentially two years), if the loan is not forgiven in its entirety; though schools should understand that it may be challenging to dial back some of the new protocols instituted once the loan is either forgiven or paid off, as community expectations may change with respect to any new policies instituted.
Finally, we understand that both NAIS and NBOA are advocating directly with the relevant government agencies in order to carve out an exemption for independent schools, such that a loan under both the PPP and the $10,000 EIDL will not be considered federal financial assistance. As of this writing, however, we recommend that schools proceed with the understanding that receiving funds through these new COVID-19 federal resources will trigger more compliance.