Falsifying Employee Numbers on PPP Applications: Defense Options

Thanks for visiting Spodek Law Group – a second-generation law firm managed by Todd Spodek, with over 40 years of combined experience defending federal fraud cases. If you’re accused of lying about employee numbers on your PPP application, you’re facing serious federal charges. False statements to obtain a federally-backed loan can result in wire fraud charges carrying 20 years in prison, bank fraud charges carrying 30 years, and false statements charges carrying 5 years.

We defend PPP fraud cases involving employee count allegations. Our team includes former federal prosecutors who understand how these cases get built and where the weaknesses are. Employee count fraud is one of the most common PPP allegations, but it’s also one of the most defensible. The question is: did you intentionally lie, or did you make an honest mistake about who counted as an employee?

Why Employee Numbers Mattered for PPP Loans

Your PPP loan amount was calculated based on your average monthly payroll costs multiplied by 2.5. More employees and higher payroll meant a bigger loan. This created incentive to inflate employee counts.

The PPP application asked for the number of employees. Different versions asked it differently – some asked for average employees, some asked for employees as of a specific date, some asked for full-time equivalents. That confusion created legitimate misunderstandings.

Your loan amount was also based on payroll documentation – IRS forms 941 showing payroll taxes, or Schedule C showing net profit for sole proprietors. If your employee count didn’t match your payroll documentation, that’s a red flag. Prosecutors look for mismatches: you claimed 20 employees, but your 941 forms show payroll taxes for 8 employees.

The SBA and DOJ are now comparing PPP applications to tax records and payroll data systematically. Algorithms flag discrepancies. If your employee count is significantly higher than what your tax records support, your loan gets referred for investigation.

What Counts as Falsifying Employee Numbers

Claiming employees who don’t exist is clear fraud. You put “25 employees” on your application when your business had 3 employees. Or you had no employees at all – you’re a sole proprietor – but claimed 10 employees to increase your loan amount. That’s intentional fraud.

Counting family members who don’t actually work for the business is fraud. Your spouse, children, or relatives are on payroll for tax purposes but don’t do any work. You counted them as employees on your PPP application. Prosecutors will interview those people, check if they actually worked, review their work product. If they didn’t really work, you falsified your employee count.

Including independent contractors in your employee count is a gray area. Some business owners counted 1099 contractors as employees. That’s generally wrong – contractors aren’t employees for PPP purposes. But the guidance was confusing, especially early on. Whether counting contractors is fraud depends on whether you had a good faith belief they counted.

Inflating full-time equivalents creates problems. The application asked for FTE – full-time equivalent employees. If you had 5 full-time employees and 6 part-time employees each working 20 hours per week, your FTE was probably 8 or 9 (depending on how you calculated it). If you put 11, you inflated the number. Whether that’s fraud or honest miscalculation depends on the specifics.

The Timing Question

Different PPP applications asked for employee count at different times. Some asked for employees as of February 15, 2020. Others asked for employees during a specific period. If you hired seasonal workers who weren’t employed on the snapshot date, should you count them? If you laid off workers in March 2020 due to COVID, do you count them in your February employee number?

We defended a client who ran a landscaping business. He had 15 employees in summer 2019, 4 employees in winter 2019, 12 employees in early 2020. His PPP application asked for average employees. He put 15 – the peak summer number. The SBA argued he should have used his average over the full year, which was closer to 10. Was listing 15 fraud or a reasonable interpretation of “average”?

We argued reasonable interpretation. The application was ambiguous, the guidance unclear, and his number reflected a legitimate calculation method. The SBA ultimately accepted our position and approved forgiveness with reduced amount based on the corrected calculation.

Defenses That Actually Work

Lack of intent is the strongest defense. Federal fraud charges require that you knowingly made false statements with intent to defraud. If you genuinely believed your employee count was correct, that’s not fraud.

Proving lack of intent requires evidence. Documentation showing how you calculated the number, what guidance you relied on, what questions you asked your accountant or lender. If you can produce contemporaneous records showing your thought process, that supports good faith.

One client kept detailed notes when completing his PPP application. He’d written down his employee count calculation: “12 full-time + 8 part-time (20 hrs/week) = 16 FTE per SBA formula”. His actual FTE should have been 14, but his calculation showed he tried to follow the formula correctly. He made a math error, not a fraudulent statement. We used those notes to negotiate a civil resolution without criminal charges.

Reliance on professional advice is a defense. If your accountant calculated your employee count and you relied on that calculation, you lacked fraudulent intent. You need documentation – emails with your accountant, worksheets they prepared, advice they gave you. Saying “my accountant did it” years later without proof doesn’t work.

Reasonable interpretation of ambiguous guidance supports good faith. The PPP rolled out fast. Guidance changed. Requirements shifted. If you interpreted an ambiguous term reasonably, even if your interpretation turned out to be wrong, that’s not fraud.

The SBA’s own approval can be a defense. If you disclosed your employee count and supporting documentation, and the SBA approved your loan, that suggests the information wasn’t fraudulent. This defense works best when you provided accurate supporting documents – if the documents were false, the SBA’s approval doesn’t help.

Materiality can be argued. If you claimed 12 employees instead of 10, and that difference didn’t affect your loan amount or eligibility, the false statement wasn’t material. Federal fraud requires that the false statement would influence a reasonable person’s decision. Minor discrepancies that didn’t affect the outcome may not be material.

How Prosecutors Prove You Lied

IRS Form 941 is primary evidence. This form reports payroll taxes quarterly and shows how many employees you had. If your 941 for Q1 2020 shows 8 employees, but your PPP application claimed 20, prosecutors have strong evidence you lied.

Your tax returns provide more evidence. If you claimed business deductions for payroll expenses, those amounts should correspond to your stated employee count. If you deducted $80,000 in payroll but claimed 15 employees making an average of $40,000 each, the math doesn’t work.

State unemployment filings show employee counts. Most states require businesses to report employee counts and wages for unemployment insurance purposes. Those reports are under penalty of perjury. If they contradict your PPP application, prosecutors will use them.

Interviews with alleged employees are devastating. If you claimed 10 employees, prosecutors will track those people down and interview them. If 3 of them say they never worked for you, or they worked but stopped in 2019, or they only worked a few hours per month, your employee count claim falls apart.

Bank records show payroll payments. Prosecutors trace your bank statements looking for evidence of payroll. If you claimed 10 employees but your bank records show payroll deposits to only 4 people, that’s a problem. If there are no payroll deposits at all, that’s a bigger problem.

Your forgiveness application creates additional evidence. When you applied for forgiveness, you submitted documentation supporting your use of funds – often including payroll records. If those records contradict your original application’s employee count, prosecutors will charge both the original fraud and the forgiveness fraud.

What to Do If You’re Accused

Don’t admit liability without talking to a lawyer. When the SBA audits you, they might phrase questions to get you to admit your employee count was wrong. “You didn’t really have 15 employees, did you?” Your instinct might be to explain or clarify. Don’t. Get legal advice first.

Gather your contemporaneous records. Find your calculation worksheets, emails with your accountant, notes about how you filled out the application. Documents created at the time of your application are much more valuable than documents created years later during the investigation.

Don’t create false documentation now to support your original claim. If you claimed 12 employees but actually had 8, creating fake W-2s or payroll records now makes everything worse. Prosecutors can prove when documents were created, and fabricating evidence is obstruction of justice – a separate federal crime.

Consider whether cooperation makes sense. In some cases, admitting you made an error and offering to repay excess funds prevents criminal prosecution. In other cases, admission of wrongdoing gives prosecutors evidence they didn’t have. The right strategy depends on your specific facts.

If investigators want to interview you, decline without a lawyer present. The FBI and SBA OIG are skilled interrogators. They’ll say they just want to clear things up, get your side of the story. They’re building a case. Anything you say can be used against you, and lying to federal agents is a separate crime under 18 U.S.C. § 1001.

At Spodek Law Group, we analyze each case carefully. How big is the discrepancy between your claimed employee count and your actual count? What documentation supports your number? What guidance were you following? Did you consult professionals? What do your tax records show?

Sometimes the best defense is proving the number was actually correct – your calculation method was valid even if unconventional. Sometimes it’s proving good faith mistake – you miscounted but didn’t intend to defraud. Sometimes it’s negotiating civil resolution before criminal charges are filed.

The Federal Charges You’re Facing

Wire fraud under 18 U.S.C. § 1343 is the most common charge. Submitting a PPP application with false employee numbers through the bank’s online portal constitutes wire fraud – using electronic communications to execute a fraud scheme. Each transmission can be a separate count. Wire fraud carries up to 20 years per count.

Bank fraud under 18 U.S.C. § 1344 applies when you defraud a financial institution. Your PPP loan came from a bank, even though the SBA guaranteed it. False statements to obtain the loan constitute bank fraud, carrying up to 30 years per count.

False statements under 18 U.S.C. § 1014 covers making false statements to influence a financial institution’s decision. Falsifying your employee count to increase your loan amount falls under this statute, carrying up to 30 years and a $1 million fine.

Conspiracy under 18 U.S.C. § 371 gets charged when multiple people were involved. If your accountant helped you inflate the employee count, if your spouse created fake payroll records, if an employee lied during interviews – those are conspiracy. Conspiracy carries up to 5 years but can be charged on top of the substantive fraud counts.

Sentencing depends on loss amount. The federal sentencing guidelines calculate loss as the amount you obtained through fraud. If you got a $100,000 loan based on 15 employees when you actually had 8, what’s the loss? Probably the difference between what you should have received and what you actually got – maybe $40,000. That loss amount drives your sentencing range.

Todd Spodek has defended federal fraud cases for years. He’s a second-generation criminal defense lawyer who understands how prosecutors evaluate employee count fraud cases. We’ve negotiated resolutions that avoided criminal charges, and we’ve successfully defended clients at trial.

If you’re accused of falsifying employee numbers on your PPP application, don’t wait. The SBA is systematically reviewing loans, comparing applications to tax records, and referring discrepancies for prosecution. Call Spodek Law Group for a confidential consultation. We’re available 24/7, and we handle federal cases nationwide. The sooner you get legal advice, the more options you have.