PPP “Payroll Costs” Exclude a Business’s Payments to Independent Contractors Under CARES Act § 636(a)(36)(A)(viii)

I. Introduction

Essintial Enterprise Solutions, LLC v. SBA (3d Cir. Feb. 3, 2026) addresses a recurring Paycheck Protection Program (PPP) forgiveness dispute: whether a company’s payments to independent contractors (reported on Forms 1099) qualify as “payroll costs” under the CARES Act.

The borrower, Essintial Enterprise Solutions, LLC (“Essintial”), received a roughly $7 million PPP loan. When it sought full forgiveness, the Small Business Administration (SBA) concluded that Essintial’s loan amount and forgiveness request improperly included “1099 Contractor costs” as “payroll costs,” and therefore forgave only part of the loan. Essintial sued under the Administrative Procedure Act (APA), and the district court ruled for Essintial on the statutory question. The Third Circuit reversed, aligning with other circuits.

Key issue: Proper interpretation of 15 U.S.C. § 636(a)(36)(A)(viii)(I)—whether “payroll costs” includes payments by a business to independent contractors, or instead treats independent contractors as separate eligible borrowers whose “payroll costs” are the amounts they pay themselves (or their self-employment income).

II. Summary of the Opinion

The Third Circuit held that the CARES Act’s definition of “payroll costs” provides two alternative definitions: subsection (aa) for businesses with employees, and subsection (bb) for a sole proprietor or independent contractor. Under the “single, best meaning” of the statute’s text and structure, Essintial—an employer—cannot treat its payments to independent contractors as “payroll costs.”

Because the SBA’s partial forgiveness decision followed the statute’s correct meaning, it was not “arbitrary, capricious, or contrary to law” under the APA. The court therefore reversed and remanded.

III. Analysis

A. Precedents Cited

  • Loper Bright Enters. v. Raimondo, 603 U.S. 369 (2024)
    Role: The opinion relies on Loper Bright’s instruction that courts must identify a statute’s “single, best meaning,” and it criticizes the district court’s residual Chevron-era focus on whether the statute is “ambiguous.” The Third Circuit frames statutory interpretation as an independent judicial duty rather than a gateway to deference.
  • Chevron U.S.A. Inc. v. Natural Resources Defense Council, Inc., 467 U.S. 837 (1984)
    Role: Mentioned only to emphasize it has been overruled by Loper Bright Enters. v. Raimondo; the court rejects “step one” ambiguity analysis as a framing device.
  • Seville Indus., L.L.C. v. SBA, 144 F.4th 740 (5th Cir. 2025)
    Role: Substantive backbone. The Third Circuit repeatedly adopts Seville’s structural reading: subsection (bb) describes the earnings of independent contractors/sole proprietors, not payments made to them by other businesses, and it flags “freakish” consequences (e.g., foreign-employee exclusion but not foreign-contractor exclusion) under the contrary view.
  • Veltor Underground, LLC v. SBA, 143 F.4th 727 (6th Cir. 2025)
    Role: Another principal comparator. The Third Circuit follows Veltor’s grammatical and contextual analysis that the “payment universes do not overlap,” and that subsection (bb) “adopt[s] the perspective of a sole proprietor or independent contractor” calculating what they pay themselves/earn, rather than what a hiring business pays them.
  • Seville Indus. LLC v. SBA, 2024 WL 697592 (W.D. La. 2024)
    Role: Identified as a district court decision reaching the opposite conclusion (like the Middle District of Pennsylvania), illustrating the split the Third Circuit resolves against Essintial.
  • Essintial Enter. Sols., LLC v. SBA, 2024 WL 5248242 (M.D. Pa. 2024)
    Role: The appealed decision. The Third Circuit critiques its methodology (overemphasis on ambiguity; reluctance to read beyond the definitional subsection) and its conclusion on “payroll costs.”
  • Star Athletica, L.L.C. v. Varsity Brands, Inc., 580 U.S. 405 (2017)
    Role: Used to justify reading the definition in the context of the entire statute; interpretation of uncertain language is not confined to a single sentence.
  • United States v. Safehouse, 985 F.3d 225 (3d Cir. 2021); Travers v. Fed. Express Corp., 8 F.4th 198 (3d Cir. 2021); Wis. Cent. Ltd v. United States, 585 U.S. 274 (2018); Perrin v. United States, 444 U.S. 37 (1979); United States v. Johnman, 948 F.3d 612 (3d Cir. 2020); Lopez v. AG, 49 F.4th 231 (3d Cir. 2022)
    Role: These authorities supply the opinion’s interpretive commitments: statutory meaning fixed at enactment; primacy of the enacted text; ordinary public meaning; grammar and usage.
  • United States v. Palomares, 52 F.4th 640 (5th Cir. 2022) (Oldham, J., concurring); United States v. Pace, 48 F.4th 741 (7th Cir. 2022)
    Role: Cited for grammar and the danger of “hyper-literalist” parsing of “and” without answering “conjunctive of what?”
  • Reese Bros. v. United States, 447 F.3d 229 (3d Cir. 2006); Levins v. Healthcare Revenue Recovery Grp. LLC, 902 F.3d 274 (3d Cir. 2018); Bartenwerfer v. Buckley, 598 U.S. 69 (2023)
    Role: Canonical tools: “and” is presumptively conjunctive (Reese Bros.); textual differences are presumed meaningful (Levins); and expressio unius is a non-absolute aid and requires careful fit (Bartenwerfer).
  • OPM v. Richmond, 496 U.S. 414 (1990); Monongahela Valley Hosp., Inc. v. Sullivan, 945 F.2d 576 (3d Cir. 1991)
    Role: Limits on equitable arguments where public money is at stake; reinforces why “bait-and-switch” framing cannot override statutory constraints absent a proper estoppel theory.
  • Axalta Coating Sys. LLC v. FAA, 144 F.4th 467 (3d Cir. 2025); Jorjani v. N.J. Inst. of Tech., 151 F.4th 135 (3d Cir. 2025)
    Role: Standards of review—de novo statutory interpretation within APA review and in summary judgment posture.

B. Legal Reasoning

  1. Two alternative definitions, not a combined arithmetic formula.
    The court centers on the structure of 15 U.S.C. § 636(a)(36)(A)(viii)(I): “payroll costs … means— (aa) …; and (bb) ….” Each subsection separately begins with “the sum of payments,” signaling that the “sum” is performed within the applicable subsection rather than across both. Congress could have drafted a single global “sum of” covering both but did not.
  2. Subsection (bb) is from the contractor’s perspective—earnings/self-compensation.
    The court gives decisive weight to the neighboring terms in subsection (bb): “income” and “net earnings from self-employment.” Those concepts naturally describe what an independent contractor receives/earns, not what a hiring firm pays out. The overlap words “wage” and “commission” are resolved by context: next to “salary” in subsection (aa), they fit employee pay; next to “income” and “net earnings,” they fit a self-employed person’s earnings characterization, not a purchaser-of-services relationship.
  3. Statutory exclusions and “whole statute” context reinforce the reading.
    The definition’s exclusion for “any compensation of an employee whose principal place of residence is outside of the United States” fits subsection (aa) but has no parallel for contractors. The court finds it implausible Congress would exclude foreign employees yet (silently) allow foreign independent contractors to be counted by employers. Additional CARES Act provisions about forgiveness reductions tied to retaining “employees” (and maintaining their “salary or wages”) likewise align with a program designed around employee retention, not preserving contractor spend.
  4. Anti-duplication rationale.
    The court highlights an “absurd scenario” avoided by the SBA’s interpretation: both the business and the independent contractors it pays could obtain PPP funds based on the same dollars. The opinion notes that the statutory certification about “duplicative” loans would not necessarily prevent this because it focused on the borrower’s own duplicative loans, not third-party contractors’ loans.
  5. Rejection of Essintial’s “and” argument as incomplete.
    While “and” is conjunctive, the court insists the operative question is what is being joined: two alternative borrower-specific definitions rather than two additive categories for one borrower. Essintial’s “arithmetical” construction (sum of (aa) plus (bb)) fails because it requires relocating statutory language (“the sum of”) to a place Congress did not put it.
  6. Eligibility provisions do not dictate loan-amount/forgiveness definitions.
    Essintial pointed to eligibility text directing lenders to consider whether the borrower paid “employees” or “independent contractors, as reported on a Form 1099-MISC.” The court treats that as serving a different function (screening legitimacy/fraud concerns via tax records), not as redefining “payroll costs” for loan sizing and forgiveness.
  7. Equity and “bait-and-switch” framing cannot override the statute.
    The court emphasizes Essintial did not plead equitable estoppel, and in any event estoppel against the government is heavily constrained where payment of public money is sought. Factually, the record also undercut “bait-and-switch”: the SBA’s Interim Final Rule guidance was available before the loan issued, and the application itself differentiated between employees and independent contractors/sole proprietors in a way consistent with the SBA’s view.

C. Impact

  • Third Circuit alignment and increased uniformity.
    By joining Seville Indus., L.L.C. v. SBA and Veltor Underground, LLC v. SBA, the Third Circuit solidifies an emerging majority rule: employers cannot treat contractor payments as PPP “payroll costs” under the CARES Act definition.
  • Administrative law framing after Loper Bright.
    The decision is also a methodological marker: courts should not center the inquiry on whether text is “ambiguous,” but should determine the statute’s “single, best meaning,” using grammar, structure, and whole-act context.
  • Practical consequences for PPP audits and repayment litigation.
    The reasoning supports SBA disallowances where borrowers inflated PPP loan amounts or forgiveness by including 1099 contractor costs, and it provides a roadmap for resisting equitable narratives that attempt to substitute perceived unfairness for statutory entitlement.
  • Program-design signal for future emergency lending statutes.
    The opinion underscores a legislative design principle: when a statute makes both employers and independent contractors separately eligible for aid, courts will be wary of readings that permit the same economic stream to be counted twice.

IV. Complex Concepts Simplified

“Payroll costs” with two subsections (aa) and (bb)
Think of the statute as providing different “payroll cost calculators” depending on who the borrower is: an employer uses the employee-focused list in (aa); a self-employed person uses the self-employment/earnings-focused list in (bb). The employer does not get to use both calculators for the same loan.
APA “arbitrary and capricious” review (5 U.S.C. § 706(2)(A))
A court sets aside agency action if it violates the law or lacks reasoned decisionmaking. Here, because the SBA’s reading matched the court’s interpretation of the CARES Act, the SBA’s partial forgiveness decision was not “contrary to law.”
Post-Chevron statutory interpretation
After Loper Bright Enters. v. Raimondo, courts do not treat “ambiguity” as a trigger to defer to agency interpretations. Courts must instead determine the statute’s best meaning using traditional interpretive tools.
“Expressio unius”
This canon suggests that listing some exclusions may imply others are not excluded. The Third Circuit found it a poor fit here because the statutory structure already suggested contractor payments were not included in the first place—so there was “nothing to exclude.”
“Surplusage” (avoid making words meaningless)
Essintial argued that mentioning 1099 contractors in eligibility provisions would be meaningless if contractor payments were not “payroll costs.” The court answered that eligibility screening and loan-size/forgiveness calculations address different problems, so the eligibility reference still does work (fraud screening).

V. Conclusion

The Third Circuit’s central contribution is a clear rule: under the CARES Act PPP definition, “payroll costs” for an employer-borrower do not include the employer’s payments to independent contractors. Subsection (aa) covers employee compensation paid by employers; subsection (bb) covers a sole proprietor’s or independent contractor’s own earnings/self-compensation.

Methodologically, the opinion reinforces the post-Loper Bright Enters. v. Raimondo approach: courts must decide statutory meaning directly—without an “ambiguity hunt”—and must read disputed text in light of grammar, structure, and whole-statute design, especially where competing readings would create duplication or mismatch with the statute’s operative mechanisms.