Sixth Circuit Clarifies that Payments to Independent Contractors Do Not Constitute “Payroll Costs” under the CARES Act’s Paycheck Protection Program

1. Introduction

In Veltor Underground, LLC v. Small Business Administration, No. 24-2025, decided on 11 July 2025, the United States Court of Appeals for the Sixth Circuit addressed a question that has generated disparate positions among lenders, borrowers, and even some trial courts since the launch of the Paycheck Protection Program (“PPP”): may a business include the sums it pays independent contractors when calculating “payroll costs” for purposes of PPP loan sizing and forgiveness?

The plaintiff-appellant, Veltor Underground, LLC (“Veltor”), a Detroit-area construction drilling company, obtained a $125,000 PPP loan after representing that it had six “employees.” In fact, those six workers were independent contractors compensated by Forms 1099-MISC. The Small Business Administration (“SBA”) and Bank of America (the originating lender) refused to forgive the loan once the misclassification surfaced. Veltor sued the SBA, the SBA’s Administrator, and the Treasury Secretary, contending that contractor payments fall within the statutory definition of “payroll costs.” The district court ruled for the Government, and the Sixth Circuit has now affirmed.

Chief Judge Sutton authored the unanimous opinion, joined by Judges Gibbons and White, with Judge White writing a separate concurrence expressing “reservations” but ultimately agreeing with the result. The decision supplies the first published appellate authority squarely holding that only self-payments by sole proprietors or independent contractors qualify under 15 U.S.C. § 636(a)(36)(A)(viii)(I)(bb); payments by employers to independent contractors do not.

2. Summary of the Judgment

• The court interpreted the CARES Act’s bifurcated definition of “payroll costs.” Subparagraph (aa) covers compensation “with respect to employees,” while subparagraph (bb) covers compensation “to or income of a sole proprietor or independent contractor.”
• Applying textual canons, context, and statutory structure, the panel concluded that subparagraph (bb) is exclusively aimed at letting self-employed individuals obtain PPP relief for their own earnings; it was not intended to let hiring entities pad payroll by including vendor payments.
• Because Veltor had no W-2 employees and is not itself an independent contractor or sole proprietor, it had no paychecks to protect; therefore it was ineligible for forgiveness and must repay the loan.
• The concurrence agreed but underscored lingering ambiguities—chiefly why 15 U.S.C. § 636(a)(36)(F)(ii)(II) obliges lenders to verify that a borrower paid independent contractors if those payments never count as payroll costs. Ultimately, legislative acquiescence in the SBA’s contrary rule tipped the balance.

3. Analysis

3.1 Precedents Cited and Their Influence

• United States v. Silk, 331 U.S. 704 (1947) & NLRB v. United Insurance Co., 390 U.S. 254 (1968)
  Classic employee-versus-independent-contractor cases establishing the notion that contractors “operate their own independent businesses.” Sutton C.J. relied on these to reinforce that contractors’ remuneration is conceptually distinct from employee wages.
• Rutherford Food Corp. v. McComb, 331 U.S. 722 (1947)
  Quoted for the proposition that contractors rely on their own initiative to convert receipts into profits—supporting the idea that payments to contractors are not “wages.”
• NLRB v. Amber Delivery Service, Inc., 651 F.2d 57 (1st Cir. 1981) (Breyer, J.)
  Used to illustrate that contractors’ income depends on the spread between revenue and expenses, unlike wages.
• Statutory-interpretation authorities: Justice Scalia & Bryan Garner’s Reading Law; Epic Systems Corp. v. Lewis, 584 U.S. 497 (2018); Pulsifer v. United States, 601 U.S. 124 (2024); Harrington v. Purdue Pharma, 603 U.S. 204 (2024).
  These guided the court’s deployment of noscitur a sociis, whole-text, and surplusage canons.

3.2 Legal Reasoning

1. Textual Parsing
   The court dissected subparagraph (bb)’s list—wage, commission, income, net earnings from self-employment, or similar compensation—and reasoned that each noun best describes payments a self-employed person makes to himself. By contrast, a business never records invoices to contractors as “wages” or “commissions.”
2. Contextual Cross-References
   a) Borrower classes (§ 636(a)(36)(D)): PPP eligibility separately enumerates (i) businesses with <500 employees and (ii) sole proprietors/independent contractors. The dual definitions of payroll costs mirror that bifurcation.
   b) Loan-forgiveness metrics (§ 636m(d)): Congress penalised cuts to employees but remained silent about contractors—illogical if contractor pay could be part of payroll.
   c) Territorial exclusion (§ 636(a)(36)(A)(viii)(II)(cc)): Employee wages abroad are excluded; contractor payments abroad are not—again signalling contractors’ pay was never in employers’ payroll bucket.
3. Structural & Practical Considerations
   Allowing both the hiring entity and the contractor to claim the same dollars would yield duplicative guarantees and forgiveness. No statutory mechanism prevents that or resolves priority conflicts. Congress elsewhere demanded certifications against duplication, but only as to the borrower’s own applications, not between unrelated entities.
4. Rejected Arguments
   • Veltor’s reliance on the conjunction “and” joining (aa) and (bb) was dismissed as grammatically irrelevant to scope.
   • Legislative press releases were afforded negligible weight under standard separation-of-powers doctrine.

3.3 Impact of the Decision

• Binding Precedent in the Sixth Circuit (KY, MI, OH, TN): District courts within the circuit must now exclude contractor disbursements from employer payroll calculations in PPP disputes.
• National Persuasive Value: Only a handful of district courts have addressed the issue. This published appellate opinion will likely guide other circuits and shape settlement negotiations.
• Worker-Classification Litigation: By reaffirming the legal demarcation between employees and contractors, the ruling may indirectly influence FLSA, ERISA, and tax cases where parties cite statutory definitions by analogy.
• Government Recovery Actions: The decision empowers DOJ and SBA’s Office of Inspector General to demand repayment where employers relied on contractor costs, potentially triggering False Claims Act exposure.
• Emergency-Statute Drafting Lessons: Congress may refine future relief bills to specify whether gig-economy payments are in or out of payroll, or delegate clearer authority to administering agencies.

4. Complex Concepts Simplified

• Employee vs. Independent Contractor: Employees receive W-2 wages, work under the employer’s control, and have taxes withheld. Independent contractors issue invoices, receive 1099 forms, and control how the work is performed.
• “Payroll Costs” Under PPP: A statutory term that (i) for employers equals W-2 compensation plus certain benefits and taxes; (ii) for self-employed individuals equals their own earnings, capped at $100,000 annualized.
• Canons of Construction: Noscitur a sociis—a word is known by its companions; Whole-text canon—statutory provisions must harmonize; Surplusage canon—interpretations should avoid making words redundant.
• Duplicative Loan Concern: If both the hiring business and the contractor claimed the same dollars, the SBA could end up forgiving two loans for one economic activity—contrary to Congress’s intent to stretch limited funds.

5. Conclusion

Veltor Underground crystallises a critical interpretive fault line in the CARES Act: while Congress wished to protect both employees and the self-employed, it did so through separate conduits, not simultaneously through employer loans. The Sixth Circuit’s careful textual, contextual, and structural analysis forecloses an expansive reading that would have permitted employers to sweep vendor payments into payroll calculations. Although the concurrence highlights statutory ambiguities—especially the puzzling lender inquiry into 1099 payments—legislative silence in subsequent amendments and the practical necessity of avoiding double recovery solidified the outcome.

Practitioners should note that misclassifying contractors as employees on PPP forms invites enforcement actions and repayment obligations. Future relief statutes will likely draw on this opinion when deciding whether, and how, to integrate the modern gig economy into payroll-based support programs.