A contractor successfully challenged an adverse size determination that found affiliation under the newly organized concern rule, by establishing that its president and chief executive officer was not a former key employee of its supposed affiliate.
In a recent size appeal decision, the SBA Office of Hearings and Appeals clarified the definition of “key employee” under the newly organized concern rule, by noting that such a former employee’s title was not conclusive—instead, to be a key employee, that person had to have influence or control over the operations of the business as a whole.
Size Appeal of Human Learning Systems, LLC, SBA No. SIZ-5769 (2016) involved an appeal challenging a size determination that found the contract awardee—Human Learning Systems (“HLS”)—to be “other than small” under the operative NAICS code. The underlying solicitation was issued by the Department of Labor, seeking the administration of a Jobs Corps Center in Tucson, Arizona. Serrato Corporation filed a size protest challenging HLS’s award, claiming that HLS was affiliated with various large businesses, including ResCare, Inc.
In response to Serrato’s protest, the SBA Area Office found HLS and ResCare to be affiliated under the newly organized concern rule. In essence, that rule is designed to prevent a large business from avoiding size standards by creating a spin-off firm to perform as a small business. To find affiliation based on the newly organized concern rule, four conditions need to be met:
- Former key employees of one concern organize the new concern;
- The individuals who formed the new concern will serve as its key employees;
- The new concern is in the same or a related industry as the other concern; and
- The new concern will be provided with contracts, financial or technical assistance, indemnification or bonding assistance, or facilities, by the other concern.
HLS’s president and chief executive officer—Benjie Williams—formerly worked as a Jobs Corps Center Director for ResCare. His résumé, moreover, said that he was responsible for oversight of four Jobs Corps Centers, and provided support to other Center Directors across the country. He also provided technical assistance and training to Center Directors, and participated in annual reviews for all centers. According to the Area Office, this work made Mr. Williams a key ResCare employee: “he obviously had significant influence and control of a Jobs Corps Center and later of Jobs Corps Operations.” Given Mr. Williams’ prior work for ResCare, and considering that the companies had worked together on previous procurements, the Area Office said that HLS and ResCare were affiliated by the newly organized concern rule.
HLS appealed the size determination, specifically challenging the Area Office’s determination that Mr. Williams was a key employee of ResCare. A key employee, the OHA noted, “is one who, because of his position in the concern, has a critical influence or substantive control over the operations or management of the concern.” Such influence or control must be over the operations of a concern as a whole—supervision over a relatively small portion of the company is not sufficient. “A key employee, then, is not merely an employee with a responsible position or a particular title. A key employee is one who actually has influence or control over the operations of the concern as a whole.”
Mr. Williams was not a key ResCare employee, according to HLS. Despite his “Vice President” title, Mr. Williams was not higher than the fifth tier of authority at ResCare. Mr. Williams was not in charge of any department at ResCare, nor did he supervise any employees. He had no authority to bind ResCare to any contracts, control its revenue, or make any substantive decisions.
OHA agreed that Mr. Williams was not a key ResCare employee. It noted that the segment of ResCare’s business relating to Jobs Corps Centers (under which Mr. Williams worked) amounted to roughly 8% of ResCare’s receipts. This small amount meant that Mr. Williams could not have influenced or controlled ResCare as a whole. And even within that business segment, Mr. Williams’ role was not controlling: though he “provided support” to Center Directors, he did not supervise them. Providing support “is not supervision,” according to OHA. Neither was Mr. Williams’ status as a Vice President evidence of control—“As a Vice President, Mr. Williams was outranked by at least six Senior Vice Presidents, four Executive Vice Presidents, the COO and eight other C-level officers, and the CEO.” Mr. Williams simply did not influence or control ResCare as a whole in a manner sufficient to find him a key employee.
The OHA held the Area Office clearly erred when it found HLS and ResCare to be affiliated under the newly organized concern rule.
As Human Learning Systems makes clear, the question of whether an employee is a “key employee” for affiliation purposes is fact-intensive. SBA will look beyond titles and examine the employee’s role in the organization, to determine whether that person had influence or control over the whole company’s operations.