When it comes to the 8(a) program, you might want to quit your day job.
The 8(a) Business Development Program, similar to other SBA socioeconomic programs such as the service-disabled veteran-owned small business program, requires the disadvantaged individual owner to work full-time at the business during normal business hours of similar firms. If an owner has a second job outside the main company, that can create problems, as it did in a recent OHA decision.
The decision reviewed an SBA determination to terminate Sonoran Construction Group from the 8(a) program. Sonoran, through owner Mr. Lez McKenzie, was admitted to the program in 2016. As part of being admitted, Sonoran had to maintain compliance with the 8(a) program rules. One of the rules is that a disadvantaged individual manager “must devote full-time to the business during the normal working hours of firms in the same or similar line of business.” 13 CFR § 124.106. The owner is also supposed to get pre-approval from SBA for outside employment.
In 2019, Sonoran submitted its annual review with documentation. The review included tax returns that showed earnings from a bank. The report also stated that Sonoran’s owner was working as an “Equipment Manager” for the bank “from 7:00am to 3:00pm Monday through Friday, 40 hours per week.”
Sonoran asserted that the bank employment didn’t conflict with managing the 8(a) company because Mr. McKenzie can work “from 4:00pm to midnight, if necessary, conducting all business-related activities. [Sonoran] is now at an early stage in its business, has only one project awarded to date, and does not require a full 40-hour commitment to effectively manage all its current activities.”
SBA asked Sonoran to submit a formal request for approval of outside employment to “include the nature and anticipated duration of the outside employment, Petitioner’s hours of operation, Mr. McKenzie’s specific time commitment to the firm, and his duties in the company.”
Sonoran responded that Mr. McKenzie’s bank position “is full-time Monday through Friday, 8:00 A.M. to 4:00 P.M. MST.” Since Sonoran can’t pay his salary, “Mr. McKenzie has no other options to acquire the financial means to meet his financial obligations. Further, Mr. McKenzie has no intention of resigning his secondary position until Petitioner can pay him and his employee a living wage.” In addition, Sonoran’s “regular hours of operation are Monday through Friday, 8:00am to 5:00pm MST” and Mr. McKenzie works there from 4:00pm to 11:00pm MST while a project manager “handles day-to-day operations, marketing, client visits, etc.”
“SBA concluded that it could not determine that Mr. McKenzie, the individual upon whom Petitioner’s eligibility is based, is able to manage and control the day-to-day operations of the firm and work full-time for BMO Harris during normal working hours.” The outside employment hours directly conflicted with management of Sonoran and could hinder Sonoran from meeting its business plan objectives. SBA indicated it intended to terminate Sonoran from the 8(a) program.
SBA terminated Sonoran’s participation in the 8(a) program for failure to maintain full-time day-to-day management and control, noting that an 8(a) company must get prior written approval for outside employment, that Mr. McKenzie had not gotten approval, that he had failed to disclose the employment at all, and that Sonoran had not generated any revenue in 2018.
Sonoran appealed, arguing, in part, that it was not aware it had to seek approval for outside employment. In addition, because it is a construction company Mr. McKenzie could manage the business remotely and he would make all major decisions.
OHA denied the appeal. Absent other evidence, “devoting 40 hours of work per week qualify as ‘full-time,’ and the hours of 8:00am or 9:00am to 4:00pm or 5:00pm, Monday through Friday, may be considered “’normal working hours.’” What can count as other evidence to refute the normal full-time hours? Based on OHA precedent, an 8(a) company must demonstrate the manager can work full-time at the 8(a) company and still maintain outside employment, generally through showing a history of successfully managing the company in the past while working another job.
Here, Sonoran’s working hours, as submitted by the company itself, directly conflicted with the time the owner was employed at the bank. The fact that Sonoran earned no business revenue during the years when Mr. McKenzie worked at the bank demonstrated he wasn’t devoting full time hours to Sonoran.
The takeaway here is that the full-time devotion requirement of the 8(a) program can be quite strict. While outside employment may be allowed in certain situations, the 8(a) company must retain detailed records demonstrating the disadvantaged manager of the business is working full-time at the business. Outside employment at odd hours (e.g. late night or on the weekends) is more likely to be allowed. Plus, pre-approval of outside employment may be required as part of the 8(a) participation agreement.
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