In order for an employee to count as a HUBZone resident for purposes of a specific HUBZone contract, the employee must reside in an officially designated HUBZone on the contract award date.

A recent decision of the U.S. Court of Federal Claims is a cautionary tale for HUBZone companies, which are responsible for ensuring that the 35% employee residency requirement is met on the award date.

The decision of the U.S. Court of Federal Claims in Dorado Services, Inc. v. United States, No. 16-945C (2016) involved an Air Force solicitation for municipal solid waste collection and disposal for installations at Joint Base San Antonio.  The solicitation was issued as a 100% set-aside for HUBZones.

After evaluating competitive proposals, the Air Force awarded the contract to Dorado Services, Inc. on October 29, 2015.  An unsuccessful offeror, GEO International Management, Inc., filed a HUBZone status protest with the SBA, challenging Dorado’s HUBZone eligibility.  GEO contended that Dorado could not have satisfied the HUBZone program’s employee residency requirement on the date of its offer or the date or on the October 29 award date.

To become certified in the HUBZone program, most companies must meet two primary criteria.  (The eligibility criteria vary for HUBZones owned by Indian tribes, Alaska Native Corporations, Native Hawaiian Organizations and Community Development Corporations.  Those separate rules are not relevant here).  First, the company’s principal office must be located in a HUBZone.  And second, at least 35 percent of the company’s employees must live in a HUBZone.

Importantly, these criteria (as well as the other HUBZone eligibility criteria) continue to apply after the company is certified as a HUBZone program participant.  In order to be eligible for a HUBZone set-aside contract, the company must meet all of the relevant eligibility criteria–including the 35% residency requirement–both on the date of its offer and the date of award.

In this case, Dorado contended that it had 82 employees and that 32 of those employees (or 36.5%) resided in a HUBZone on the date of award. However, after a great deal of internal back-and-forth, the SBA issued a determination finding that Dorado did not meet the 35% employee residency requirement on the date of award, for several reasons.

One of the SBA’s reasons concerned the status of eight employee, all of whom lived in a single census tract.  That tract had once been a “qualified census tract,” that is, an ordinary HUBZone.  On October 1, 2012, the tract became a “redesignated area.”  A redesignated area still qualifies as a HUBZone, but only for a three-year period of time.  The tract’s status expired on October 1, 2015–about a month before the award date.  The SBA determined that the eight employees who resided in this tract did not qualify as HUBZone residents on the date of award.

After exhausting its internal remedies with the SBA, Dorado filed a bid protest in the U.S. Court of Federal Claims, challenging the SBA’s HUBZone decision.  Dorado contended, in part, that the eight individuals should have been counted as HUBZone residents because SBA’s HUBZone maps contained conflicting information for the census tract where those residents lived.  Dorado pointed out that the maps stated that the tract was a “previously Qualified Census Tract . . . whose status is: Redesignated until October 1, 2015.”  However, even after October 1, 2015, the SBA maps continued to state “YES, this location is HUBZone qualified.”

The Court first determined that it has jurisdiction to consider a protest regarding the SBA’s decision of an awardee’s HUBZone status for a HUBZone set-aside contract.  Turning to the merits of the case, the court found that “SBA’s treatment of the  . . . eight individuals is of paramount importance in this case” because Dorado “cannot meet the 35% residency requirement if those eight individuals are not counted as HUBZone residents.”

The Court noted that the Department of Housing and Urban Development, not the SBA, determines which census tracts are “qualified.”  The SBA itself “does not have discretion when it comes to designating HUBZones.”  Thus, the Court wrote, “the text under the maps constitutes, at best, an unofficial characterization of the census tract; it has no bearing on whether that census tract is, in fact, a HUBZone.”

The Court then wrote that Dorado should have more carefully checked its employees’ HUBZone residency in relation to the Air Force contract award:

[T]he record fails to support Dorado’s apparent argument that it placed reliance on the text under the maps to its detriment.  As Dorado itself noted at oral argument, a contractor cannot predict in advance when an agency will decide to make an award.  So a contractor attempting to ensure in advance that it would comply with the 35% residency requirement would logically check on its employees’ residency status before submitting its offer and thereafter.  Had Dorado done so here (and assuming the maps included the same text at that time), then the text would have put Dorado on notice that the eight employees would no longer live in a HUBZone as of October 1, 2015.  This, in turn, would have given Dorado an opportunity to plan its hiring accordingly.

The Court found that the eight individuals in question did not live in a qualified HUBZone tract on the date of award, and entered judgment against Dorado.

The HUBZone program’s regulations can be confusing, and none more so than the 35% residency requirement.  The Dorado Services case demonstrates a very important principle that is often misunderstood by HUBZone contractors: it is not enough for a contractor to be HUBZone certified to qualify for a HUBZone set-aside contract; the contractor also must be in active compliance with all HUBZone eligibility requirements (including the 35% residency requirement) on the date of offer and the date of award.

The Court’s discussion also reflects a “best practice” for HUBZone contractors.  As the Court suggested, given that employees can move and that HUBZone tracts themselves can expire, it is important that HUBZone contractors take ownership of their eligibility by actively monitoring compliance with the 35% residency requirement and taking action to address any potential shortfalls–especially when a potential HUBZone contract award is pending.