One of the pillars of the SBA’s HUBZone program is the location of a company’s employees. In August of this year, SBA released an Information Notice emphasizing important points about where employees reside, and HUBZone entity’s efforts to employ the necessary amount of employees residing in HUBZone areas. While SBA’s HUBZone policies don’t have the weight of law as compared to a regulation, the HUBZone office will generally enforce this sort of guidance quite strictly. So don’t think it’s just a suggestion. As these are crucial elements of eligibility, it is important for all HUBZone businesses to be aware and reminded of SBA’s expectations.
We have covered the basics of how to qualify for the HUBZone program before. I highly recommend you read that article, along with this one (and our other HUBZone articles), if you are interested in the HUBZone program. As you may notice, one of the unique aspects of the HUBZone program is the emphasis on where employees reside.
To qualify to participate in the HUBZone program (among many other items) a business must have at least 35% of its employees residing within a HUBZone. Participants must also certify that they will attempt to maintain the 35% requirement throughout performance of any HUBZone contract, and those that fall below 20% during contract performance will be definitively determined to have failed to attempt to maintain the HUBZone residency requirements. SBA, in a recent Information Notice focused in on reminders to contractors about what truly qualifies as employing a HUBZone resident, and how to maintain the necessary employment percentages.
Legitimate Employment of HUBZone Residents
SBA reminded contractors that part of the HUBZone’s program’s goals is to “increase employment opportunities, investment, and economic development” in historically underutilized business zones. In pursuit of that SBA expects individuals to be actually working. Not simply a name on a spreadsheet or payroll to try and meet HUBZone requirements. SBA makes it clear in this information notice that simply hiring HUBZone residents but not having them conduct work will not meet program requirements. SBA warned contractors that “if they appear to be placing individuals on their payroll without providing them legitimate work” then SBA could decline or decertify firms from the HUBZone program.
SBA expects that employees work “a minimum of 40 hours during the four-week period immediately prior” to the date SBA reviews a business for HUBZone status. In addition, HUBZone could request job descriptions and information that demonstrates work is being performed within that job description’s expectations for each part time employee. This could include:
- progress reports, and
- attendance reports
Be sure to keep copies of these types of documents. SBA makes specific mention of contractors utilizing third-party employment agencies. If a HUBZone contractor utilizes a third-party employment agency, they should be “prepared to submit evidence to SBA that the company providing the HUBZone employees is a legitimate leasing company that is primarily engaged in the business of leasing employees to other businesses.”
Maintaining Employment Percentages
SBA’s other main point in its information notice was on HUBZone contractors maintaining 35% HUBZone residency requirements. As noted above, the regulation states HUBZone contractors must “attempt to maintain” 35% of employees being residents of a HUBZone during certification. Of course, since the only guarantee in life is change, SBA notes that there may be times a contractor falls below that 35% standard. In that situation, contractors must make “substantive and documented efforts” to reach that 35% minimum. But regardless of efforts taken, if the percentage falls below 20%, then the contractor is conclusively seen as failing to meet the 35% requirement. SBA in its information notice makes it clear that 20% is not the goal, and “being above 20% alone does not demonstrate that a firm is attempting to maintain 35% HUBZone residency.” So, being above 20% does not function as a safe harbor unless the contractor takes concrete actions trying to meet the 35% requirement.
SBA warned that any firm performing a HUBZone contract at the time of their HUBZone certification anniversary “must be prepared to submit evidence that the firm was making substantive and documented efforts to maintain” 35% HUBZone residency. Proof could include
- written offers of employment to HUBZone residents,
- advertisements seeking HUBZone employees,
- job fair attendance at or near HUBZones, and
- evidence that they have not dropped below 20% during contract performance.
SBA closed out their information notice with a warning to contractors that if a firm drops below 20% HUBZone employee residency, then they must notify the SBA and “voluntarily decertify from the program or they will be proposed for decertification.”
While these are things SBA has mentioned before, it’s clear that the HUBZone office is bringing renewed attention to them. While the two items emphasized by SBA recently are both well-known pillars of HUBZone certification, this notice is a warning to HUBZone contractors that SBA will be focusing enforcement on these items. By reiterating the parameters of expectations, SBA will likely feel little sympathy for contractors who fail to meet them.
In fact, the SBA mentioned this very information notice in a press release announcing efforts to “root out abuse and fortify the integrity of the HUBZone program.” SBA plans include increased enforcement, increased debarment, increased audits, and updated regulations. So, if you are a HUBZone contractor, now would be the time to double check your employment records, and plan for any efforts you can take if you don’t meet the 35% requirement or don’t have HUBZone employees conducting work within their job descriptions. If you fail to plan ahead for these items, then you can probably expect some risks to your HUBZone certification.
Questions about this post? Email us. Need legal assistance? call at 785-200-8919.