A few weeks ago, SBA released a proposed rule that would, among other things, modify the HUBZone program. We took a look at some of these changes when the proposals were released. As we promised in that post, we stated we were going to discuss some other aspects of the proposed rule in later posts. Today, we’ll be looking at some of the other changes that SBA is proposing for the HUBZone program, as there’s a lot. In this post, we’ll be focusing on other changes to how HUBZone employees are determined, new rules on certification and decertification, and changes to the “attempt to maintain” rule with regards to maintaining 35% HUBZone resident workforce. Some of these changes reflect a stricter approach from SBA that contractors should be on the lookout for.
Employees
As we noted in that earlier post, SBA wants to increase the requirement that HUBZone employees work a minimum of 40 hours per month to 80 hours per month. In addition to this, it seeks further changes to 13 C.F.R. § 126.200. The proposed rule would eliminate in-kind employees, meaning the rule would eliminate the provision that “that someone receiving in-kind compensation may be considered an employee.” SBA feels the provisions simply isn’t being utilized. The proposed rule also would clarify that individuals obtained “from a concern primarily engaged in leasing employees” (emphasis added) are generally considered employees. So, just leasing employees from any other company would not work, it must be from an employee leasing company.
Those aren’t the only proposed changes. One important proposed change concerns the legacy employee rule, which we have briefly discussed before. The rule would clarify that a “Legacy HUBZone Employee is an individual who: (a) resided in a HUBZone (other than a Redesignated Area) for at least 90 days preceding, and 180 days following, the concern’s HUBZone certification date or most recent recertification date, and (b) remains an employee at the time of the concern’s current recertification date.” An individual who resides in a Redesignated Area will not count once they move out of that area. However, if the area was originally a regular HUBZone when that individual resided there, the fact it later became a Redesignated Area will not be an issue: They can still be a legacy employee.
The second, and even more important change, is a proposed limit on the number of legacy employees. SBA seeks to limit HUBZone companies to having one legacy employee at a time. This could have a major impact for many companies whose employees have benefited from company growth so much they were able to move elsewhere. SBA also noted it is considering whether the legacy employee rule should have a time limit.
Finally, SBA wants to codify one of its current practices. It notes:
“The proposed rule would clarify the existing requirement that an individual must be performing work for the concern in order to be considered an employee for HUBZone purposes. This proposed rule would provide that in order to ensure that an individual is performing work for the business concern, SBA may request a combination of job descriptions, resumes, detailed timesheets, sample work product and other relevant documentation.” This means SBA can ask for all sorts of details about the employees, beyond the basic job title and description.
Decertification and Certification
Again, SBA is seeking to change up the HUBZone program significantly. The biggest change could be a challenge for many firms to deal with. A “proposed § 126.601(a) would require a firm to be both a certified HUBZone small business and one that continues to be eligible as of the date of its offer for a HUBZone contract. In light of this change, the rule also proposes to amend § 126.500 to require firms to recertify to SBA every three years, rather than annually.” Further, “[t]he proposed rule would clarify that an offeror on a competitively awarded HUBZone contract need not be eligible on the date of award of such contract.” However, for a sole-source HUBZone contract, “a firm must be HUBZone-certified at the time of award.” Further, pending applications won’t cut it to make an offer. So, “unlike the WOSB Program, a firm cannot submit an offer on HUBZone contract while its application is still pending.”
On the one hand, HUBZone firms wouldn’t have to do recertification every year, which would certainly be less burdensome for those firms. On the other hand, firms would now have to make sure they are compliant with the HUBZone eligibility requirements each time they submit an offer on a HUBZone set-aside (or where the price evaluation preference applies), instead of being able to just rely on their certification. This would greatly affect HUBZone protests. This rule change would make the program more like the WOSB and SDVOSB programs, but for those programs, eligibility depends more on static things like ownership and company control. With HUBZone, eligibility depends primarily on workforce makeup. That is something that can be hard for companies to completely control.
One thing that could benefit a number of businesses is a change to 13 C.F.R. § 126.309 for reapplying when your firm has been decertified. SBA “would keep the 90-day wait period for firms whose application has been declined, but would eliminate that wait period for firms that have been decertified.” So, a firm that was denied certification would have to wait to reapply, but a firm that was decertified would not have to wait to reapply. “Given how many small businesses are being affected by the expiration of the Redesignated Areas—whether as a result of its principal office no longer being located in a HUBZone or employees no longer residing in a HUBZone—SBA believes it is best to eliminate the waiting period that currently applies after decertification.”
Attempt to Maintain
SBA is also seeking to make the “attempt to maintain” rule stricter. We discussed this rule a bit in a previous post. As SBA puts it, the current rule means “a HUBZone firm can have less than 35% HUBZone residents at the time of its annual recertification if the firm is performing a HUBZone contract. This means that a firm being awarded HUBZone contracts in essence never has to demonstrate that it is employing at least 35% HUBZone residents.” SBA no longer likes this and thinks a grace period or ramp up is the better approach.
As such, SBA now proposes that the grace period be 12 months following the award of a HUBZone contract. In other words, “a HUBZone firm that was awarded a HUBZone contract during the year preceding its recertification date would have to represent that, at the time of its recertification, it is attempting to maintain compliance with the 35% HUBZone residency requirement and the concern’s principal office is located in a HUBZone.” The firm must meet the 20% minimum in the first year after contract award and 35% on each certification date after the first year.
When it comes to its reasoning, SBA stated:
“SBA does not believe that the 35% HUBZone residency requirement should be watered down to as low as 20% over the course of a firm’s participation in the HUBZone program merely because a HUBZone small business concern received one or more HUBZone contracts. However, SBA also believes that it must give some meaning to the ‘attempt to maintain’ statutory language, which is why allowing a firm to drop below the 35% residency requirement (but no lower than 20%) for a year makes sense to SBA.” So, the 20% floor will stay in place if you have won a HUBZone contract in the last year.
SBA welcomes comment on all these proposals, so we encourage contractors to get their comments in. The Federal Register site for the proposed rule has a place where you can submit comments.
Summary
Looking at the proposed changes, SBA is definitely moving towards a stricter implementation of the HUBZone program. While some of the proposed changes place less of a burden on HUBZone firms, most appear to be additional requirements. SBA has, in recent years, indicated it has great concern about what it feels is significant abuse of the HUBZone program. It is clearly trying to address this concern with these proposed rules. We think this is understandable, but we also think SBA may want to take a close look at these proposed changes to be sure they don’t throw out the baby with the bathwater. We will further have another post coming up soon to go over the other proposed changes to the HUBZone program.
Questions about this post? Email us. Need legal assistance? Call us at 785-200-8919.
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