The U.S. Small Business Administration’s Office of Inspector General isn’t mincing words–OIG thinks that SBA has strayed from Congressional intent with its expansive definition of who qualifies as a HUBZone employee for purposes of satisfying the HUBZone Program’s eligibility requirements. In a recent report, SBA OIG points out that SBA’s broad definition could result in a company becoming HUBZone-eligible even if none of the company’s employees currently live in HUBZones.
By way of background, the HUBZone Program generally requires that at least 35% of a HUBZone-certified company’s employees be residents of a HUBZone. (HUBZone companies owned by entities such as Indian tribes may elect an alternative standard, but that’s not relevant here). In 2020, as part of an effort to overcome the government’s longstanding inability to meet its 3% HUBZone prime contracting goal, the SBA expanded the definition of who qualifies as a HUBZone employee.
The current definition, set forth in 13 C.F.R. 126.200(d), says, in relevant part:
An employee who resides in a HUBZone at the time of certification (or time of recertification where the individual is being treated as a HUBZone resident for the first time) shall continue to count as a HUBZone resident employee if the individual continues to live in the HUBZone for at least 180 days immediately after certification (or recertification) and remains an employee of the concern, even if the employee subsequently moves to a location that is not in a HUBZone or the area in which the employee’s residence is located no longer qualifies as a HUBZone.
When it adopted the revised definition, SBA explained that as employees experience increased financial success, they tend to move out of HUBZones. SBA did not want to essentially penalize success by revoking HUBZone certification when a company’s previous HUBZone residents moved out of HUBZones.
That makes sense, but as the SBA OIG says, it absolutely is true that the revised definition means that a company can be HUBZone-certified even if none of its employees live in a HUBZone, or have lived in one for years.
For example, consider a company with five employees, two of whom live in HUBZones. This arrangement meets the HUBZone Program criteria (40% of employees live in HUBZones, exceeding the 35% mark). Based on this, the company becomes HUBZone-certified. Seven months later, both HUBZone residents move to non-HUBZones. Under the expanded definition, the company remains HUBZone-eligible indefinitely, even though none of its employees now live in HUBZones.
In its new report, SBA OIG says:
In 2020, SBA changed a HUBZone requirement, allowing certified businesses to have employees who are not current HUBZone residents. Under the new requirements, the business continues to meet the requirement as long as it has employees who lived in a HUBZone for at least 180 days after the business was first certified. HUBZone businesses could have no employees residing in the HUBZone at all and still qualify because employees initially hired as HUBZone residents moved out of the HUBZone after the 180-day period. The requirements of the rule are clearly inconsistent with legislative intent.
Later in the report, SBA OIG adds:
The new HUBZone employee residency requirement may reduce the program’s ability to meet legislative intent. Allowing certified businesses to count employees who are not current HUBZone residents does not ensure continual employment of individuals who live in distressed areas. We question if the full economic benefits of the HUBZone program will be realized in these areas.
SBA OIG’s position doesn’t seem to have swayed SBA, which remains committed to the expanded definition. HUBZone-certified firms relying on the expanded definition, however, should tread carefully.
Not only could SBA OIG’s continued objections catch Congress’s eye, but the issue could someday end up in federal court. For instance, an unsuccessful offeror on a HUBZone set-aside contract might file a lawsuit alleging that the winning bidder’s reliance on the expanded definition is contrary to law. In such a case, the fact that SBA OIG agrees with the protester may be persuasive.
This article was originally published by Steven Koprince on LinkedIn and is reprinted with permission. Steve is the founder of Koprince McCall Pottroff LLC but has retired from the practice of law to focus on other endeavors. His views do not necessarily represent those of the firm or its attorneys. To read more of Steve’s current government contracting writing, follow him on LinkedIn and subscribe to his LinkedIn newsletter.
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