SBA Provides Flexibility for HUBZone Compliance

We’ve written quite a few posts about how contractors can adapt and deal with the changes caused by the COVID-19 pandemic. Some small businesses federal contractors, however, face unique challenges. This is particularly true of participants in the HUBZone Program. Specifically, while the OMB has encouraged agencies to allow contractor employees to telework, how will this affect HUBZone entities, where the location of their employees is key to maintaining their HUBZone status?

Well, the SBA has the answer in some recent guidance, and it’s something we could all probably do with a little more of–flexibility. Flexibility, in this case, means that SBA realizes complying with the principal office and employee residency requirements may be tough during a time when all people are encouraged to telework. The flexibility applies to a few of the HUBZone rules.

Principal Office

An essential requirement for HUBZone participation is that a HUBZone company’s principal office must be located in a HUBZone. 13 CFR § 126.200. The principal office is where “the location where the greatest number of the concern’s employees at any one location perform their work.” 13 CFR § 126.103. This definition assumes that businesses will typically have a centralized office where work is being performed. But if all the employees are suddenly working from home due to social distancing measures, does that alter where the principal office is?

Not exactly. SBA has said that it will “determine affected firms’ compliance with the principal office requirement by reviewing documentation showing where the firm’s employees performed their work prior to the telework measures being put in place as a result of the COVID-19 pandemic.” While not spelled out in the guidance, it seems like SBA considers affected firms to be those that are changing their business operations to cope with COVID-19. To remain HUBZone eligible, these affected companies need to do two things:

  1. Provide documentation showing compliance with the principal office requirement prior to requiring telework; and
  2. Provide “documentation stating it placed all its employees on telework associated with social distancing in response to the COVID19 pandemic, the teleworking measure is temporary in nature, and the employees will return to their normal work location once the teleworking measures have been lifted.”

There is a price to be paid for the SBA’s flexibility. Affected HUBZone businesses must document both prior compliance with principal office requirements (which they should have been doing anyway), as well as the telework policies put in place to battle COVID-19. While documentation may be a low priority in this turbulent time, future compliance will likely depend on effective record keeping.

Residency and Employment

The other hallmark of the HUBZone Program is its residency requirements. Generally, “at least 35% of a concern’s employees must reside in a HUBZone” and a HUBZone company must attempt to maintain this requirement during performance of a HUBZone contract. 13 CFR § 126.200. SBA realizes that some employees may be residing in a different location than normal, due to COVID-19 restrictions, so it will modify the normal rules in a few ways.

First, SBA has modified some rules for maintaining continuous employment in certain situations related to COVID-19. The continuous-employment rule, found at 13 CFR § 126.200(d)(3), allows an employee to continue to qualify as a HUBZone resident even if they later move. Basically, SBA has said that a business can continue to count an employee as a HUBZone resident toward the 35% requirement if the employee lived in a HUBZone for 180 days before and after recertification and they continue to work for the business. SBA calls this a “legacy HUBZone employee” in this recent guidance, although I’ve not seen that term in earlier SBA guidance or in the regulation.

For purposes of maintaining continuous employment, A HUBZone company is allowed to put an employee in “temporary non-paid status, such as FMLA, to care for themselves or a sick family member during COVID19” and still count that person as an employee if “if the firm attests to its intent to put such individuals back on payroll after the period of extended sick leave.” But if a person is laid-off, the person no longer counts as a HUBZone employee under the continuous-employment rule.

Second, SBA realizes that some HUBZone employees may be students whose schools have closed. SBA will count those employees based on documentation of where the employee lived “prior to the COVID-19 response measures being put in place.” If a HUBZone employee had to leave student housing and to a non-HUBZone location, but continues to work for the HUBZone firm, the employee can still count if the firm shows two things:

  1. The university/college closed the student’s residence; and
  2. The employee has been maintained on the payroll.

Certification Issues

SBA will pause the new annual recertification process because it may be difficult for some firms. Instead, a firm can maintain compliance status “from its most recent certification and should be prepared to prove eligibility at the time of offer for any solicitations.” But, a firm can voluntarily recertify on its anniversary date if it wants to.

Lastly, SBA noted that it can expedite a HUBZone application of any firm that submits a complete package for certification if the firm is responding to “a specified solicitation that relates to COVID-19.” If your firm is in this last category, make sure to emphasize this point to the HUBZone office and it may be a way to get HUBZone certification faster than normal.

It is encouraging to see the SBA take proactive steps to provide flexibilities for HUBZone firms during the COVID-19 crisis. Such flexibilities should provide some relief to HUBZone firms facing significant business disruptions responding to COVID-19 response measures.

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