Newly Organized Concern Affiliation Rule: GovCon Manager Not a “Key Employee”

The SBA’s newly organized concern affiliation rule is designed to prevent former officers, directors, principal stockholders or “key employees” of a large business from evading the SBA size rules by spinning off a new company.

But who is a “key employee” for purposes of the newly organized concern affiliation rule?  As demonstrated in a recent SBA Office of Hearings and Appeals decision, the mere fact that an employee has the word “manager” in his or her title does not necessarily make that person a key employee under the newly organized concern rule.

SBA OHA’s decision in Size Appeal of Willow Environmental, Inc., SBA No. SIZ-5403 (2012) involved a Defense Logistics Agency small business-set aside solicitation for the transportation and disposal of hazardous waste.  After reviewing proposals, the DLA announced that Willow Environmental, Inc. was the apparent successful offeror.

A competitor filed a SBA size protest, challenging Willow’s eligibility.  The competitor alleged that Willow was affiliated with American Environmental Services, or AES.

The SBA Area Office agreed with the protester, determining that Willow was affiliated with AES under the newly organized concern rule.  The SBA Area Office noted that Willow was formed in 2008 by Erin Waclawski, who was formerly employed by AES as its Government Services Manager.  The SBA Area Office held that Ms. Waclawski was a former key employee of AES, and that the other factors for newly organized concern affiliation were met.  The SBA Area Office issued a size determination declaring Willow ineligible for the DLA set-aside contract.

Willow filed a size appeal with SBA OHA.  Willow argued that Ms. Waclawski’s duties at AES were limited to the firm’s government contracts, which were no more than 40% of its business.  Further, Willow introduced evidence that in Ms. Waclawski’s role with AES, she was not authorized to make substantive decisions for the company, such as selecting the projects to bid upon, determining staffing requirements, making pricing decisions, borrowing money for the company, or negotiating vendor contracts.  Willow stated that Ms. Waclawski’s role was limited to carrying out management’s decisions, and pointed out that she was not indispensable: she took two three-month maternity leaves while others fulfilled her duties.

SBA OHA agreed with Willow.  It noted that under the newly organized concern rule, a “key employee” is defined as an individual with “critical influence or or substantial control over the operations or management” of the company.   In this case, SBA OHA held, despite Ms. Waclawski’s impressive title, “the record does not demonstrate that Ms. Waclawski, as Government Services Manager, could exert such influence or control over AES.”  Rather, SBA OHA held, the evidence Willow submitted “make[s] clear that Ms. Waclawski had no actual authority to engage in substantive decision-making for AES.”  SBA OHA granted Willow’s size appeal and reversed the SBA Area Office’s size determination.

The Willow Environmental, Inc. SBA size appeal decision illustrates an important limitation on the reach of the newly organized concern affiliation rule: a “key employee” must have critical influence or substantive control over the company’s operations or management.  Where, as here, a former employee had an impressive title such as Government Services Manager, the title alone does not mean that the individual necessarily was a key employee under the newly organized concern rule.

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