Ostensible Subcontractor Rule: Hiring Incumbent Employees “En Masse” Causes Affiliation

In the syndicated television show Crossing Over, psychic John Edward (not to be confused with former presidential candidate and tabloid mainstay John Edwards), claimed to carry on conversations with deceased relatives of audience members.  Perhaps not surprisingly, some critics have been skeptical of Mr. Edward’s supposed paranormal abilities, accusing him, according to Wikipedia, of using “prior knowledge or a wide array of quick and sometimes general guesses to create the impression of psychic ability.”  In other words, according to the critics, Crossing Over was one big sham.

Crossing Over–and the significant questions surrounding its legitimacy–is an apt metaphor for a question I commonly get from small companies planning a subcontracting relationship with an ineligible incumbent.  “Can we just hire all the prime’s employees?” they ask.  While this type of “crossing over” of employees, from ineligible incumbent subcontractor to eligible small business prime contractor, is not always impermissible, hiring too many of an ineligible incumbent’s employees–particularly managerial employees–can be seen as a sham of sorts by the SBA, as seen in one recent decision of the SBA Office of Hearings and Appeals.

SBA OHA’s decision in Size Appeal of SM Resources Corporation, Inc., SBA No. SIZ-5338 (2012), involved an 8(a) set-aside contract for environmental consulting services.  STEM International, Inc., the incumbent, had apparently graduated from the 8(a) program and was no longer eligible for award as the prime contractor.  In stepped SM Resources Corporation, Inc., an active 8(a) participant, which submitted a proposal with itself as the prime contractor and STEM as its key subcontractor.

SM Resources proposed four key personnel.  Only one of those four personnel was intended to be a STEM employee during contract performance.  However, all three of the remaining key personnel were current STEM employees, who had signed contingent hire letters agreeing to transfer to SM Resources if SM Resources won the contract.  In addition to the key personnel, SM Resources proposed to staff the contract mostly with current STEM employees.  Of the employees SM Resources proposed, only 14% were current SM Resources employees; the remainder, apparently, were current STEM employees.

After SM Resources was identified as the apparent successful offeror, a competitor filed an SBA size protest, alleging ostensible subcontractor affiliation between SM Resources and STEM.  The SBA Area Office found that SM Resources had violated the ostensible subcontractor rule, due in large part to the high numbers of employees (particularly key employees) transferring from STEM to SM Resources.

On appeal, SBA OHA agreed with the SBA Area Office and found that STEM was SM Resources’ ostensible subcontractor.  SBA OHA concluded that SM Resources “is merely proposing to adopt the personnel of its incumbent ostensible subcontractor.  The Area Office properly considered [SM Resources’] proposed en masse hiring of STEM’s employees as an indicia of unusual reliance.”

The SM Resources SBA size appeal decision encapsulates SBA OHA’s position on the “crossing over” of employees from an ineligible incumbent to a small business: the more employees who transfer, and the higher their managerial positions, the more skeptical the SBA is likely to be.  To paraphrase John Edward’s critics, en masse employee transfers of the sort seen in this case may lead the SBA to conclude that the parties have merely created the impression of an eligible small business.

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