SBA OHA: Inactive Employees Count for SBA Size Purposes

Back in my undergraduate days at Duke, I attended almost all of the home basketball games.  Occasionally, sometime in the second half, with the Blue Devils up 20 points or more, an opposing player would execute an impressive dunk, and proceed to do a little celebration.  I, along with my fellow Cameron Crazies, would immediately begin chanting, “scoreboard, scoreboard,” while pointing at the device in question.  Our message was, “that’s nice, but it just doesn’t matter.”  (Actually, we Crazies sometimes chanted “just doesn’t matter,” too).

“That’s nice, but it just doesn’t matter” is what the SBA’s Office of Hearings and Appeals had to say in a recent size appeal decision involving the question of whether employees who are sick, on vacation, or even comatose count toward a company’s employee-based SBA size standard.  SBA OHA’s answer: if they’re on the payroll, they count.  Period.

SBA OHA’s decision in Size Appeal of Griswold Industries dba CLA-VAL Company, SBA No. SIZ-5274 (2011) involved a Defense Logistics Agency procurement under NAICS code 332911, which carries a 500 employee SBA size standard.  After CLA-VAL was identified as the apparent successful offeror, a competitor filed an SBA size protest, contending that the company exceeded the size standard.  The SBA Area Office agreed, finding CLA-VAL to be ineligible for the contract.

On appeal, CLA-VAL argued that the SBA Area Office should not have counted employees who did not perform services for the company as of the size determination date.  CLA-VAL noted that its payroll included individuals on workers’ compensation, including a person in an irreversible coma who had not performed any work for the company in four years.  CLA-VAL also contended that its summer workers should not have been counted, since they were not performing work for the company at the relevant date.  The company made a similar argument involving employees on leave of absence.

CLA-VAL’s arguments have a certain commonsense appeal, but SBA OHA held that commonsense or not, the SBA size regulations require the employee count to include all individuals on the payroll, with very limited exceptions described in the regulation.  Referencing its own prior decisions, SBA OHA wrote that it has “consistently held that there is no exception to the rule that all employees must be counted, and consistently rejected any alternative approach to the all-inclusive counting method.”  SBA OHA stated that this approach is designed to prevent companies from “manipulating their payrolls” in order to qualify as small.  SBA OHA denied CLA-VAL’s size appeal.

The Griswold Industries case is a good reminder that small businesses cannot “get cute” when it comes to qualifying as small under an employee-based SBA size standard.  If you’re tempted to believe that certain employees don’t count toward your total because they aren’t currently performing services for the company, just think of a legion of 1,200 Duke fans (you UNC grads are shuddering already), pointing at you and chanting “just doesn’t matter.”

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