SBA’s regulations for service-disabled veteran-owned small businesses create a rebuttable presumption that a service-disabled veteran doesn’t control the company if the veteran is unable to work normal business hours in the company’s industry.
The rule sounds reasonable at first blush, but as a recent SBA Office of Hearings and Appeals case demonstrates, the SBA may apply the presumption even to a one-person start-up with no contracts. Not many people can afford to quit their day jobs before their businesses truly get off the ground–creating a real conundrum for SDVOSB start-ups.
For the sake of fairness, the SBA’s Normal Business Hours rule needs fixing, pronto. Here’s how to do it.
SBA OHA’s decision in CVE Protest of Hamhed, LLC, SBA No. CVE-180-P (2021) involved a VA SDVOSB set-aside RFQ seeking food service workers for the VA Montana Health Care System. After evaluating quotations, the VA identified YUFS, Inc. as the apparent awardee.
YUFS was, apparently, a start-up with no contracts. It had only one employee, its owner and President, Dr. Akubum Yufanyiabonge. Dr. Yufanyiabonge, a service-disabled veteran, held a full-time job outside YUFS.
Dr. Yufanyiabonge’s full-time job was with the U.S. Army, and FAR 3.6 prohibits Contracting Officers from knowingly awarding contracts to companies controlled by government employees. Dr. Yufanyiabonge’s bidding on government contracts while employed by the government might have been unwise–but as we’ll see, OHA’s decision did not turn on where he was employed, but when he worked for that employer.
A competitor, Hamhed, LLC, filed a CVE status protest with OHA, challenging YUFS’ SDVOSB eligibility. Hamhed alleged that YUFS would be unusually reliant on its subcontractor to perform the contract.
During OHA’s evaluation of the protest, OHA noticed that Dr. Yufanyiabonge appeared to hold employment outside YUFS. So OHA, on its own volition, asked YUFS to explain how it complied with SBA’s “Normal Business Hours” rule, 13 C.F.R. 125.13(k). That rule states:
Normal business hours. There is a rebuttable presumption that a service-disabled veteran does not control the firm when the service-disabled veteran is not able to work for the firm during the normal working hours that businesses in that industry normally work. This may include, but is not limited to, other full-time or part-time employment, being a full-time or part-time student, or any other activity or obligation that prevents the service-disabled veteran from actively working for the firm during normal business operating hours.
YUFS “did not file a substantive response to OHA’s Order.” But information from the case file, submitted during YUFS’ CVE application, showed that Dr. Yufanyiabonge “works for YUFS Monday through Thursday from 5:00 p.m. until midnight, and on Fridays and Saturdays from 6:00 a.m. to 5:00 p.m.” During the CVE application, “YUFS did not attempt to persuade CVE that such hours are typical of businesses in YUFS’s industry.”
YUFS’ failure to substantively address OHA’s question was fatal: OHA held that YUFS “has not rebutted the presumption at 13 C.F.R. § 125.13(k).” OHA sustained the protest and held that YUFS was ineligible to qualify as an SDVOSB.
Perhaps if YUFS had explained that, for example, Dr. Yufanyiabonge could not afford to simply quit his day job to work full-time for a start-up, OHA would have been sympathetic. (Note: I have no information regarding Dr. Yufanyiabonge’s finances–that’s just an example of the sort of statement that many service-disabled veterans likely would make in a similar situation).
But perhaps OHA wouldn’t have been so understanding. While there’s no way to no for sure, one very important thing is clear from the Hamhed decision: the SBA will, in fact, apply the “Normal Business Hours” rule even to a one-person start-up with no contracts, in which the service-disabled veteran is the only owner, officer and employee.
In my experience, most service-disabled veterans cannot afford to simply give up their salary and employment benefits to work full-time for a start-up business, at least not until that business starts generating revenues. It’s often said that it can take 18 months for a company to win its first government contract. That’s a loooong time to go without a paycheck.
It seems pretty clear to me that the Normal Business Hours rule needs to be adjusted to make it fairer to start-ups. But how?
One way might be to adopt a looser rule for start-ups, such as firms in their first eighteen months. But a one-size-fits all cutoff would still cause problems–not every new contractor succeeds at the same pace.
I think a better approach would be to focus on the concept underlying all of 13 C.F.R. 125.13–control. The point of 13 C.F.R. 125.13 shouldn’t to impose ticky-tack requirements, but to ensure that the benefits of SDVOSB status flow only to companies controlled by service-disabled veterans. If no non-veteran can plausibly be said to control the company, who cares if the veteran doesn’t work normal hours?
This is essentially the approach OHA took in a case called ProSphere Tek, Inc., which my colleague Shane McCall blogged about a few months ago. In ProSphere Tek, OHA held that the CVE had erred by denying a company’s SDVOSB application because the CVE “did not identify any non-service-disabled veteran persons or entities that have any involvement in [the applicant’s] operations, and did not describe any mechanism through which non-service-disabled veteran persons or entities could potentially control [the applicant].”
It’s no surprise that OHA didn’t follow the same approach in Hahmed because the regulation at issue in ProSphere Tek specifically discusses non-veteran control, while the Normal Business Hours rule doesn’t. But from a policy perspective, it seems clear to me that the Normal Business Hours presumption also should be rebutted when there is no reason to believe that the veteran’s inability to work normal hours doesn’t allow for non-veteran control.
I hope SBA will think twice about how the Normal Business Hours rule is applied, and amend the rule to be fairer to start-ups. The policy underpinning OHA’s ProSphere Tek decision would be a great place to start.
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