Congress Lengthens Employee-Based Size Standard Period

If you’re a regular SmallGovCon reader (and we hope you are!), you probably are familiar with the Small Business Runway Extension Act. Under the Runway Extension Act, Congress lengthened the period used to determine small business status under receipts-based size standards, from three to five years. Congress’s laudable goal was to allow businesses to “stay small” longer, but the Runway Extension Act can backfire when a business has been shrinking instead of growing.

Now, Congress has done it again. In the Conference Report to the 2021 NDAA, Congress has extended the period used to measure employee-based size standards, from 12 to 24 months–and whether this is good news may depend on if a business has been growing or shrinking.

Under manufacturing and supply NAICS codes, small business status is calculated based on average employee count, rather than average annual receipts. For instance, under current SBA size standards, the small business size standard for NAICS code 316210 (Footwear Manufacturing) is 1,000 employees.

But what period is used to calculate the average? If a company has been in business for at least 12 months, current SBA regulations call for “[t]he average number of employees . . . based upon numbers of employees for each of the pay periods for the preceding completed 12 calendar months.” SBA didn’t come up with the 12-month period on its own. The Small Business Act–the statute governing the SBA–currently requires a 12-month period.

But now Congress is poised to amend the Small Business Act to double the period to 24 months. The 2021 NDAA simply deletes the words “12 months” in 15 U.S.C. 632, and replaces them with “24 months.” (I’m not sure why Congress deleted the word “months” and replaced it with “months,” but this is literally what the 2021 NDAA does.)

Congress appears to have learned a couple lessons from the rollout of the Runway Extension Act.

First, as you may recall, there was a lot of debate about when the new 5-year period would take effect. Immediately? After the SBA issued regulations implementing it? When the Jets finally make it back to the playoffs? (Okay, the last one, like the Jets themselves, wasn’t a legitimate contender).

Congress doesn’t want another “when is it effective?” battle. So the 2021 NDAA makes it simple: “[t]his section and the amendments made by this section shall take effect 1 year after the date of the enactment of this Act.”

Second, remember that weird position SBA took after the Runway Extension Act was adopted: namely, that SBA was somehow exempt from it? Congress has addressed this, too, adding clarifying language to the Small Business Act to say that, yes, Congress’s size standard rules do in fact apply to SBA.

That leaves us with one final potential problem: the backfiring issue. And unfortunately, as I read it, the 2021 NDAA doesn’t do a darn thing to address that. Remember, a longer size standard period is great for growing companies, but not so great for shrinking companies. When a company is shrinking, a longer period can essentially force the company to stay large longer.

Here are a couple simplified examples of how the 2021 NDAA could affect growing and shrinking businesses. Since these are just hypotheticals to make my point, I’ve used six-month periods instead of monthly or bimonthly payroll records.

19-24 Mos. Ago500
13-18 Mos. Ago750
7-12 Mos. Ago1,000
1-6 Mos. Ago1,250
A growing business will benefit from the 2021 NDAA.

If this company is operating under a 1,000-employee size standard, the 2021 NDAA will have exactly the effect Congress hopes. The company will continue to qualify as a small business using a 24-month average, even though its 12-month average (1,125) would exceed the size standard.

But what about a shrinking company?

19-24 Mos. Ago2,500
13-18 Mos. Ago1,500
7-12 Mos. Ago.1,000
1-6 Mos. Ago500
But the 2021 NDAA won’t do any favors to a shrinking business.

Here, if we assume the same 1,000-employee size standard, the 2021 NDAA would prevent this hypothetical shrinking company from qualifying as small, even though its 12-month average is just 750.

Essentially assuming that all businesses are growing seems especially odd in 2020, given the difficulties many businesses (particularly small businesses) have experienced due to COVID-19. Perhaps Congress will consider other options before the one-year implementation period, such as allowing a company to choose a 12-month or 24-month size period. For now, though, the 2021 NDAA simply will extend the size period under employee-based size standards from 12 months to 24 months, no more than a year after it becomes effective.

The President has threated to veto the NDAA for unrelated reasons, so it’s not clear when that effective date will occur. But even if lawmakers accede to the President’s wishes, it seems that Congress is in agreement: the size period should be extended. That means it will likely become law in the coming weeks.

My colleagues and I will keep you posted.

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