The SBA has released a proposed rule to use a 24-month period to calculate a company’s number of employees for eligibility purposes in all of SBA’s programs. This change will affect any business seeking to qualify as small under an employee-based NAICS code, such as those applicable to manufactured products.
The SBA’s proposed rule would amend 13 CF.R. 121.106. That regulation currently states that SBA calculates the size of a business by averaging the number of employees for each pay period in the preceding 12 months. Following the proposed revision, 13 C.F.R. 121.106(b)(1) would read:
The average number of employees of the concern is used (including the employees of its foreign and domestic affiliates) based upon numbers of employees for each of the pay periods for the preceding completed 24 calendar months.
The revised regulation would maintain a prorated formula if a company has not been in busines for 24 months.
The SBA acknowledges that lengthening the period from 12 months to 24 months will help some businesses while harming others. Generally speaking, lengthening of a size evaluation period helps growing businesses by allowing them to base their average in part on older pay periods when they had fewer employees. On the flip side, lengthening a size evaluation period harms shrinking businesses by forcing them to use pay periods from longer ago, when they were larger.
The SBA esimates that under the proposed rule “about 280 or 1.3 percent of currently large businesses would gain or regain small status and about 1,200 or 0.2 percent of total small businesses would see their small business status extended for a longer period.” On the other hand, based on the same data, SBA estimates that “763 firms would lose their small business status and 287 firms would see their size status shortened, which represent, respectively, 0.1 percent and 0.04 percent of total small firms subject to an employee-based size standard.”
Understandably, businesses that are negatively impacted by this change are likely to oppose it, but their options are limited. The SBA did not develop this change on its own; the change is being made pursuant to a Congressional mandate from the 2021 National Defense Authorization Act. Barring further Congressional intervention, SBA’s hands are largely tied, except in some limited areas. (For example, the Congressional directive did not include nonmanufacturers, but SBA has proposed to lengthen the nonmanufacturer period to 24 months for the sake of consistency).
My suspicion is that Congress did not really understand that this change would hurt almost as many businesses as it helps. I believe that Congress made this change in an effort to grow the pool of eligible small businesses, but did so with the overly-simplistic underlying notion that all businesses are always growing.
Clearly that is not the case, especially in a pandemic. In my view, the best approach would be to allow companies to choose whether to use a 12-month or 24-month period. This would allow growing businesses to stay small longer but prevent shrinking businesses from being forced to count longer-ago pay periods. I wrote about this proposal at greater length earlier this year, and I still think it’s the right idea. But that’s just my two cents–unless Congress agrees (are you reading this, Congress?) it won’t be the law.
Comments on the proposed rule are due by December 2. Follow this link for instructions on how to submit a comment.
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