Upcoming SBA Rule Will Switch to 24-Month Calculation for Employee Size Standards

SBA has issued a final rule changing all employee size standards to a 24-month calculation. This rule is scheduled to be published in the Federal Register on June 6, 2022, and and will take effect 30 days from the date it is officially published. Let’s take a closer look.

This final rule actually implements two updates to SBA’s rules that, once effective, will change the way SBA calculates a company’s size to determine whether it qualifies as small for SBA’s various assistance programs. The first one (the primary focus of this article) is that the SBA will adopt a 24-month average to calculate a company’s number of employees for eligibility purposes in all of SBA’s small business and socioeconomic programs. This change to SBA’s size rules will implement section 863 of the 2021 National Defense Authorization Act (NDAA), which amended section 3(a)(2)(C)(ii)(I) of the Small Business Act, to change SBA’s employee-based size standards from a 12-month averaging period to a 24-month averaging period.

Once this change takes effect, as SBA explains:

[F]or certifications following the effective date, the size of a business concern under an employee-based size standard will be calculated by averaging the concern’s number of employees for each pay period in the preceding completed 24 calendar months. In determining a concern’s number of employees, SBA counts all individuals employed on a full-time, part-time, or other basis. Part-time and temporary employees count as full-time employees, and the concern aggregates the employees of its domestic and foreign affiliates. If the concern has not been in business for 24 months, it would average its number of employees for each pay period during which it has been in business.

The change will apply to all industries subject to SBA’s employee-based size standards, which predominantly apply to manufacturers (but also to certain mining, utilities, transportation, publishing, telecommunications, insurance, research and development, and environmental remediation firms). But SBA also noted that nonmanufacturers too qualify for their small business status for government supplies contracts using employee-based size standards. And as such, SBA clarified that even though the nonmanufacturers and nonmanufacturing industries are not technically covered by the 2021 NDAA’s change to its proposed size standards,

SBA believes that it would be unworkable to use a 24-month average for manufacturing industries but retain a 12-month average for other industries with employee-based size standards. Firms may participate in multiple industries, and it is burdensome to use different averaging periods for different industries with employee-based size standards.

Thus, once the final rule takes effect, the 24-month average will be a widespread change for SBA’s employee based size calculations moving forward.

Notably, the second change this final rule implements is that SBA will now allow participants in its Business Loan, Disaster Loan, Surety Bond, and Small Business Investment Company (SBIC) Programs to use a five-year averaging period to calculate their average annual receipts (in addition to the current three-year averaging period).

According to SBA, both of “[t]hese changes will allow larger small businesses to retain their small business size status for longer, and some mid-sized businesses to regain their small business status.”

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