As PilieroMazza noted recently here, the Small Business Administration (SBA) released a major proposed rulemaking that will impact government contractors, including those that are participants in or seeking to be admitted to the Historically Underutilized Business Zones (HUBZone) Program. PilieroMazza is posting a series of client alerts regarding SBA’s proposed rulemaking. This alert highlights some of the proposed changes pertaining specifically to the HUBZone Program that will impact small business government contractors and their contracting partners.
A. Overview
The HUBZone Program was established in 1997. In 2019, SBA implemented the first comprehensive revisions of the HUBZone regulations. Since that time, SBA made minor revisions to the HUBZone regulations and published multiple “Frequently Asked Questions” memorandums which have both provided guidance for the implementation of the regulations and promulgated new policies and procedures for the HUBZone Program, including regarding what it means to be an employee for HUBZone purposes and telework. At a high level, in order to qualify as a HUBZone, a company must have its “principal office” located in a HUBZone and at least 35% of its “employees” must “reside” in a HUBZone. However, once you start to peel back the onion of what these terms mean for purposes of the HUBZone Program and how these terms have been refined through rulemaking and FAQs, the HUBZone Program has further complexities. The proposed rule seeks to incorporate some of SBA’s clarifications and policy changes to the HUBZone Program.
B. Changes to the Definition of “Principal Office”
1. SBA seeks to clarify the requirement that the concern must conduct business at the “principal office” by requiring the concern to submit “photos and/or a live virtual walk-through of the space” to SBA. For “coworking” spaces, a concern must provide evidence that it has a “dedicated space within any shared location, and that such dedicated space contains sufficient work surface area, furniture, and equipment to accommodate the number of employees claimed to work from this location.”[1] A “virtual office” or a location where a concern only receives mail and/or occasionally performs business will not qualify as a principal office under the proposed rule.
2. The proposed rule will require firms to submit a lease that commenced at least 30 days prior to the date of SBA’s review of the HUBZone firm and that ends at least 60 days after the date of the review. Currently, there is not a time-based requirement.
3. Recognizing how the rise of telework has transformed how businesses operate, SBA proposes to add a new rule providing that if 100% of a firm’s employees telework, then at least 51% of its employees must work from HUBZone locations rather than the 35% requirement under the current regulations. Under the proposed carve out for full telework, the firm’s principal office would be the location where records are kept. SBA believes that this proposed change will balance the reality of increased telework and the goal of infusing capital into HUBZone areas by employees utilizing the services of other business concerns located near the principal office. SBA seeks comments on whether teleworking employees who reside and work within the same census tract as the principal office (or an adjacent census tract) should be counted as working in the “principal office” and seeks comments on other changes that SBA should consider in response to the rise in telework.
C. Defining an “Employee”
1. The HUBZone Program has a unique definition of employee. To address fraud and abuse in the HUBZone Program, SBA is proposing to change the definition of “employee” of a HUBZone firm from an individual who works for the firm for 40 hours per month to an individual who works for the firm for 80 hours per month. SBA is concerned that the current rule allows individuals to only work for the business for one week per month leaving the principal office of the HUBZone “empty and closed for the remaining three weeks.” SBA seeks comments on whether the proposed 80 hours per month requirement is appropriate or whether there should be a minimum number of required hours per week. SBA also seeks comments on whether there should be an exception to the 80 hours per month threshold for a limited number (or percentage) of individuals who are working at least 40 hours per month.
2. While this was already SBA’s recent practice, SBA is tightening the rules surrounding what it means to be an employee and to ensure that employees are performing work for the HUBZone business concerns. Accordingly, SBA is proposing to request a combination of job descriptions, resumes, detailed timesheets, examples of work product, evidence of communication assigning work and responses to such, and other relevant documentation.
3. The proposed rule would delete the provision in the regulations allowing individuals who receive “in-kind contributions” to be considered employees. According to SBA, little to no firms are able to meet the narrow exceptions for payment through in-kind contributions in the current regulations, and the process for requesting and reviewing documentation that is ultimately insufficient slows down the HUBZone application process.
4. SBA proposes to codify its policy that “leased employees” will only be considered “employees” for HUBZone purposes where they are leased from a concern that is “primarily engaged in leasing employees.” The proposed change to the regulations—at Section 126.103—will be consistent with SBA’s size regulations pertaining to affiliation at 13 C.F.R. § 103(b)(4), which provides that “Business concerns which lease employees from concerns primarily engaged in leasing employees to other businesses . . . are not affiliated with the leasing company . . . solely on the basis of a leasing agreement.”
5. The proposed rule includes a new definition for the term “HUBZone Resident Employee,” meaning an individual who meets the definition of an employee and resides in a HUBZone.
6. SBA proposes to codify its interpretation of the HUBZone regulations that if a firm has only one employee, that employee must reside in a HUBZone for the firm to be eligible for HUBZone certification.
7. SBA seeks comments on the treatment of “Legacy HUBZone employees.” The proposed rule provides that a certified HUBZone small business may only have one Legacy HUBZone employee at any given time, clarifies the amount of time an individual must reside in a HUBZone to qualify as a Legacy HUBZone employee, and specifies that residence in a “Redesignated Area” will not qualify an individual as a “Legacy HUBZone employee”.
8. SBA is also seeking comments on whether reservists should be considered “employees” for HUBZone purposes since they will appear on the company’s payroll with zero hours per month when they are called to active duty. Companies may be required to hold positions for reservists, but currently SBA regulations do not contemplate how reservists should be classified under the HUBZone regulations.
D. Definition of “Reside” in a HUBZone
1. Under the current regulations, SBA will rely on an individual’s voter registration card to determine whether an individual “resides” in a HUBZone. Because voter registration does not provide a date of issuance, SBA cannot rely on the cards to determine how long an individual resided at a particular address. Instead, SBA proposes to use the address identified on an individual’s driver’s license or “other government-issued identification.”
2. SBA proposes to decrease the current requirement that an individual must live in a location for 180 calendar days to 90 calendar days immediately prior to the relevant date of review. The purpose of the proposed change is to allow firms to enter the HUBZone Program more quickly and will likely be a welcome change.
E. HUBZone Program Eligibility
1. To address abuse in the HUBZone Program, SBA proposes to require firms to both be certified HUBZone small businesses and eligible HUBZone firms on the date of the offer for HUBZone contracts. Currently, firms must be certified and have been eligible as of the date of its initial certification or at the time of its most recent recertification. There is not currently a requirement that HUBZone firms be eligible on the date of offer. According to SBA, the proposed rule change attempts to address abuses in the HUBZone Program and eliminate firms hiring employees that live in HUBZones only at the time of certification. If carried over to the final rule, this will be a significant change.
2. The proposed rule would clarify that as long as an offeror is eligible as of the date of its offer for a competitively awarded HUBZone contract, the firm will be eligible for the award. Accordingly, if a HUBZone employee who was necessary for the firm’s continued HUBZone eligibility left the firm between the firm’s offer and the date of award, the HUBZone firm would still be eligible for award. However, for HUBZone sole-source awards, a firm must be HUBZone-certified at the time of award. Like SBA’s treatment of sole-source awards in the 8(a) BD Program, SBA believes sole-source procurements require stricter eligibility rules since the procuring activity must conclude that the firm receiving the award is the only certified HUBZone small business capable of performing the contract.
3. SBA determined that the “attempt to maintain” requirement—which allows a HUBZone firm to have less than 35% HUBZone residents at the time of annual recertification if the firm is performing a HUBZone contract—does not sufficiently satisfy the goals of the HUBZone Program. The proposed rule will give firms a 12-month “grace period” after award of a HUBZone contract, during which time the firm can hire enough HUBZone residents to meet the 35% HUBZone residency requirement for the program. The proposed rule would require a firm awarded a HUBZone contract during the year preceding the recertification date to certify, at the time of recertification, that it is attempting to maintain compliance with the 35% HUBZone residency requirement and that the concern’s principal office is in a HUBZone.
F. Certification and Recertification Rules
1. SBA proposed to change the requirement for HUBZone firms to recertify to SBA from every year to every three years. At the same time, SBA proposed to require firms to be eligible at the time that they submit offers for any HUBZone contract which would make the need for annual recertification unnecessary. Together, these two proposed changes would bring the HUBZone Program more in line with SBA’s other socioeconomic contracting programs, including VetCert and WOSB.
2. The proposed rule would eliminate the waiting period for re-application to the HUBZone Program for firms that have been decertified. However, the proposed rule does not make changes to the 90-day waiting period for firms whose applications have been denied.
3. Because the proposed rule will require a HUBZone small business concern to meet the HUBZone principal office and residency requirements on the date of offer, the new rule proposes that during a program examination, SBA “may verify that the concern met the program’s eligibility requirements at the time of its application for certification, at the time of any recertification, or at the time of its offer for a HUBZone contract.”
If your firm is affected by these proposed changes and would like to submit public comments to SBA, please make sure to do so before the deadline on October 7, 2024.
If you have questions about SBA’s proposed changes, please contact the authors of this client alert, Meghan Leemon and Emily Reid, or another member of PilieroMazza’s Government Contracts Group.
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[1] Id. at 68, 287.
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