SBA Update: New Rule Makes Major Changes to Eligibility and Certification Requirements for HUBZone Program

As PilieroMazza noted recently here, on December 17, 2024, the Small Business Administration (SBA or the Agency) published a final rule that will make changes to its regulations for the Historically Underutilized Business Zone (HUBZone) Program and clarify certain program policies. This final rule goes into effect on January 16, 2025, and “will apply to existing contracts.”[1] Below are some key high-level takeaways on changes to the HUBZone Program.

Attorneys in PilieroMazza’s Government Contracts Group released a series of client alerts on different aspects of the final rule, which can be found here and visit this link for a webinar replay.

A. Overview

In the proposed rule, the SBA sought to incorporate clarifications and policy changes first published in the Agency’s “Frequently Asked Questions” memorandums for the HUBZone Program. Currently, subject to certain exceptions, to qualify as a HUBZone small business, a company’s “principal office” must be located in a HUBZone, and at least 35% of its “employees” must “reside” in a HUBZone. To be considered an “employee” of a HUBZone firm, an individual must work at least 40 hours in the relevant four-week period. In the proposed rule, the SBA suggested that the threshold for the HUBZone residency requirement be increased from 35% to 51% when all of the firm’s employees telework and proposed increasing the number of hours to be considered an employee from 40 to 80 during the qualifying period. The Agency received over 650 comments from 261 commenters on the proposed rule, including numerous comments regarding the proposed changes to the HUBZone program.         

In response to public comments, the SBA decided to back down on some of the Agency’s more onerous proposed regulations, leaving the 35% residency and 40-hour requirements largely intact, subject to certain new requirements and caveats discussed in this article. The final rule contains several changes welcomed by commenters, including reducing the residency requirement for HUBZone employees from 180 to 90 calendar days before the relevant date of review and reducing the frequency of recertification from annually to triennially.           

B. Changes to the Definition of “Principal Office”

1. Proposed Rule: The SBA sought to clarify the requirement that a company conduct business at the “principal office” by requiring the concern to submit “photos and/or a live virtual walk-through of the space” to the SBA. For “shared working” spaces, a business 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” the location.[2] 
   a. Final Rule: The SBA adopted this change in the final rule. Accordingly, a “virtual office” or a location where a concern only receives mail and/or occasionally performs business will not qualify as a principal office for HUBZone program eligibility. 
   
   
2. Proposed Rule: The SBA proposed requiring firms to submit a deed or an active lease that commenced at least 30 days before the date of the 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.
   a. Final Rule: Although the SBA acknowledged that some commenters raised concerns about the burdens imposed by having a lease for a specific period before and after the SBA’s review of the HUBZone firm, the SBA adopted the new requirement in the final rule.
   
   
3. Proposed Rule: SBA proposed 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. Under the current regulations, only 35% of the firm’s employees must reside in a HUBZone. Under the proposed rule, the firm’s principal office would be the location where records are kept. In SBA’s view, the proposed change would balance the reality of increased telework and the goal of infusing capital into HUBZone areas by employees utilizing the services of other business concerns near the principal office.        
   a. Final Rule: Since the majority of the commenters opposed the proposed change, the requirement that at least 35% of a firm’s employees must reside in a HUBZone location will remain unchanged. In addition, HUBZone firms will still be required to maintain a “principal office” (the place where more employees work compared to any other location) in a designated HUBZone unless all employees work in HUBZones and at least 35% of the employees are HUBZone resident employees. However, the SBA signaled that it will “continue to evaluate the impact of the prevalence of telework on the HUBZone portfolio.”

C. Defining an “Employee”

1. Proposed Rule: To address fraud and abuse in the HUBZone Program, SBA proposed to change the definition of “employee” of a HUBZone firm from an individual who works for the firm for 40 hours per four-week period to an individual who works for the firm per 80 hours four-week period preceding the relevant date of review. The SBA was concerned that the “minimum 40 hours per month was not sufficient to promote the purpose of the HUBZone program” and that the proposed 80-hour requirement would be consistent with the 8(a) BD program.      
   a. Final Rule: In response to the overwhelming majority of commenters who opposed this change to the definition of “employee,” the SBA scrapped the proposal to increase the total required hours for an employee to 80. Of note, commenters argued that the proposed change would “disproportionately harm part-time employees, particularly students, retirees, people with disabilities, or individuals holding multiple jobs” and questioned how the change would “effectively address fraud or abuse as intended by the SBA.”

   Instead, the SBA will keep the 40-hour threshold for a definition of a HUBZone employee. However, the new rule will require an individual to work at least 10 hours per week, as opposed to 40 hours per month, during the four-week period preceding the date of review to be considered an “employee.” A HUBZone business may qualify for an exception to the new 10-hour per week threshold, provided that the employee works at least 40 hours per four-week period if the business concern can demonstrate “a legitimate business reason for that work schedule,” like performing seasonal work.        

2. Proposed Rule: While this was already SBA’s recent practice, the Agency proposed tightening the rules surrounding what it means to be an employee and to ensure that employees are performing work for the HUBZone business. Accordingly, SBA proposed 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.
   a. Final Rule: Despite opposition to the proposed change from commenters who argued that providing employment and wages to individuals is sufficient to promote the goals of the HUBZone program, the SBA adopted the proposed rule and reiterated its position that the “HUBZone program was intended to create meaningful work employment opportunities in underserved areas.” As such, the SBA will require HUBZone firms to submit relevant documentation to ensure that employees are performing meaningful work.
   
   
3. Proposed Rule: SBA proposed to no longer allow individuals who receive “in-kind contributions” to be considered employees. According to the SBA, little to no firms can 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.       
   a. Final Rule: Most commenters agreed with the proposed rule. In the final rule, the SBA adopted the proposal to delete the regulatory provision allowing in-kind compensation.

4. Proposed Rule: SBA proposed to codify its policy that “leased employees” are still considered “employees” for HUBZone purposes when they are leased from a concern that is “primarily engaged in leasing employees.” The proposed change to the regulations—at Section 126.103—would be consistent with SBA’s size regulations pertinent to affiliation at 13 C.F.R. § 121.103(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.”              
   a. Final Rule: In response to a positive reception from commenters, the SBA adopted the proposed rule and recognized an exception in the final rule where a contract is a staffing contract.   

5. Proposed Rule: 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.
   a. Final Rule: SBA adopted the proposed rule.

6. Proposed Rule: SBA proposed codifying 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.    
   a. Final Rule: SBA did not receive comments on the proposed rule and adopted the change in the final rule. 

7. Proposed Rule: The proposed rule provided that a certified HUBZone small business may only have one Legacy HUBZone employee at any given time, clarified the amount of time an individual must reside in a HUBZone to qualify as a Legacy HUBZone employee, and specified that residence in a “Redesignated Area” will not qualify an individual as a “Legacy HUBZone employee.”
   a. Final Rule: In response to concerns from commenters that restricting Legacy HUBZone employees contradicts the intent of the HUBZone program, SBA will not limit firms to only one Legacy HUBZone employee. Instead, the final rule will allow a HUBZone small businesses to have up to four Legacy HUBZone employees at any given time as long as the firm has at least one other HUBZone employee who currently resides in a HUBZone.        

   In addition, the final rule imposes new limits on who will be considered a Legacy HUBZone Employee. An individual initially qualified as a HUBZone Resident Employee by residing in a Redesignated Area or a Qualified Disaster Area will not qualify as a Legacy HUBZone Employee under the new rule. Also, individuals who worked for the HUBZone firm fewer than 30 hours per week, excluding vacation, sick leave, and maternity/paternity leave, at any time during their employment will not qualify as a Legacy HUBZone Employee. The new 30-hour per week requirement represents a significant change to the definition of a Legacy HUBZone Employee.

8. Proposed Rule: SBA requested 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, the SBA regulations do not contemplate how reservists should be classified under the HUBZone regulations.   
   a. Final Rule: Based on the positive comments received, the final rule “provides that, in general, reservists and National Guard members will be treated as employees for HUBZone purposes during their periods of active duty, even if they do not receive compensation from the HUBZone company during this time.

D. Definition of “Reside” in a HUBZone

1. Proposed Rule: Under the current regulations, SBA will rely on an individual’s voter registration cards to determine whether an individual “resides” in a HUBZone. Because voter registration cards do not provide a date of issuance, SBA cannot rely on the cards to determine how long an individual has 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.”      
   a. Final Rule: Despite some opposition from commentor’s on the reliance on driver’s licenses to determine an employee’s residency, the SBA “still believes that a driver’s license is the easiest way to demonstrate residency”.The final rule clarifies that the SBA will ask for a driver’s license in all circumstances, but the SBA will accept other proof of residency, like deeds, leases, and utility bills, as long as the individual provides an “explanation as to why a driver’s license is unavailable or inconsistent” with the individual’s address.

2. Proposed Rule: SBA proposed changing 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.  
   a. Final Rule: In a welcome change to the HUBZone regulations, the final rule adopts the new 90-day residency requirement which allows firms to enter the HUBZone Program more quickly.      

E. HUBZone Program Eligibility

1. Proposed Rule: To address abuse in the HUBZone Program and eliminate firms hiring employees that live in HUBZones only at the time of certification, SBA proposed 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 the firm’s initial certification or at the time of its most recent recertification. Currently, there is no requirement that HUBZone firms be eligible on the date of offer.
   a. Final Rule: SBA adopted the proposed change in the final rule and explained that the agency “found that the annual recertification requirement does not fulfill the purposes of the HUBZone program as effectively as requiring firms to be eligible at the time of offer for HUBZone contracts.”

2. Proposed Rule: The proposed rule clarified 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.   
   a. Final Rule: SBA adopted the proposed change to the final rule. The SBA also clarified that as long as an offeror is eligible as of the date of offer for a competitively awarded HUBZone contract, the firm will be eligible for award. However, for HUBZone sole source awards, a firm must be HUBZone certified and eligible as of time of award.

3. Proposed Rule: As explained in the proposed rule, 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. SBA proposed to increase the floor from 20% to 35% during performance of a HUBZone contract and to 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.
   a. Final Rule: SBA adopted the proposed change to the final rule and clarified that the “attempt to maintain” requirement does not extend to HUBZone subcontracts or to non-HUBZone contracts for which a procuring agency takes goaling credit as an award to a HUBZone small business concern.

   The final rule will require HUBZone firms to meet the eligibility requirements as of the time of the date of initial offer for a HUBZone contract. In the final rule, the SBA clarified that the 20% floor described in the definition of “attempt to maintain” is not an automatic substitute for the 35% HUBZone residency requirement and added a new sentence to the regulation stating that a firm that cannot demonstrate that it is making the “substantive and documented efforts” described in the definition of “attempt to maintain” has failed to attempt to maintain the HUBZone residency requirement.         

   The SBA adopted the grace period in the final rule providing that “where a certified HUBZone small business concern was awarded a HUBZone contract during the ‘12-month period preceding its recertification’ it can represent that it is attempting to maintain compliance with the 35% HUBZone residency.” The new rule is not limited to the first HUBZone contract received by a certified HUBZone small business, but rather, allows each additional HUBZone award to trigger a new 12-month grace period from the date of award of the additional HUBZone contract. As long as the concern received any HUBZone contracts during the 12-month period preceding its recertification, it can represent that it is attempting to maintain compliance with the 35% HUBZone residency requirement.

F. Certification and Recertification Rules

1. Proposed Rule: SBA proposed changing the requirement for HUBZone firms to recertify to SBA from every year to every three years. The proposed change sought to bring the HUBZone Program more in line with SBA’s other socioeconomic contracting programs, including VetCert and WOSB.       
   a. Final Rule: The majority of comments supported the proposed triennial recertification requirement, and the SBA adopted the change in the final rule.
   
   
2. Proposed Rule: SBA proposed to eliminate the waiting period for re-application to the HUBZone Program for firms that have been decertified, but did not make changes to the 90-day waiting period for firms whose applications have been denied.               
   a. Final Rule: The SBA adopted the proposed rule and retained the 90-day waiting period after a concern is declined certification. 

3. Proposed Rule: 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.” Further, the proposed rule was made in conjunction with the “one-year certification” rule and proposed triennial recertification rule.               
   a. Final Rule: SBA received a mix of support and opposition in the 28 comments regarding the proposed rule. The final rule adopted the proposed rule requiring firms to be certified HUBZone small businesses and eligible HUBZone firms on the date of initial offer for a HUBZone contract, including price. Representing a major change to the HUBZone program requirements, the new rule clarified how certification would impact eligibility for contract award.

   For multiple award contracts where price is not required, the offeror must be identified as a certified HUBZone small business concern in the Dynamic Search Small Business Search database and meet the HUBZone requirements as of the date that it submits initial offer, which may not include price.             

If you have questions about SBA’s final rule on the HUBZone Program and how the changes may impact your business, 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] The final rule will not have retroactive effect. Once in effect, the rule changes in the final rule will apply to existing contracts. However, the delayed effective date for disqualifying recertifications is discussed here. 

[2] HUBZone Programs Updates and Clarifications, and Clarifications to Other Small Business Programs, 89 Fed. Reg. 102, 448 at 102,469 (December 17, 2024).