On December 17, the U.S. Small Business Administration issued a final rule that made significant changes to the SBA’s HUBZone small business contracting program. The final rule generally adopts many of the changes that SBA initially proposed in August 2024. However, the agency also refrained from adopting certain changes after receiving comments that overwhelmingly opposed them.
The changes to the HUBZone program regulations both benefit current or prospective HUBZone business concerns and implement more stringent compliance measures for eligibility. We plan to provide a weekly summary of the three most significant changes.
- HUBZone Certification and Eligibility
To participate in the HUBZone small business government contracting program, a business concern must be “small” under the applicable size standard assigned to that entity’s primary NAICS Code. Section 126.200 lists the requirements a concern must meet to qualify as a certified HUBZone small business concern. In order to certify, a business must:
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- be at least 51% owned by a qualifying individual or entity;
- must qualify as “small” under the size standard of the NAICS code listed in the concern’s SAM profile;
- maintain its principal office in a HUBZone (the “Principal Office requirement”); and
- ensure at least 35% of its workforce resides in a HUBZone (the “Residency Requirement”).
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The SBA’s final rule amended the regulations to clarify that HUBZone “certification” refers to “the process by which SBA determines that a concern is qualified for the HUBZone program and eligible to be designated by SBA as a certified HUBZone small business concern in [the Dynamic Small Business Search or] DSBS.”
a. Qualifying as Small
To qualify as “small,” a concern and its affiliates in the aggregate must qualify as a small business concern under the size standard corresponding to any NAICS code listed in its profile in SAM. The final rule explains that with respect to a size determination for an initial or recertification application, the SBA will not automatically perform a formal size determination. Instead, the “SBA will accept the concern’s size representation in SAM, unless there is evidence to the contrary.” The SBA will request a formal size determination pursuant to § 121.1001(b)(8) only if it has information that “calls into question the concern’s SAM size representation.”
b. Principal Office Requirement
The SBA initially proposed to add a provision that would have increased the Residency Requirement to 51% for firms that have 100% of employees engaged in remote / telework to meet the Principal Office Requirement. The effect would have been that, rather than requiring firms engaged in 100% remote work to maintain a physical office in a HUBZone, the firm could meet the Principal Office Requirement by maintaining a higher percentage (51% as opposed to 35%) of employees who resided in a HUBZone. In response to a majority of commenters opposed to this change, the final rule does not adopt this change and instead preserves the current policy: that the principal office of a HUBZone firm must always be located in a HUBZone.
The final rule did adopt a modification to the Principal Office Requirement with respect to the SBA’s long-term investment policy, which “incentivizes firms to make long-term investments in qualifying HUBZones by allowing them to maintain their principal office for up to 10 years and continue to be considered to meet the principal office requirement even if the area loses its HUBZone designation.” The ten-year protection period begins on either the firm’s initial HUBZone certification date, or on the date of the investment—whichever comes later. However, the long-term investment protection policy does not apply to a principal office that is also an owner’s residence if the residence-address and office-address are not separate and distinct. In other words, a principal office located in a duplex where the owner resides will qualify for this protection if the residence and office are located in separate halves of a duplex, each having its own distinct address.
c. Residency Requirement
The final rule made changes to the Residency Requirement by revising the definition of “reside.”
First, the final rule decreased the amount of time an employee is required to reside in a HUBZone prior to certification or recertification review from 180 calendar days to 90 calendar days.
Second, the final rule clarified which evidence may be used to confirm an individual resides in a HUBZone. The final rule clarifies that in determining whether an employee resides in a HUBZone, the SBA will, in all cases, first look to the address listed on an individual’s driver’s license or other government-issued ID; but in cases where the individual does not have a driver’s license or the address does not match the claimed HUBZone address, the SBA will accept other documentation as proof of residency, provided the individual includes an explanation as to why they cannot present a license or why the address on their license is inconsistent with the claimed HUBZone address.
Regarding affiliated concerns, the final rule provides that for purposes of determining compliance with the HUBZone Residency Requirement, the SBA reviews the “totality of circumstances” to determine whether to aggregate the employees of affiliated companies. If the firms are not considered affiliated for size purposes (i.e., for example, entities owned by Tribes, ANCs, and NHOs are generally not treated as affiliated with their parent or sister companies), their employees generally will not be aggregated for HUBZone purposes.
Even for firms that are regarded as affiliated for size purposes, the employees will not be aggregated for determination of compliance with the HUBZone Residency Requirements if “there is a clear line of fracture between the concern seeking HUBZone status and its affiliates.”
d. Other Changes to HUBZone Eligibility
First, the final rule added a new provision to § 126.503 which states that if a firm or its representative knowingly submitted false or misleading information, the firm may be decertified from the program under which the false/misleading information was knowingly submitted and decertified or its eligibility terminated from all other SBA programs in which it currently participates.
Second, the final rule amended the WOSB and HUBZone eligibility requirements to provide that a small business concern is ineligible for certification if the concern or any of its principals has failed to pay significant financial obligations owed to the Federal Government.
Third, the SBA amended 126.306(d) to clarify the date for determination of size status for HUBZone program eligibility. That has become when the SBA issues a decision on their eligibility. The current rule provides “an applicant must be eligible as of the date it submitted its application and at the time SBA issues a decision” for HUBZone certification. The SBA revised this rule to clarify that, for purposes of applying for HUBZone certification, an applicant must be eligible as of the date the SBA issues a decision. Therefore, a firm does not necessarily have to be eligible for the HUBZone program as of the date of its application; it need only be eligible on the date the SBA makes its decision regarding eligibility. However, noting that “it would be impossible to require payroll records for some unknown future date,” the final rule clarifies that the concern must submit payroll records for the four-week period immediately before it submits its application date to demonstrate it meets the employee residency requirement. An applicant is obligated only to provide notice to the SBA of any payroll changes that could affect its eligibility after submitting an application.
Lastly, the final rule revised § 126.500(b) to provide that in order to ensure continued HUBZone program eligibility, the SBA will conduct a program examination of each HUBZone concern every three years—more frequently for concerns the SBA deems at high risk of ineligibility using a risk-based analysis.
This article summarizes aspects of the law. This article does not constitute legal advice. For legal advice regarding your situation, you should contact an attorney.
We also acknowledge the contributions of Molly Gunther, one of our Anchorage Law Clerks, in the development and drafting of this article.
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