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 adopted many of the changes SBA initially proposed in August 2024. However, the agency also refrained from making certain changes after it received comments that overwhelmingly opposed them.

The amendments to the HUBZone program regulations both benefit current or prospective HUBZone business concerns and implement more stringent compliance measures for eligibility. Each week, we have provided a section of a summary of the most significant changes. Our first two updates described HUBZone Certification and Eligibility and Maintaining HUBZone Certification and Eligibility Requirements for HUBZone-‎Specific Contract Awards.

Below is the third and final part of our series.

III.‎ HUBZone Employee Eligibility

a.‎ Section 126.103: Definition of “Employee”‎

The HUBZone program was “intended to provide meaningful work experiences to individuals who reside in some of the nation’s most economically distressed communities to help them gain valuable skills, on-the-job experience, and upward mobility.” Accordingly, the final rule made revisions to the definition of “employee” for HUBZone purposes, with the stated goal of preventing firms from evading their obligation to provide meaningful employment opportunities in HUBZone areas by maintaining residents on their payroll without actually employing them or giving them work to perform.

First, the SBA revised § 126.200(d)(1) to clarify that if a firm has one employee, that person must reside in a HUBZone for the firm to be eligible for HUBZone certification, and added this “has always been SBA’s interpretation of the HUBZone requirements[.]”

Second, the SBA initially proposed to increase the individual employee monthly hourly work requirement from 40 hours to 80 hours per month. Currently, in order to qualify as an “employee” for HUBZone purposes, an individual must work a minimum of 40 hours per month. In response to comments overwhelmingly opposing this change, the agency decided to maintain the 40-hour threshold. It revised the language of the rule to state that an individual must work “at least 10 hours per week during the four-week period preceding the date of review in order to be considered an ‘employee’ for HUBZone purposes.” Individuals who work fewer than 10 hours in any given week during those four weeks may still be considered an “employee” for HUBZone purposes if they work a minimum of 40 hours per month, and the business can demonstrate a “legitimate business reason” for the employee working fewer than 10 hours in such week(s). The SBA provided an example:

For example, if a business concern demonstrates that there is seasonal work that requires more work in one or two weeks than in the rest of the month, SBA could find the individual to count as an employee for HUBZone purposes.

Third, the SBA added a provision to clarify the “obvious requirement” that, in general, an individual must be performing work in order to be considered an employee for HUBZone purposes. The agency stated that “[s]imply paying HUBZone residents, without giving them work to do, does not create real employment opportunities.” This provision allows exceptions for an employee enlisted as a member of the military reserve forces (a “reservist”), as well as employees on medical or maternity leave. The final rule provides that reservists and National Guard members will be treated as employees for HUBZone purposes during their periods of active duty, even if they are not compensated during that time. In contrast, employees on medical or maternity leave will only count as employees for HUBZone purposes if they are still being paid by the HUBZone concern while on leave. For example, if employees have accrued a month’s worth of paid leave when they initially take leave, they will be considered employees for HUBZone purposes during the month of paid leave, but not for any additional time off, unless the business concern continues to pay them.

Fourth, the SBA removed individuals who receive in-kind compensation from falling under  the definition of “employee” in the final rule. “In-kind compensation” refers to non-cash compensation in the form of benefits (e.g., health insurance or childcare assistance, etc.). Employees must receive monetary compensation in order to be treated as an employee for HUBZone purposes.

Fifth, regarding leased employees, the SBA added language to clarify that they will only be considered employees for HUBZone purposes when they are leased “from a concern primarily engaged in leasing employees.” This is a change from the current regulations, which provide that individuals obtained from a “leasing concern” are generally considered employees for HUBZone purposes.

Lastly, regarding legacy HUBZone employees, the final rule adopted a provision that permits each firm to have four Legacy HUBZone Employees. A “Legacy HUBZone employee” under § 126.200(d)(3) is an individual who resides in a HUBZone at the time of certification or recertification for new HUBZone resident employees and

shall continue to count as a HUBZone resident employee if the individual continues to live in the HUBZone for at least 180 days immediately after certification (or recertification) and remains an employee of the concern, even if the employee subsequently moves to a location that is not in a HUBZone or the area in which the employee’s residence is located no longer qualifies as a HUBZone.

The SBA is limiting Legacy HUBZone Employees to four because, “[w]ithout a limit on the number of Legacy HUBZone Employees permitted by SBA, a firm could potentially move all individuals into a HUBZone for a one-year period and qualify all of those individuals as Legacy HUBZone Employees without those individuals ever intending to live long-term in the HUBZone area.” In order to count Legacy HUBZone Employees, the company must have at least one other HUBZone resident employee, to prevent a scenario in which a HUBZone firm has zero employees actually residing in a HUBZone.

The final rule also clarifies that employees will not qualify as a Legacy HUBZone Employee if: 1) the employee moved to a non-HUBZone area after initially qualifying as a HUBZone employee due to residence in a Redesignated Area or a Qualified Disaster Area; or 2) the employee worked fewer than 30 hours per week at any time during employment with the HUBZone concern, unless such hour deficit was due to normal time off for vacation or sick leave.

The final rule also amended § 126.304(e) to clarify that HUBZone firms must continuously retain documentation related to any “Legacy HUBZone employees” so such employees meet the requirements to be designated as Legacy HUBZone employees.

This article summarizes aspects of the law and does not constitute legal advice. For legal advice with regard to 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.