On August 23, the Small Business Administration issued a proposed rule that would make significant changes to the SBA’s HUBZone small business contracting program, as well as to other small business programs, including the 8(a) Program and the All Small Mentor-Protégé Program.
Comments are due by October 7, 2024. They should reference Docket No. SBA-2024-0007 or RIN 3245-AH68, and may be submitted through http://www.regulations.gov/.
We continue our series that addresses the proposed changes in detail. In this update, we discuss proposed changes to the annual certification and residency requirements of the HUBZone program.
Currently, 13 C.F.R. 126.500 requires HUBZone-certified companies to recertify their status annually, including a mandate that they certify their compliance with the 35% HUBZone residency requirement and principal office rule on the date of their annual program certification. If they have a HUBZone contract, they are permitted to have as little as 20% of their employees residing in a HUBZone, provided they can document they are attempting to maintain the required level of 35% HUBZone residency.
As we discussed in an earlier update, the SBA is proposing to require HUBZone companies to be compliant with the 35% HUBZone residency and principal office requirements at the time of offer plus price, as opposed to the time of the annual program recertification. In connection with this, the SBA also proposes to:
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- Prohibit HUBZone concerns from submitting an offer for a HUBZone contract while their application to admission to the HUBZone is pending. A company would only be allowed to submit offers for HUBZone contracts after its application is approved.
In addition to those changes, the SBA also proposes adjustments to the current “attempt to maintain” requirement. Under current HUBZone regulations, a HUBZone firm may have less than 35% HUBZone residents at the time of its annual recertification while the firm is performing a HUBZone contract, so long as the company can represent that it has at least 20% HUBZone residents and is “attempting to maintain” the 35% HUBZone residency requirement during the life of its HUBZone contracts.
The SBA would alter this rule to require HUBZone entities to certify they are attempting to maintain the 35% HUBZone residency requirement at each of the following times:
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- when they apply for HUBZone certification,
- at the time they complete their recertification, and
- at the time of any offer plus price for any HUBZone contract, or offer without price for a multiple-award contract vehicle
As part of these revisions, the SBA also proposes that a HUBZone company which does not receive a HUBZone contract during the year preceding its recertification date must represent that, at the time of its recertification, at least 35% of its employees reside in HUBZones and the concern’s principal office is located in a HUBZone. However, a firm that was awarded a HUBZone contract during the year preceding its recertification date would only have to represent that, at the time of its recertification, it is attempting to maintain compliance with the 35% HUBZone residency requirement and the concern’s principal office is located in a HUBZone.
§ 126.500 How does a concern maintain HUBZone certification?
(a) Recertification.
(1) Any concern seeking to remain a certified HUBZone small business concern in DSBS (or successor system) must recertify to SBA that it continues to meet all HUBZone eligibility criteria (see§ 126.200) every three years. In order to recertify—
(i) A certified HUBZone small business concern that was not awarded a HUBZone contract during the 12-month period preceding its recertification must represent that, at the time of its recertification, at least 35% of its employees reside in HUBZones and the concern’s principal office is located in a HUBZone.
(ii) A certified HUBZone small business concern that was awarded a HUBZone contract during the 12-month period preceding its recertification must represent that, at the time of its recertification, it is attempting to maintain compliance with the 35% HUBZone residency requirement and the concern’s principal office is located in a HUBZone.
(2) The concern’s recertification must be submitted in the 90 calendar days before the triennial anniversary of its HUBZone certification date.
(3) If a concern fails to recertify, SBA will propose the concern for decertification pursuant to § 126.503.
(b) Program examinations.
SBA will conduct program examinations of certified HUBZone small business concerns to ensure continued program eligibility using a risk-based analysis to select which concerns are examined.
This change would effectively give HUBZone companies a one-year grace period after award of a HUBZone contract, during which it need only certify that the company is “attempting to maintain” the 35% HUBZone residency requirement.
The SBA explained this means that:
A certified HUBZone small business concern that has received a HUBZone contract must be “attempting to maintain” the 35% HUBZone residency requirement (including by having at least 20% of its employees reside in a HUBZone) on the first certification anniversary date after being awarded a HUBZone contract and at least 35% of its employees reside in a HUBZone on each certification anniversary date thereafter. SBA does not believe that the 35% HUBZone residency requirement should be watered down to as low as 20% over the course of a firm’s participation in the HUBZone program merely because a HUBZone small business concern received one or more HUBZone contract.
The proposed regulation also requires a certified HUBZone company that is performing a HUBZone contract and fails to “attempt to maintain” the minimum employee residency requirement must notify SBA via email to hubzone@sba.gov within 30 calendar days of such occurrence.
In addition to revising the recertification requirements of HUBZone companies, SBA also proposes to modify who would be considered a HUBZone employee. To qualify for the program, the current basic requirement is that 35% of a company’s employees must reside in a HUBZone. The SBA seeks to make the following changes to the rules that govern the residency requirement:
In order to qualify as an employee for HUBZone purposes, an employee will have to work 80 hours per month. 13 C.F.R. 126.103 currently requires employees to work only 40 hours a month to be regarded as a HUBZone employee.
Individuals must perform “work for the concern in order to be considered an employee for HUBZone purposes,” and the SBA may request “a combination of job descriptions, resumes, detailed timesheets, sample work product and other relevant documentation” to confirm this. The SBA describes this change as a clarification of the existing definition of employee in 13 C.F.R. 126.103.
Leased employees will only be treated as employees for HUBZone purposes when they are leased from a concern that is primarily engaged in leasing employees. 13 C.F.R. 126.103 currently provides that individuals obtained from a “leasing concern” may generally be considered employees without requiring the “leasing concern” to be primarily engaged in leasing.
The definition of “reside” would be changed to state that to determine residence, SBA will first look at the individual’s address on his or her driver’s license “or other government-issued identification.” 13 C.F.R. 126.304(b)(2) currently provides that SBA will rely on an individual’s voter registration card.
The requirement for an individual to have lived at a location from 180 calendar days would be reduced to 90 calendar days for the individual to qualify as a HUBZone employee, because it would emower firms to enter the program more quickly. 13 C.F.R. § 126.103 currently requires employees to have resided in the HUBZone for 180 days to be counted as a HUBZone employee.
HUBZone concerns would be allowed to have one Legacy HUBZone employee, defined as an individual who: (a) resided in a HUBZone (other than a Redesignated Area) for at least 90 days preceding, and 180 days following, the concern’s HUBZone certification date or most recent recertification date; and (b) remains an employee at the time of the concern’s current recertification date.
Specifically, SBA requests comments on the following: whether SBA should limit the duration of Legacy HUBZone employee status to a certain number of years, and if so, how many years would be appropriate; whether individuals who were students when they resided in a HUBZone should be eligible for treatment as Legacy HUBZone Employees; whether Legacy Employees should be limited to full-time employees only; and whether an owner of the concern should be able to qualify as a Legacy HUBZone Employee. SBA is concerned that not imposing some restrictions on Legacy Employees could open the provision to abuse. The purpose of this provision is to allow HUBZone firms to retain employees who have managed to improve their position and move out of a HUBZone. This purpose is not relevant to many owners of HUBZones because they are not at risk of being fired for moving out of a HUBZone.
Finally, the SBA is proposing changes to what qualifies as a principal office. Under current HUBZone regulations, a HUBZone concern’s “principal office” must be in a HUBZone, and the “principal office” is the office where the greatest number of employees of the HUBZone concern work.
The SBA proposes the following modifications to regulations that define a HUBZone company’s “principal office.”
For leased facilities, a lease must have commenced at least 30 days prior to the date of SBA’s review and end at least 60 days after the date of the review. The proposed regulation states:
In order for a location to be considered the principal office, the concern must provide a deed or an active lease that includes a start date that was at least 30 calendar days prior to the relevant date of review, and an end date that is at least 60 calendar days after the relevant date of review, as well as any other documentation requested by SBA
For shared working spaces (or “coworking” spaces), firms will have to provide evidence that the firm has 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. The proposed regulation states:
For shared working spaces, evidence that the firm has 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.
A virtual office (or other location where a firm only receives mail and/or occasionally performs business) does not qualify as a principal office. The proposed regulation states:
In order for a location to be considered the principal office, the concern must conduct business at this location.
If 100% of a firm’s employees telework (i.e., work the majority of the time from their homes), then at least 51% of its employees must work from HUBZone locations and the firm’s principal office would be the location where its records are kept. The proposed regulation states:
If 100% of a firm’s employees telework, at least 51% of its employees must work from HUBZone locations to meet the principal office requirement.
The SBA also seeks comments about whether the agency should “allow teleworking employees who reside and work within the same census tract as the firm’s claimed principal office (or an adjacent census tract) to be counted as working from the principal office. If permitted, SBA believes this should be limited to firms with commercial leases and/or firms with only a single office location but seeks comments on this and other changes SBA should consider in response to the shift to telework.”
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.
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