Contractors can sometimes make mistakes when calculating the SBA’s 35% HUBZone employee requirements when bidding for government contracts. 13 CFR 126.601 governs the employee residency requirements for HUBZone companies.
Failure to comply with the rule can cause companies to lose out on millions in government contract awards.
Do not take chances with virtual office spaces: If the SBA conducts its HUBZone requirements investigation and finds that you have a “shell” office or virtual office, it can pursue criminal action against you. See this case for proof.
It is the small business that has the burden of checking the HUBZone maps and making sure that it meets the HUBZone residency requirements when it is submitting a proposal for a new contract. Courts are very strict about this requirement. “[T]he government is not generally subject to estoppel or a waiver of restrictions on eligibility for benefits even when the applicant is given misleading information that results in prejudicing his efforts to obtain the benefits.” (citing Office of Personnel Mgmt. v. Richmond, 496 U.S. 414, 433 (1990))).
In a bid protest at the Court of Federal Claims (COFC), the issue was whether the awardee met the HUBZone employee requirements both at the time of offer and on the date of award.
SBA Congressional Authority
The COFC discussed the basics of the 35% HUBzone employee requirements by first showing the Congress gave the SBA the authority to decide matters under the HUBZone Program under the Small Business Reauthorization Act of 1997, Pub. L. 105-135, Tit. VI, 111 Stat 2592, 2627 (1997). The general rule is to be eligible under the HUBZone Certification Program, a small business must have at least 35% of employees residing in a HUBZone. See 13 CFR 126.200.
COFC Jurisdiction in a HUBZone Protest: The Air Force in this case, filed a motion to dismiss for lack of the Court’s jurisdiction. It claimed that the issue was a matter of contract administration. The COFC denied its motion because the real dispute was the SBA decertified the protestor from the program. Thus, and the COFC had jurisdiction under bid protest regulations.
The COFC felt that the SBA’s decertification was a governmental action in connection with a procurement. Citing Aeolus Sys., LLC v. United States, 79 Fed. Cl. 1, 6–7 (2007) (showing bid protest jurisdiction when challenging to SBA determination that plaintiff wasn’t a HUBZone small business concern under the regulations, which led to cancellation of a contract awarded to plaintiff)
Who is a HUBZone Employee Under 13 CFR 126?
Under the HUBZone requirements regulations, an “employee” is defined as “individuals who are employed on a full-time, part-time, or another basis, if that individual works a minimum of 40 hours per month.” 13 CFR 126.103. Under congressional authority to oversee the HUBZone Program, the SBA looks at the “the totality of the circumstances, which includes criteria used by the IRS for Federal income tax purposes and those outlined in SBA’s Size Policy Statement No. 1” to determine who is an employee.
What Does HUBZone Residency Mean?
Under SBA regulations governing HUBZone employee requirements, “reside” means “to live in a primary residence at a place for at least 180 days, or as a currently registered voter, and with intent to live there indefinitely.” 13 CFR 126.103. When conducting a HUBZone residency investigation, the SBA usually asks for the following:
- Records indicating the home address of each HUBZone resident employee of the company . . . including copies of driver’s licenses or voter registration cards showing that the employee’s home address is in a HUBZone .
- A copy of a HUBZone map determination for each employee residing in a HUBZone, including the name of each employee on the HUBZone maps; and
- An explanation and any other documents addressing the specific allegations set forth in a bid protest.
The HUBZone employee requirements and statutory scheme establish several criteria for determining HUBZone boundaries. See 15 USC 632(p)(4). Under the first criterion, any census tract that the Department of Housing and Urban Development (HUD) has determined is a HUBZone qualified census tract for purposes of the low-income housing credit is also a HUBZone. See 51 USC 632(p)(4)(A) (incorporating by reference the definition found in 26 USC 42(d)(5)(B)(ii)). If a formerly qualified census tract “ceases to be qualified” (as determined by HUD), it becomes a “redesignated area” for a three-year period. See 15 USC 632(p)(4)(C). Redesignated areas are also HUBZones.
HUBZone Employee Requirements – 13 CFR 126.6 HUBZone 35% When Bidding on New Contracts
Under 13 CFR 126.601(c), a small business “must be a SBA qualified HUBZone both at the time of the initial offer and at the time of [the] award to be eligible for a HUBZone contract.” Thus, small business bidders must meet the employee 35% residency rule both on the time the bid offer and at the time of contract award. Find out more about HUBZone joint venture rules.
The Court of Federal Claims agreed with the SBA for decertifying the protestor because it failed to meet the HUBZone compliance requirement at the date of award.
HUBZone safe harbor provisions not applicable when bidding on new government contract: The safe harbor provided by the “attempt to maintain‟ language in the HUBZone regulations applies only during the performance of an ongoing contract, and a firm must meet all the regulations of the HUBZone program – including the 35 percent residency requirement – at the time of offer and award of any new HUBZone contracts.”
Contractors should make sure that they comply with the employee residency requirements or face elimination from getting a government contract award. Find out More About HUBZone Program Joint Ventures.
For legal assistance with SBA HUBZone employee requirements, call Watson & Associates, LLC’s government small business lawyers at 1-866-601-5518.