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 certified companies. Failure to comply with the rule can cause companies to lose out on millions in government contract awards. In addition, the DOJ and SBA OIG are actively pursuing criminal charges for procurement fraud. When calculating for purpose of recertification or certification when submitting a proposal for a new federal contract, you must understand the rules. You can put your company at risk if proper care is not used. Engaging HUBZone lawyers that understand the regulations can be helpful during a civil or criminal HUBZone investigation.
What is the Definition of a HUBZone Employee Under 13 CFR § 126.103?
An employee for purposes of evaluation for HUBZone certification means all individuals employed on a full-time, part-time, or another basis. Those individuals must also work for a minimum of 40 (forty) hours during the four-week period immediately prior to the relevant date of the review. Such a date would mean the date that you submit your HUBZone application to SBA or the date of recertification.
When applying for initial certification, the Area Office will assess your company’s payroll records for the most recent and completed pay periods for the four-week period immediately prior to the date of application or date of HUBZone recertification. There is no one-size-fits-all. The SBA approaches its analysis of deciding who meets the definition of a HUBZone employee. For example, the SBA uses criteria used by the Internal Revenue Service (IRS) for Federal income tax purposes and the factors set forth in SBA’s Size Policy Statement No. 1 (51 FR 6099, February 20, 1986).
Why is the HUBZone Employee Requirement Important?
The HUBZone employee requirement is important for at least a couple reasons. First, the Department of Justice is seeking our small businesses that are receiving federal government contracts but not complying with the SBA regulations. Those companies often end up being investigated and charged with fraud against the United States. Second, if your competition challenges you as the awardee with HUBZone violations, you can lose a very lucrative contract in a small business status protest.
HUBZone Application:: Who Meets the HUBZone Employee Definition By Statute?
The SBA regulations intend for the following groups to meet the employee definition in the HUBZone Program:
- Individuals obtained from a temporary employee agency, leasing concern, or through a union agreement,
or co-employed pursuant to a professional employer organization agreement;
- An individual who has an ownership interest in the concern and who works for the concern a minimum
of 40 hours during the four-week period immediately prior to the relevant date of review, whether or not the individual
- The sole owner of a concern who works less than 40 hours during the four-week period immediately prior to the relevant date of review, but who has
not hired another individual to direct the actions of the concern’s employees;
- Individuals who receive in-kind compensation commensurate with work performed. Such compensation must provide a demonstrable financial value
to the individual and must be compliant with all relevant federal and state laws.
HUBZone Investigations – Who Does Not Meet the Employee Definition?
For purposes of HUBZone investigations, litigation and criminal allegations against small businesses, be mindful that the following groups of people do not meet the definition of an employee in their HUBZone application.
- Individuals who are not company owners and receive no compensation (including no in-kind compensation) for work performed;
- Individuals who receive deferred compensation for work performed ( this means work but paid at a later date);
- Independent contractors that receive payment via IRS Form 1099 and are not considered employees under SizePolicyStatementNo1.pdf (sba.gov); and
- Subcontractors ( note that the SBA may investigate whether or not your 1099 contractors are truly contractors or disguised employees – this could be a problem during a HUBZone investigation for fraud).
Tip: Affiliate employees may be considered employees if the totality of the facts and circumstances show that there is no clear line of fracture between the
HUBZone applicant (or certified HUBZone small business concern) and its affiliate(s) (see13 CRF 126.204).
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.
When it comes to meeting application requirements, it is the small business that has the burden of checking maps and making sure that it meets the HUBZone requirements employee definition 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))).
- A good way of applying the rule is to follow the projected dates for bid submission and contract award.
SBA HUBZone Employee Requirements & Congressional Authority
The COFC discussed the basics of the 35% HUBZone employee requirements by first showing that Congress gave the SBA the authority to decide matters under the 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 qualified Zone. See 13 CFR 126.200.
COFC Jurisdiction in a HUBZone Protest
The Air Force in one 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 that 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 program 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 the cancellation of a contract awarded to plaintiff)
What Does SBA HUBZone Residency Requirements Mean?
Under SBA regulations governing SBA HUBZone residency 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 residency investigation, the SBA usually asks for the following:
- Records indicating the home address of each 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 map determination for each employee residing in a Zone, including the name of each employee on the maps; and
- An explanation and any other documents addressing the specific allegations set forth in a bid protest.
The employee requirements and statutory scheme establish several criteria for determining HUBZone redesignated tract areas. 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.
SBA HUBZone Requirements – 35% Employees When Bidding on New Contracts
Under 13 CFR 126.601(c), a small business “must be an SBA qualified small business both at the time of the initial offer and at the time of [the] award to be eligible for a government contract.” Thus, small business bidders must meet the employee 35% residency requirements both at the time the bid offer and at the time of contract award. Find out more about HUBZone joint venture rules.
- Note that HUBZone requirements mean that employees can be from any HUBZone and just not a particular location. See Tips From HUBZone Fraud & False Claims Act Whistleblower Attorneys
The Court of Federal Claims agreed with the SBA for decertifying the protestor because it failed to meet the compliance requirement at the date of the award.
HUBZone safe harbor provisions not applicable when bidding on new government contracts:
The safe harbor provided by the “attempt to maintain‟ language in the 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 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.
What is a HUBZone Status Protest Under 48 CFR 19.306 and How To Avoid Litigation Mistakes
When you believe that the awardee does not meet the SBA’s HUBZone requirements, then you must file a bid protest that articulates a factual and legal basis as to why the awardee does not meet the requirements. 48 CFR 19.306 governs HUBZone status protests. See also SBA HUBZone Advantages, Benefits & Definition.
You Must be an Interested Party to File a HUBZone Protest. If you have reason to believe that the awardee does not meet the HUBZone employee requirements, then you must immediately file a HUBZone bid protest. In order to file a protest, you must be an interested party. Keep in mind that the agency contracting officer, or the SBA may at anytime protest the apparent awardee’s status as a qualified historically underutilized business zone small business concern (see 13 CFR 126.800).
Tip: If you are an interested party seeking to file a protest for both the small business size and status of the awardee, then you have to file two separate protests.
HUBZone Requirements & Residency for a Bid Protest
To file a bid protest about calculating the HUBZone 35% employee residency requirements under 13 CFR 126, it must be in writing and must state all specific grounds for the protest. You cannot rely on suppositions or “information and belief”. These approaches are common mistakes still made today. It will get your protest dismissed.
Reasons for challenging the awardee’s status may include:
- The awardee is not a qualified small business concern as defined in 13 CFR 126.103 and 13 CFR 126.200.
- The awardee’s principal office is not located in a HUBZone; or
- At least 35 percent of the employees do not reside in a HUBZone.
SBA OHA Has No Jurisdiction to Hear HUBZone Bid Protests
When challenging another company’s HUBZone statute, you want to file it in the correct location. Be aware that SBA OHA will have to dismiss the appeal because it lacks subject matter jurisdiction to hear disputes regarding the certification of HUBZone small business concerns.
SBA OHA’s jurisdiction is set out in 13 CFR 134.102. OHA has jurisdiction over appeals from size determinations and NAICS Code decisions. See 13 CFR 134.102(k). OHA also has subject matter jurisdiction over appeal cases from the Service-Disabled Veteran-Owned Small Business Concern Program under 13 CFR 134.102(q), and Women- Owned Small Business protests determinations under 13 CFR 134.102(s).
However, you must be aware that 13 CFR 134.102 does not allow OHA to hear cases about HUBZone status protests, nor does OHA have the authority to directly overturn a HUBZone award decision. See Size Appeal of Browning Construction Co., SBA No. SIZ-4526 (2002) (concluding that OHA’s jurisdiction “is limited and does not include HUBZone protests or appeals from HUBZone determinations.”) Find out about the standard for challenging agency actions.
For legal assistance with SBA HUBZone employee requirements and appeals, call Watson & Associates, LLC’s HUBZone attorneys and federal government small business lawyers at 1-866-601-5518.