SBA OHA Clarifies HUBZone “Employee” Rules in CS Government Solutions Appeal
In a recent HUBZone appeal, the SBA Office of Hearings and Appeals (OHA) affirmed SBA’s decision that CS Government Solutions, LLC was not an eligible HUBZone small business for DHS’s FirstSource III procurement. For HUBZone contractors, the decision is a reminder that HUBZone eligibility can be tested aggressively in both SBA program examinations and HUBZone status protests.
For companies pursuing HUBZone set-aside work, the case highlights a practical rule: placing a person on payroll is not necessarily enough to make that individual a qualifying HUBZone employee.SBA may examine whether the person actually performed work and whether the firm can support its employee count with documentation beyond payroll records alone.
The procurement and the HUBZone Bid Protest
The case arose from DHS’s FirstSource III procurement, a department-wide contract vehicle for information technology commodities and value-added reseller services that included a HUBZone set-aside track. CS Government Solutions, LLC was a joint venture between Sirius Federal, LLC and Cynergy Professional Systems LLC, with Cynergy identified as the HUBZone partner.
CS Government Solutions submitted its Phase I proposal in June 2021 and its Phase II proposal in January 2023. After DHS later identified the company as a successful offeror in the HUBZone category, competitor BahFed Corporation filed a HUBZone status protest challenging the joint venture’s eligibility.
Why SBA challenged eligibility
The protest centered on four individuals Cynergy claimed as HUBZone employees. During a HUBZone program examination, SBA concluded those individuals appeared on the payrolls of multiple businesses seeking to obtain or maintain HUBZone certification, raising concerns that they were not legitimate employees of Cynergy.
Cynergy eventually submitted payroll materials, W-2s, timesheets, offer letters, resumes, a job description, and a table that it characterized as work product. SBA nevertheless found the record did not show that the four individuals performed at least 40 hours of work during the relevant four-week period, so SBA excluded them from the employee count.
Once those four individuals were removed, SBA found Cynergy no longer met the HUBZone requirement that at least 35 percent of its employees reside in a HUBZone. SBA therefore decertified Cynergy and later sustained BahFed’s HUBZone protest against CS Government Solutions.
The HUBZone Act and the implementing regulations required that at least 35% of a HUBZone small business concern’s employees reside in a HUBZone. (Id., at 4, 15 U.S.C. § 657a(d)(1)(A); 13 C.F.R. § 126.200(d)(1).) She noted the regulations defined “Employee” as individuals hired on full-time, part-time or other basis so long as they worked for a minimum of 40 hours during the four-week period prior to the review. She further noted the preamble to an amendment of the regulation in 2019 which stated that some third-party businesses were providing HUBZone resident employees to prospective HUBZone concerns. The preamble concluded that SBA would allow these arrangements where they were legitimate, and the individuals hired were performing legitimate work. (Id., at 6-7, 84 Fed. Reg. 65,222, 65,225 (Nov. 26, 2019).)
SBA’s policy is that individuals hired through third party employment agencies must be performing work in order to be considered employees for the HUBZone Program. The Deputy Director concluded that it is thus clear that individuals hired directly by a HUBZone applicant or HUB-105 participant must be performing work in order to be considered employees for HUBZone purposes. In 2024, SBA published a final rule that emphasized an individual must be performing work in order to be considered an employee for HUBZone purposes. (Id. (89 Fed. Reg. 102,448 (Dec. 17, 2024).)
The HUBZone Protest Appeal to OHA
On appeal, CS Government Solutions argued that SBA should have relied only on payroll records to determine whether the four individuals counted as employees.The appellant also argued SBA improperly created a non-regulatory “legitimate work” standard by looking to work product and other non-payroll evidence.
OHA rejected those arguments and affirmed SBA’s determination. The judge held that SBA was not limited to payroll records and could evaluate the “totality of the circumstances” in deciding whether claimed workers qualified as employees for HUBZone purposes.
HUBZone rules are emphasized in the decision
The decision is especially important because it collects several HUBZone rules contractors should keep in mind.
- Eligibility in a two-phase procurement
For a two-phase procurement, a concern must be HUBZone-certified as of the date it submits its initial offer, whether or not that initial submission includes price.OHA explained that eligibility in this context relates back to the firm’s most recent certification anniversary date preceding that offer.
In this case, that meant SBA looked back to Cynergy’s December 20, 2020 certification anniversary date because CS Government Solutions submitted its Phase I offer on June 8, 2021. That timing rule mattered because the later protest turned on whether Cynergy was truly eligible at that earlier point in time.
- The 35 percent residency requirement
The decision reiterates that the HUBZone statute and regulations require at least 35 percent of a HUBZone concern’s employees to reside in a HUBZone. If individuals do not qualify as employees, they cannot be counted toward that percentage.
After excluding the four disputed individuals, SBA found Cynergy had 19 qualifying employees and at most 5 HUBZone residents, when at least 7 HUBZone residents were needed to satisfy the 35 percent requirement. That shortfall alone was enough to disqualify the procurement from HUBZone eligibility.
- What it means to be an “employee”
Under the regulations in effect at the relevant time, an employee included an individual employed on a full-time, part-time, or other basis so long as the person worked at least 40 hours during the four-week period immediately prior to the relevant review date.OHA emphasized the importance of the word “worked” in the regulatory definition.
The decision also notes that SBA reviews payroll records for the relevant pay periods, but does not stop there. Instead, SBA may determine employee status based on the totality of the circumstances, including other evidence relevant to whether the individual truly qualifies as an employee.
- SBA may review more than payroll records
A major issue in the case was whether payroll records are the exclusive proof of employee status. OHA concluded they are not.
The decision explains that the HUBZone regulations contemplate other worker categories, such as temporary agency workers, unpaid owners, and independent contractors, which cannot be assessed solely through payroll records.OHA also pointed to SBA’s authority to request additional information and supporting documents when evaluating HUBZone eligibility.
- Employees must perform actual work
OHA accepted SBA’s position that HUBZone employees must perform actual work, not simply receive compensation. The decision relied in part on SBA’s longstanding interpretation of the HUBZone program as a jobs program intended to create real employment opportunities in historically underutilized business zones.
The judge also discussed SBA’s rulemaking commentary explaining that placing HUBZone residents on payroll without giving them actual work undermines the purpose of the program.In other words, the HUBZone program is not satisfied by payroll entries alone if the individuals are not genuinely working for the company.
OHA found that “….individuals here were allegedly working on Information Technology and thus should have produced a significant work product for review. Instead, beyond the payroll records, there is merely one sheet of contacts with Contracting Officers. The D/HUB, using all the information at hand and considering the totality of the circumstances, reached the conclusion that the Individuals had not worked for forty hours in the four weeks preceding the date of review. This is a reasonable conclusion, given the record before the D/HUB, that four people each working for forty hours over four weeks should have produced a far more substantial product. They therefore failed to meet the definition of “Employee” in the HUBZone regulation. Therefore, they were not counted as Cynergy employees and thus Cynergy did not meet the standard of 35% of its employees being HUBZone residents, and was not a HUBZone concern, and Appellant is not an eligible HUBZone joint venture. The D/HUB’s judgment here cannot be said to be clear error.”
Why the appellant lost
OHA ultimately held that SBA did not clearly err in excluding the four disputed individuals from Cynergy’s employee count.The record included only limited evidence of their purported work, and SBA found that evidence insufficient to show the four individuals each performed the required hours during the relevant time period.
Because those individuals could not be counted, Cynergy fell below the 35 percent HUBZone residency threshold and was not an eligible HUBZone concern for the award.Since Cynergy was the HUBZone venturer in the joint venture, CS Government Solutions likewise could not qualify for the HUBZone set-aside procurement.
Practical lessons for HUBZone contractors
The decision offers several practical lessons for HUBZone firms, joint ventures, and contractors preparing for possible protests.
- Payroll alone may not be enough. Firms should not assume that a payroll record or timesheet will automatically establish HUBZone employee status if SBA questions whether the individual actually performed work.
- Documentation matters. Companies should maintain records showing that claimed HUBZone employees were onboarded, trained, supervised, and performing real work during the relevant review periods.
- Certification timing matters. In a two-phase procurement, the key date may be the initial proposal and the certification anniversary date that precedes it, not a later submission date.
- A weak HUBZone partner can jeopardize a joint venture. If the HUBZone venturer is later found ineligible, the entire HUBZone joint venture can lose eligibility for the procurement.
Why this case matters
For contractors, CS Government Solutions is a significant reminder that HUBZone eligibility disputes often turn on documentation and proof, not just formal labels. When SBA suspects that a company used “paper employees” to satisfy the 35 percent rule, the agency can look behind payroll records and examine whether those workers were performing legitimate work.
That makes early compliance review critical, especially for companies pursuing large set-aside opportunities or entering joint ventures that depend on one partner’s HUBZone status. Businesses facing a HUBZone protest or program examination should assess employee documentation quickly and carefully before the record is fixed.
How Watson & Associates’ HUBZone protest lawyers can help
Watson & Associates, LLC helps government contractors respond to HUBZone status protests, prepare for SBA eligibility reviews, and assess the strength of HUBZone joint venture structures before award challenges arise. This decision shows how quickly an employee-count issue can become a bid-threatening eligibility dispute.
Contractors that rely on HUBZone status should periodically review their employee documentation, residency support, and recertification timing to reduce protest risk. Where a HUBZone protest, examination, or appeal is already underway, prompt legal review can make the difference between preserving an award and losing it. Call our government contract attorneys at 1.866.601.5518.