Small businesses that are bidding on government contracts must be aware of the risks of hiring management level employees from a competitor or a company where there have been previous relationships. Although the person has left the other company, the SBA’s investigation after a small business size protest is filed can prove to be disastrous. More specifically, the catch all analysis under SBA affiliation rules – totality of the circumstances test could be a problem
In a recent case, the SBA Office of Hearings and Appeals (SBA OHA) reversed the SBA’s Small business size determination decision found affiliation based on the totality of circumstances test.
The case was reversed mainly because the SBA’s size determination analysis as to the role of a key employee was flawed and not supported by the record. What the SBA found was that the Appellant’s resume showed that he held two positions as a key employee. His duties included provided PMO level support to human resources, accounting, and operational activities. The Appellant also served as vice president at another company. Read more about 13 CFR 125.6 Understanding Rules of Prime Contractor’s Limitations on Subcontracting FAR 52.219 14
The question for SBA OHA was whether the facts in the size protest record showed that the Appellant’s company and the second company demonstrated interactions between them that were so suggestive or reliance as to cause the businesses to become affiliated. OHA found that the size protest record lacked support. See Difference Between Teaming Agreement vs Joint Ventures.
Totality of the Circumstances Test – SBA Office of Hearings and Appeals Analysis for Control
The rule for finding small business affiliation under the totality of the circumstances test must include an analysis of control between the two companies. A mere connection between two businesses does not by itself cause affiliation. When the SBA fails to assess elements of control, it’s small business size determination under might not likely be upheld on appeal.
Here, the SBA Office of Hearings and Appeals found that the SBA Area Office lacked any explanation of the facts to support affiliation. A small business size determination must show how the two firms have the power to control each other. In this size appeal decision, SBA OHA looked for a detailed analysis from the SBA and not a mere conclusion. Citing Size Appeal of Human Learning Sys., LLC, SBA No. SIZ-5769, at 11 (2016). See information about CICA and Rule of Two Small Business requirements.
SBA Affiliation Rules — Key Employee’s Title Alone Will Not Suffice Under the Totality of the Circumstances Test
When the Area Office looks at key employees under SBA affiliation rules who may have served in positions at the alleged affiliate’s business, it is required to look beyond an employee’s title. SBA OHA found that key employees are those positions that have a critical influence or substantive control over the operations or management of the alleged affiliated business. See rules about affiliation and identity of interest. A Director of Operations is one example of being a key employee that OHA may consider as having the ability to control. However, each size protest case is very fact-specific.
Business owners or key management executives must look carefully at the organization of staff members. Paying special attention to hiring incumbent personnel is critical. This is especially true when you plan to use the incumbent as a teaming partner or subcontractor.
For help or legal counsel in a small business size protest case or a size appeal to SBA Office of Hearings and Appeals, call our government contracts attorneys at 1-866-601-5518.