The U.S. Small Business Administration proposed sweeping changes to the HUBZone Program regulations last week. Most of the proposed regulations will be considered welcome changes that seek to streamline and relax some compliance requirements, making it easier for firms to maintain and retain their HUBZone status after initial adoption into the HUBZone Program. The changes also clarify ambiguities in the regulations.
The deadline for submitting comments on the proposed rules is December 31, 2018. We recommend that interested parties consider submitting comments on the proposed rules, even if it is to generally support the SBA’s proposal. Opportunities to revise this program’s rules are rare. We strongly recommend that the following stakeholders review the specific changes proposed and seek advice from counsel as needed:
- Current HUBZone businesses
- Entity-owners (such as Tribes, ANCs, etc.) of HUBZone businesses
- Current or potential applicants to the HUBZone Program
- Businesses interested in partnering with HUBZone businesses
Proposed Rule Highlights
- Move to Annual Recertification. The proposed rule would eliminate the burden on HUBZone small businesses to continually demonstrate that they meet all eligibility requirements at the time of each offer and award for any HUBZone contract opportunity. SBA would require only annual recertification of HUBZone status, instead of multiple contract-specific certification dates throughout the year. So participants would re-certify once a year, and participants would certify their HUBZone status at the time of the offer for each HUBZone contract, but the date of eligibility will be determined by the annual certification date (not the offer date). This change will lessen the administrative and compliance burden on HUBZone businesses, and it also makes compliance activity more predictable and certifications more stable.
- Relaxation of Requirement for 35% of Employees to be HUBZone Residents. SBA proposes some practical changes to relax some compliance requirements regarding the requirement to have 35% of your employees in a HUBZone Area, making it easier for HUBZone participants to retain their status.
- Who is a HUBZone Resident? SBA has relaxed requirements for which employees can be claimed as HUBZone residents. In addition to employees currently residing in a HUBZone as of the certification date, HUBZone residents will also include employees who resided in a HUBZone at the time of certification regardless of whether the employee moved to a non-HUBZone area later or the area lost its HUBZone status. SBA also proposed changes to include employees who reside overseas for the contract duration, when they continue to meet certain requirements regarding residency in a U.S. HUBZone while not performing the overseas contract.
- “Attempt to Maintain” Compliance with 35% HUBZone Resident Employees. The proposed rule would authorize SBA to propose decertification of a HUBZone small business concern that is performing one or more HUBZone contracts if SBA determines that the concern no longer has at least 20% of its employees living in a HUBZone. The proposed rule has defined the statutory requirement that a HUBZone small business concern ‘‘attempt to maintain’’ compliance with the 35% HUBZone requirement while performing a HUBZone contract to mean having not less than 20% HUBZone employees. During the proposed decertification process, the concern could demonstrate that it does in fact continue to have at least 20% HUBZone employees and has otherwise attempted to meet the 35% requirement.
- Definition of Employee. HUBZone stakeholders may have different feelings regarding this issue. SBA proposes some clarifications to the definition of employee, which refers to an individual who works a minimum of 40 hours per month. SBA is considering revising the requirement from 40 hours per month and replacing it with 20 hours per week. If this impacts your business (positively or negatively), you may wish to provide comments on this issue.
Topics for Comments
While all comments are welcome, SBA specifically requested comments regarding the following issues:
- Seasonal Employees. Should/can seasonal employees be counted while still maintaining the integrity of the eligibility requirements?
- 20% Minimum HUBZone Resident Employees. What do you think about the proposed 20% minimum requirement (under the 35% HUBZone resident employee rule)? “SBA believes that a lower percentage (i.e., allowing less than 20% HUBZone residents) would unreasonably diminish the impact of the program on the targeted areas and populations. However, SBA requests comments as to whether a different percentage is also reasonable and would accomplish the objectives of the HUBZone program while not unduly burdening firms performing HUBZone contracts.”
- In-kind Compensation guidance. Is SBA’s treatment of in-kind compensation (non-monetary compensation such as housing, food, etc.) reasonable?
- Overseas Employees & Contracts. Proposed application of employee residency requirements to employees working overseas on overseas contracts.
More SBA Regulations Expected for 8(a) Program & Mentor Protégé Programs
We wanted to note that this set of regulatory changes to the HUBZone Program is really the first of two major revisions of SBA regulations. The SBA is working on revamping much of the SBA 8(a) Program and aspects of the Mentor Protégé Programs. We anticipate the release of proposed regulations regarding those changes next year.