[Federal Register Volume 72, Number 144 (Friday, July 27, 2007)]
[Proposed Rules]
[Pages 41239-41243]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-14492]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
RIN 3245-AF60
Small Business Size Standards; Calculation of the Number of
Employees
AGENCY: U.S. Small Business Administration.
ACTION: Proposed rule.
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SUMMARY: The U.S. Small Business Administration (SBA) proposes to
change the way it calculates a concern's number of employees in
determining its small business size status. SBA proposes to alter the
period used for calculating average number of employees from the
current method, which uses a rolling average over the preceding 12
months, to an average over the last 3 completed calendar years. This
proposal simplifies the calculation of the average number of employees,
reduces the burden on small businesses, and better defines the size of
a small business where number of employees is the measure for the size
standard.
DATES: Comments must be received by SBA on or before September 25,
2007.
ADDRESSES: You may submit comments, identified by RIN 3245-AF60 by one
of the following methods: (1) Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments;
or (2) Mail/Hand Delivery/Courier: Gary M. Jackson, Division Chief for
Size Standards, 409 Third Street, SW., Mail Code 6530, Washington, DC
20416.
FOR FURTHER INFORMATION CONTACT: Diane Heal, Office of Size Standards,
(202) 205-6618 or [email protected].
SUPPLEMENTARY INFORMATION: SBA is proposing to revise its method of
[[Page 41240]]
calculating the number of employees of a business concern from a 12-
month rolling average to an average over the last 3 completed calendar
years. Calculation of size would be based on, and coincide with, a
concern's calendar year submission of Form W-3, ``Transmittal of Wage
and Tax Statement,'' to the Internal Revenue Service (IRS) (found at
http://www.irs.gov/pub/irs-pdf/fw3.pdf). This policy would also
coincide with the regulatory requirement for a concern to update its
size status on an annually basis in the Central Contractor Registration
(CCR) and On-line Certifications and Representations (ORCA) databases.
Using the IRS W-3 Form would also give SBA a government-validated
document to use in verifying employment size. Currently, SBA reviews a
concern's payroll records to determine size where the size standard is
number of employees. For receipts-based size standards, SBA requires
concerns to submit their IRS tax returns (13 CFR 121.104). This method
of validating receipts has worked well.
If a concern has been in business for less than 3 calendar years,
average annual number of employees will be calculated based on an
annualized figure for the time it has been in operation. For example, a
concern that has been in business for 1 year and 3 months will divide
its total number of employees by 1.25 (1 year + 3 months/12 months).
For this calculation, the time period includes all completed pay
periods as of the date of self-certification.
If a concern has not filed an IRS Form W-3 for a period that must
be included within the period of measurement, SBA may calculate the
concern's average annual using other information. SBA prefers to use
other relevant government documents reporting the number of employee of
a concern, such as IRS Form 941, Employer's Quarterly Federal Tax
Return. In lieu of government documents, SBA will consider any other
available information, such as payroll records, which show the total
number of employees for the relevant period.
Why is SBA proposing a 3-year average: SBA is proposing to revise
its method of calculating the number of employees of a business concern
because it considers the current method to be burdensome to small
businesses, and because of changes in the Federal procurement process
regarding the development of e-government and the acquisition process.
This proposal is also in the spirit of SBA's efforts to simplify its
size standards where possible.
With the current system of calculating employees, a concern's size
can fluctuate from pay period to pay period, necessitating a new
calculation after each pay period. SBA's proposal to calculate the
number of employees of a concern as an average over the concern's last
3 calendar years provides consistency and stability in calculating
size. The proposed calculation, if adopted, would require a concern to
calculate its employment size only once a year and it would apply until
the beginning of the next calendar year. The time period for
calculation would also be similar to the method used for calculating
receipts for size purposes, i.e., an average annual receipts over the
concern's last 3 completed fiscal years. Furthermore, for those
concerns with fiscal years that end at the calendar year, both
employment and receipts averages would be calculated at the same time.
With the advent of e-government systems in the Federal acquisition
process, a concern must update its CCR and ORCA information at least
once a year and every time its small business size status changes,
which could occur many times during the year using the current employee
calculation method. This is extremely burdensome on small businesses,
especially if a concern has different pay periods for different types
of employees (e.g., bi-weekly for hourly employees and monthly for
salaried employees).
The proposed method of calculation would also be less burdensome
and costly to small businesses and the Federal Government. Currently,
if a concern's small business size status is protested, the concern
must provide to SBA its own, and all of its affiliates, extensive
payroll records for the 12 months preceding the date of self-
certification. By going to an average number of employees over a
calendar year basis, a concern could supply SBA with copies of its own
and its affiliates' IRS Form W-3, along with other requested documents
as needed, that would show the concern's total number of employees for
each of the 3 preceding calendar years.
What SBA is not proposing: On December 3, 2004, SBA published an
Advanced Notice of Proposed Rulemaking (ANPRM) in the Federal Register
(69 FR 70197) that sought comments from the public on issues raised
during the public comment period concerning SBA's withdrawn proposal to
simplify and restructure its small business size standards (69 FR
13130, dated March 19, 2004). Many comments received as a result of the
withdrawn proposal recommended that SBA modify its method for
calculating the number of employees of a business concern. In the
December 3, 2004, ANPRM, SBA sought additional comments on alternative
methods of calculating the size of a business concern based on number
of employees, including the feasibility of using full-time equivalents
(FTEs). SBA also requested comments on whether the period for
calculating average employment should be modified from SBA's current
method, which uses a rolling average over the preceding 12 months.
During June of 2005, SBA conducted 11 hearings throughout the country
to receive additional comments on the ANPRM issues.
SBA received more than 5,000 comments addressing or mentioning the
subject of calculating a concern's number of employees; however, only
10 commenters made substantive comments regarding this subject. The
remaining commenters gave one-sentence responses without providing any
reasoning for their position. All but 86 of the comments were from
organizations that submitted as their own a form comment prepared by
and representing the position of a particular small business
association. Of the remaining 86 commenters, there were 11 business or
trade associations, 2 Alaskan Native Corporations, 1 Community
Development Corporation, and one large business prime contractor.
Many commenters misunderstood the request for comments on the
employee issue to be a request for a single employee-based size
standard to be used government-wide. SBA received recommendations of 25
employees and $100,000; 25 employees and $5 million; 50 employees; 75
employees; 100 employees; 500 employees, and 1,500 employees. One
commenter recommended two size standards of 100 and 750 employees, but
gave no reasoning for the selection of the two numbers.
Most of the comments received supported the concept of FTEs, with
only three commenters discussing how to calculate FTEs. One commenter
believed that FTEs should be based upon the number of man hours divided
by the average work year for a small business within a given industry
and recommended that a man-year equate to 1,080 hours. One commenter
recommended SBA define FTEs for a week, month, or full-time year,
because it would add consistency between companies. The other
recommended that SBA use a 1,920 hours per year standard. The remainder
of the commenters just stated their support for the idea.
[[Page 41241]]
Six commenters stated their opposition to FTEs. Of the six, four
discussed their reasons. Two trade associations strongly opposed the
use of FTEs because their industry relies heavily on part-time,
temporary and seasonal employees. They believed that this change would
place a tremendous administrative recordkeeping burden on their member
firms. One of the other commenters believed the use of FTEs would lead
to endless disputes and size status protest concerning how to compute
the number of FTEs. Another believed that FTEs would create incentives
to increase temporary jobs and reduce full time jobs. SBA did not
receive any substantive comments on FTEs from concerns in industries
that would be impacted by this change, i.e., industries that calculate
their size by number of employees. Rather, all of the substantive
commenters that addressed FTEs were from concerns and trade
associations in industries where the size standards are calculated in
receipts and not employees.
Based on these comments, SBA has decided not to convert any
industries where the size standard is measured by average annual
receipts to employee-based size standards. Also, the voluminous
supportive comments provided no basis for SBA to justify a significant
change in policy of this nature. Therefore, SBA will not make any
changes to the way it calculates number of employees to include FTEs.
Thirteen commenters advocated no change to the way SBA calculates
the number of employees. Only one of the commenters gave a reason,
i.e., he believed the current method was not complex. SBA believes that
the calculation is not complicated, but the current method is
burdensome to small businesses, as they need to recalculate their size
from pay period to pay period.
As part of SBA's review of comments from the ANPRM on the FTE
issue, it explored alternative data sources besides payroll records by
which to calculate a concern's number of employees. For the reasons
discussed above, SBA believes the use of IRS Form W-3 is a viable
alternative to payroll records and lessens the burdens on small
businesses and the Federal Government. SBA had decided to propose this
change pertaining to employment size rather than other changes offered
by the commenters.
Alternative Methods for Calculating Number of Employees: As an
alternative, SBA considered using a concern's total number of employees
for only its last calendar year. This method would also lessen the
burden and instability of the current method that fluctuates pay period
to pay period. However, trends in the economy fluctuate over a period
of years. SBA's use of a 3-year average for calculating receipts has
always taken these fluctuations into account, which provides for a more
stable measure of a concern's size. By extending the 3-year period to
the calculations of number of employees, SBA is providing consistency
in the way it determines size by both receipts and employees. For this
reason, SBA has determined that a 3-year average for calculating the
number of employees of a concern is more appropriate.
SBA welcomes public comments on its proposal to adopt a 3 calendar
year average to calculate a concern's number of employees and the use
of IRS Form W-3. Comments on alternatives, including the option of
retaining the current method of calculating employment size, should
explain why the alternative would be preferable to the proposed method
of calculating the number of employees.
Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork
Reduction Act (44 U.S.C. Ch. 35), and the Regulatory Flexibility Act (5
U.S.C. 601-612)
The Office of Management and Budget (OMB) has determined that this
proposed rule is a significant regulatory action for purposes of
Executive Order 12866. Accordingly, the next section contains SBA's
Regulatory Impact Analysis. This is not a major rule, however, under
the Congressional Review Act, 5 U.S.C. 800.
Regulatory Impact Analysis
1. Is there a need for the regulatory action?
SBA's mission is to aid and assist small businesses through a
variety of financial, procurement, business development, and advocacy
programs. To assist effectively the intended beneficiaries of these
programs, SBA must establish distinct definitions of which businesses
are deemed small businesses. The Small Business Act (15 U.S.C. 632(a))
delegates to SBA's Administrator the responsibility for establishing
small business definitions. The supplementary information section of
this proposed rule explains SBA's reasons for revising the way it
defines small businesses in industries where the size standards are
employee-based. SBA believes that it can simplify the calculation of
employee size and lessen the burden on small businesses.
2. What are the potential benefits and costs of this regulatory action?
The most significant benefit to businesses in industries that
calculate their size in number of employees is the lessening of the
burdens placed upon these businesses when they calculate their small
business size status for eligibility for Federal small business
assistance programs and retaining small business status for a longer
period of time. These programs include SBA's financial assistance
programs; economic injury disaster loans; and Federal procurement
preference programs for small businesses, including 8(a) concerns,
small disadvantaged businesses, small businesses located in
Historically Underutilized Business Zones (HUBZone), and service
disabled veteran-owned small businesses. HUBZone small businesses are
also eligible for Federal contracts awarded through full and open
competition after application of the HUBZone price evaluation
preference. Other Federal agencies also may use SBA size standards for
a variety of regulatory and program purposes. Through the assistance of
these programs, small businesses become more knowledgeable, stable, and
competitive businesses.
The benefits of redefining how the number of employees is
calculated would accrue to two groups: businesses that use small
business assistance programs and SBA officials that make formal size
determinations. Besides reducing the burden on businesses, this
proposed rule would reduce the burden on SBA officials performing size
determinations. SBA officials could use a concern's IRS Form W-3 and
not have to review a concern's payroll records, unless necessary.
SBA estimates that on average a business spends approximately 4
hours preparing size information in response to a size determination.
In some cases where a concern must provide extensive payroll records to
substantiate its employment size, preparation and copying expenses may
be much greater than 4 hours. SBA's proposal to utilize the IRS W-3
Form could significantly reduce these expenses by allowing businesses
to provide already prepared information. SBA estimates that preparation
time may decrease by at least 1 hour for size determinations based on
employment size. SBA would also expend less time on size determinations
by use of the IRS W-3 Form rather than verifying and calculating
employment size from payroll records. This may save from a few hours to
a few days in review time,
[[Page 41242]]
depending on the complexity of the case.
3. What are the alternatives to this proposed rule?
SBA considered two alternative approaches to the proposed rule.
First, it considered other sources of information on a concern's
employment, such as from the U.S. Department of Labor and the Social
Security Administration. SBA found that the IRS' W-3 Form provides the
most reliable and cost effective alternative source of employment
information from payroll records. In addition, SBA would require that a
concern calculate both its average annual receipts and number of
employees from information submitted to the same Federal agency--the
IRS. Second, SBA considered calculating employment size on an annual
basis instead of over a 3-year period as a viable alternative. As
explained above, a 3-year period has the advantages of providing more
stability in small business status and of achieving consistency in
policy with the 3-year average used to calculate average annual
receipts.
SBA's proposal could potentially impact up to 2,000 businesses, but
the actual number is likely to be significantly less than this number.
In the Dynamic Small Business Search, approximately 1,800 small
businesses out of over 300,000 are near or above 500 employees that
could grow or downsize to qualify as small under one of the SBA's
employee-based size standards that range between 500 employees to 1,500
employees. In addition, another 200 businesses are near or slightly
above the 150-employee size standard for information technology value
added resellers. Employment levels of businesses tend to be more stable
than revenues, which limits the number of businesses that may become
small or retain small business status if this proposal were adopted.
SBA invites comment on the impact this proposed rule would have on the
number of firms that could potentially do business with the Federal
Government or on data to estimate the effect this change would have on
the Federal contracting programs.
Under SBA's 7(a) Guaranteed Loan Program, SBA estimates that
potentially 10 additional loans totaling $8 million in new Federal loan
guarantees could be made to businesses newly-defined as small or those
retaining small business status. Additional loans under this program
would likely be limited to businesses in the wholesale trade sector,
which are subject to a 100-employee size standard. Using the
relationships between SBA loan data and the 2002 Economic Census,
approximately one-half of one percent of the 1,900 newly eligible small
businesses will seek SBA financial assistance. On average, small
businesses between 50 to 100 employees obtain 7(a) loans between
$700,000 and $800,000 in value.
Any newly defined small businesses could also benefit from SBA's
Economic Injury Disaster Loan (EIDL) Program. Since this program is
contingent upon the occurrence and severity of a disaster, no
meaningful estimate of benefits can be projected for future disasters.
SBA's proposed simplification of the way it calculates small
business size standards in terms of number of employees is consistent
with SBA's statutory mandate to assist small business. This regulatory
action promotes the Administration's objectives. One of SBA's goals in
support of the Administration's objectives is to help individual small
businesses succeed through fair and equitable access to capital and
credit, Government contracts, and management and technical assistance.
Reviewing and modifying size standards and related eligibility
criteria, when appropriate, ensures that intended beneficiaries have
access to small business programs designed to assist them.
For purposes of Executive Order 12988, SBA has determined that this
rule is drafted, to the extent practicable, in accordance with the
standards set forth in that Order.
For purposes of Executive Order 13132, SBA has determined that this
rule does not have any federalism implications warranting the
preparation of a federalism assessment.
For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35,
SBA has determined that this rule would not impose new reporting or
record keeping requirements.
Initial Regulatory Flexibility Analysis
Under the Regulatory Flexibility Act (RFA), this rule, if
finalized, may have a significant impact on a substantial number of
small entities in industries where the size standard is measured in
number of employees. As described above, this rule may affect small
entities seeking Federal contracts, SBA 7(a) Loans, SBA Economic Impact
Disaster Loans, and assistance from other Federal small business
programs.
Immediately below, SBA sets forth an initial regulatory flexibility
analysis (IRFA) of this proposed rule addressing the following
questions: (1) What is the need for and objective of the rule, (2) what
is SBA's description and estimate of the number of small entities to
which the rule will apply, (3) what is the projected reporting, record
keeping, and other compliance requirements of the rule, (4) what are
the relevant Federal rules which may duplicate, overlap or conflict
with the rule, and (5) what alternatives will allow the Agency to
accomplish its regulatory objectives while minimizing the impact on
small entities?
1. What is the need for and objective of the rule?
SBA believes a change in the method of calculating the number of
employees will simplify size standards and lessen the burden on small
businesses in calculating their size status.
2. What is SBA's description and estimate of the number of small
entities to which the rule will apply?
The impact of this rule will almost exclusively be related to
Federal contracting programs. The Dynamic Small Business Search
contains more than 300,000 registrants. Of these, SBA's estimates that
about 2,000 businesses near or above the current employee size
standards may benefit from this proposal if adopted. However, the
actual number is likely to be significantly less than this number
because not all of these businesses will experience a sufficient change
in size to alter their small business status or to have been awarded
Federal contracts. SBA invites comment on the impact this proposed rule
would have on the number of firms that could potentially do business
with the Federal Government or on data to estimate the effect this
change would have on these contracting programs.
3. What are the projected reporting, record keeping, and other
compliance requirements of the rule and an estimate of the classes of
small entities which will be subject to the requirements?
A revised method of calculating the employment size of a concern
does not impose any additional reporting, record keeping or compliance
requirements on small entities. Changing the way the number of
employees of a business is calculated does not impose a regulatory
burden as they neither regulate nor control business behavior.
4. What are the relevant Federal rules which may duplicate, overlap or
conflict with the rule?
This proposed rule overlaps with other Federal rules that use SBA's
size standards to define a small business. Under sec. 3(a)(2)(C) of the
Small Business Act, 15 U.S.C. 632(a)(2)(c), Federal agencies must use
SBA's size
[[Page 41243]]
standards to define a small business, unless specifically authorized by
statute. In 1995, SBA published in the Federal Register a list of
statutory and regulatory size standards that identified the application
of SBA's size standards as well as other size standards used by Federal
agencies (60 FR 57988-57991, dated November 24, 1995). SBA is not aware
of any Federal rule that would duplicate or conflict with established
size standards.
Redefining the way size standards based on number of employees are
calculated may also affect small businesses participating in programs
of other agencies that use SBA size standards. As a practical matter,
however, SBA cannot estimate the impact of this proposed change on each
Federal program that uses its size standards. In cases where an SBA
size standard is not appropriate, the Small Business Act and SBA's
regulations allow Federal agencies to develop different size standards
with the approval of the SBA Administrator (13 CFR 121.902). For
purposes of a regulatory flexibility analysis, agencies must consult
with SBA's Office of Advocacy when developing different size standards
for their programs (13 CFR 121.902(b)(4)).
5. What alternatives will allow the Agency to accomplish its regulatory
objectives while minimizing the impact on small entities?
As an alternative, SBA considered using a concern's total number of
employees for only its last calendar year. This method would also
lessen the burden and instability of the current method that fluctuates
pay period to pay period. However, trends in the economy fluctuate over
a period of years. SBA's use of a 3-year average for calculating
receipts has always taken these fluctuations into account, which
provides for a more stable measure of a concern's size. By utilizing
the 3-year period to calculate a concern's number of employees, SBA is
providing consistency in the way it determines size by both receipts
and employees. For this reason, SBA has determined that a 3-year
average for calculating the number of employees of a concern is more
appropriate.
List of Subjects in 13 CFR Part 121
Administrative practice and procedure, Government procurement,
Government property, Grant programs--business, Individuals with
disabilities, Loan programs--business, Reporting and recordkeeping
requirements, Small businesses.
For the reasons set forth in the preamble, SBA proposes to amend 13
CFR part 121 as follows.
PART 121--SMALL BUSINESS SIZE REGULATIONS
1. The authority citation for part 121 continues to read as
follows:
Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 637(a), 644, and
662(5); and Pub. L. 105-135, sec. 401 et seq., 111 Stat. 2592.
2. Revise Sec. 121.106 to read as follows:
Sec. 121.106 How does SBA calculate annual number of employees?
(a) Employees include all individuals employed on a full-time,
part-time, or other basis. This includes employees obtained from a
temporary employee agency, professional employer organization or
leasing concern. Part-time and temporary employees are counted the same
as full-time employees. SBA will consider the totality of the
circumstances, including criteria used by the IRS for Federal income
tax purposes, in determining whether individuals are employees of a
concern. Volunteers (i.e., individuals who receive no compensation,
including no in-kind compensation, for work performed) are not
considered employees.
(b) Average annual number of employees. (1) Where the size standard
is number of employees, a concern's size is based on an average annual
number of employees.
(2) Average annual number of employees means the total number of
employees of the concern (including the employees of its domestic and
foreign affiliates) for the preceding 3 calendar years divided by 3.
(3) Average annual number of employees for a concern that has been
in business for less than 3 years means the total number of employees
over the period the concern has been in business divided by the number
of completed calendar years and fraction of the calendar year the
concern has been in business. For example, a concern that has been in
business for 1 year and 3 months divides its total number of employees
by 1.25 (1 year +3 months/12 months).
(4) SBA will use a concern's IRS Form W-3, Transmittal of Wage and
Tax Statement, and any corrections thereof, to calculate average annual
number of employees. For purposes of counting employees obtained from a
temporary employment agency, professional employer organization, or
leasing concern, SBA will use contractual documents or invoices between
the parties showing the number of individuals provided to the concern.
(5) Where a concern has not filed an IRS Form W-3 for a period
which must be included within the period of measurement, SBA may
calculate the concern's average annual number of employees using IRS
Form 941, Employer's Quarterly Federal Tax Returns, other accredited
governmental documents or any other available information, such as
payroll records, which show the total number of employees for that
relevant period.
(c) Employees of Affiliates. (1) The employee size of a business
concern with affiliates is calculated by adding the average annual
number of employees of the business concern with the average annual
number of employees of each affiliate.
(2) If a concern has acquired an affiliate or been acquired as an
affiliate during the applicable period of measurement or before the
date on which it self-certified as small, the employees counted in
determining size status include the employees of the acquired or
acquiring concern. Furthermore, this aggregation applies for the entire
period of measurement, not just the period after the affiliation arose.
(3) The employees of a former affiliate are not counted if
affiliation ceased before the date used for determining size. This
exclusion of employees of a former affiliate applies during the entire
period of measurement, rather than only for the period after which
affiliation ceased.
Dated: April 30, 2007.
Steven C. Preston,
Administrator.
[FR Doc. E7-14492 Filed 7-26-07; 8:45 am]
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