[Federal Register Volume 74, Number 211 (Tuesday, November 3, 2009)]
[Rules and Regulations]
[Pages 56699-56702]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-26229]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 126
RIN 3245-AF44
HUBZone and Government Contracting
AGENCY: U.S. Small Business Administration.
ACTION: Final rule.
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SUMMARY: This rule amends the U.S. Small Business Administration's
(SBA's or Agency's) Historically Underutilized Business Zone (HUBZone)
program's definition of the term ``employee.''
DATES: This rule is effective May 3, 2010.
FOR FURTHER INFORMATION CONTACT: Mariana Pardo, HUBZone Program Office,
at (202) 205-2985 or by e-mail at: [email protected].
SUPPLEMENTARY INFORMATION:
On January 26, 2007, the SBA published in the Federal Register, 72
FR 3750, a proposed rule to amend the HUBZone program's definition of
the term ``employee.'' In this proposed rule, SBA sought to revise the
definition of the term ``employee'' to: (1) Delete the full-time
equivalency requirement; (2) specifically allow HUBZone small business
concerns (SBCs) to count leased or temporary employees or employees
obtained through a temporary agency, professional employee organization
(PEO) arrangement or union agreement, as employees; (3) specifically
state that SBA relies on the totality of circumstances as further
defined by Size Policy Statement No. 1 when determining whether
individuals are employees of a concern; (4) explain that volunteers are
not employees; (5) define volunteers as those persons that receive no
compensation; and (6) address the status of individuals that own all or
part of the SBC but receive no compensation for work performed.
The SBA received a total of eight comments on the proposed rule.
Five comments supported the rule in general and three opposed the rule.
These comments are discussed in detail below.
Summary of Comments and Response to Comments
The SBA received one comment stating that the definition of the
term ``employee'' should specifically address the issue of deferred
compensation. The commenter wanted the SBA to clarify that a person
that has agreed to defer his or her compensation will not be considered
an employee.
The SBA agrees with this comment and believes that if it permitted
a non-owner individual to work for no compensation, or even deferred
compensation, and be considered an employee for HUBZone program
purposes, it would open up the program to potential abuse. Finding a
person to be an employee where the individual has deferred compensation
is contrary to the intent of the HUBZone program, which is to increase
gainful employment in historically
[[Page 56700]]
underutilized business zones. Further, we note that the issue regarding
deferred compensation was actually the subject of a recent Court of
Federal Claims decision. In that case, the court ruled that SBA's
interpretation of its regulation--that persons who have agreed to defer
his or her compensation will not be considered an employee for HUBZone
program purposes--is reasonable. Aeolus Systems, LLC v. United States,
No. 07-581 C, slip op. (Fed. Cl. Oct. 31, 2007). Consequently, the SBA
agrees with this comment, and has clarified the rule to specifically
address deferred compensation.
Another commenter recommended deleting the specific language in the
proposed rule that refers to ``professional employee organization''
(PEO) and replacing it with the phrase ``or co-employed pursuant to a
professional employer organization arrangement.'' The comment stated
that the purpose of this amendment is to distinguish PEOs from leasing
and temporary employment companies or agencies. According to the
comment, with respect to PEOs, the PEO and the small business client
co-employ the employees; in comparison, temporary agencies or leasing
companies supply a pool of labor to the clients and the workers return
to the temporary agency or leasing company for reassignment upon
termination of the arrangement. The SBA agrees with this comment and
has made the recommended change.
In addition, the same commenter was concerned about references in
the preamble to the proposed rule concerning SBA's Size Policy
Statement and ``payment of wages.'' In the preamble to the proposed
rule, the SBA explained that because of the numerous types of
agreements in the public domain concerning temporary, leased, and co-
employees, SBA cannot state definitively that each of those types of
employees are employees of the HUBZone SBC. 72 FR 3752. Therefore, the
SBA will look to the totality of circumstances, including whether the
HUBZone SBC pays the employees' wages. Id.
The comment stated that the ``W-2 employer'' should not be the
determinative factor in deciding who employs a worker. Specifically,
with respect to PEOs, the commenter states that the client small
business provides the payroll to the PEO, who in turn pays the
employees. The SBA agrees, and the ``W-2 employer'' is not the
determinative factor. As the comment noted, with respect to PEOs, the
small business client provides the funding for the employees' wages
when it provides the payroll to the PEO, who in turn remits payment to
the co-employees. As explained in Size Policy Statement No. 1, the SBA
will review many factors, including whether the HUBZone SBC pays the
employees wages and/or withholds employment taxes and/or provides
employment benefits. 72 FR at 3753. Consequently, the SBA does not
believe any change to the proposed rule or other clarification is
necessary to address this comment.
The SBA received three comments opposing the proposal to count
workers obtained through unions as employees of the HUBZone SBC and one
comment specifically supporting the rule. One comment from a union
stated its belief that the rule will prevent companies from using union
workers and that the SBA does not have a sufficient basis for this
proposal. Similarly, another commenter stated its belief that the rule
will prevent small businesses from using unions because unions can not
control the residency of the union members.
The definition of the term ``employee'' includes all persons
employed by a HUBZone SBC. With respect to union workers, the workers
are performing work for the HUBZone SBC, not the union. The HUBZone SBC
pays the wages of these employees and controls the employees' work. In
at least one private letter ruling, the IRS has stated that ``when
working on the targeted jobs, the workers are employees of the
contractors for whom they perform services. They are not employees of
the Union.'' I.R.S. Priv. Ltr. Rul. 91-06-047 (Nov. 15, 1990). The same
is true here--the workers are employees of the HUBZone SBC for whom
they perform services and are not employees of the union. In addition,
if a HUBZone SBC were allowed to utilize union workers and not count
them as employees, it would be inconsistent with SBA's treatment of
other similar types of workers, including temporary workers and those
provided via a PEO arrangement. Thus, the definition of the term
employee includes those workers provided by a union and who perform
services for the qualified HUBZone SBC.
One commenter opposed the rule in general and believes that SBA has
no basis to support the finding that any change is needed in the
definition of the term ``employee'' to prevent abuse. This same
commenter believes that the proposed rule creates uncertainty in who is
counted as an employee and that the totality of circumstances test as
proposed is different than the current test. This commenter believes
that the rule will harm smaller businesses that can not maintain a
large staff to meet the requirements of the program. In sum, the
commenter believes that more time is needed before making a change to
this definition.
The SBA disagrees with this comment. First, the totality of
circumstances test has been in the SBA rule since the inception of the
program. 63 FR 31896, 31909 (June 11, 1998). Second, at least one court
has affirmed the SBA's use of this test and ruled that SBA's
incorporation of relevant factors from a previous policy statement into
the regulation's ``totality of circumstances'' test is not erroneous or
contrary to controlling statute or regulation. See Metro Machine Corp.
v. SBA, 305 F.Supp.2d 614 (E.D. VA 2004). Finally, the agency has been
reviewing the definition of the term employee for several years now,
beginning with a proposed rule in 2002. The SBA has received a
relatively few number of comments evidencing to the Agency that the
proposal is acceptable to most HUBZone SBCs (who have now had 3
opportunities to formally comment on the issue). The SBA has conducted
thousands of program examinations and re-certifications and has
examined this issue thoroughly. The SBA believes that it has a
reasonable basis to support a change in the regulation, as set forth in
the proposed and this final rule.
One comment stated that the SBA should not allow employees working
only 40 hours a month to be considered employees for HUBZone program
purposes because such a rule would promote abuse and more non-HUBZone
residents would end up getting higher paying full-time work. In
contrast, one commenter specifically agreed with the proposed minimum
of 40 hours per month. As explained in the proposed rule, the SBA
believes that the 40 hours per month requirement precludes a firm from
receiving HUBZone status if it merely hires a few HUBZone residents to
work one or two hours a week. SBA believes that this minimum work
requirement (40 hours a month) provides flexibility to the HUBZone SBCs
and the employees who choose to work part-time, but at the same time
minimizes possible abuses of the rule. The SBA notes that in order to
determine whether an employee works 40 hours a month, the Agency will
rely on the most recent payrolls of the small business.
The SBA received two comments concerning the effect this rule will
have on current HUBZone program participants and those participants
that have already submitted an offer or are getting ready to submit an
offer. One of these commenters suggested the SBA provide for a phase in
period of one year for those firms that currently use leased
[[Page 56701]]
employees. After reviewing these comments, the SBA has provided for an
effective date of this rule 6 months from its date of publication in
the Federal Register. The SBA believes this would be sufficient time
for HUBZone small businesses to make any necessary changes to address
the new definition of the term employee.
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. 601-602)
SBA has determined that this rule does not impose additional
reporting or recordkeeping requirements under the Paperwork Reduction
Act, 44 U.S.C., chapter 35. Further, this rule meets applicable
standards set forth in section 3(a) and 3(b)(2) of Executive Order
12988, Civil Justice Reform, to minimize litigation, eliminate
ambiguity, and reduce burden. This action does not have retroactive or
preemptive effect.
OMB has determined that this rule constitutes a ``significant
regulatory action'' under Executive Order 12866 and in the proposed
rule, the SBA prepared a Regulatory Impact Analysis. The SBA received
no comments on this analysis and continues to believe that our analysis
is accurate.
This rule will not have substantial direct effects on the States,
on the relationship between the Federal government and the States, or
on the distribution of power and responsibilities among the various
levels of government. Therefore, for the purposes of Executive Order
13132, SBA determines that this rule has no federalism implications
warranting preparation of a federalism assessment.
Final Regulatory Flexibility Analysis for the HUBZone Regulations
SBA has determined that this rule may have a significant economic
impact on a substantial number of small entities within the meaning of
the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, et seq. In the
proposed rule, the SBA prepared an Initial Regulatory Flexibility Act
Analysis (IRFA). The SBA did not receive any comments on this IRFA. The
RFA requires the SBA to prepare a Final Regulatory Flexibility Act
Analysis (FRFA). The RFA provides that when preparing a FRFA, an agency
shall address all of the following: A statement of the need for, and
objectives of, the rule; a summary of the significant issues raised by
the public in response to the IRFA; a description of the estimate of
the number of small entities to which the rule will apply; a
description of the projected reporting, recordkeeping and other
compliance requirements; and a description of the steps taken to
minimize the significant economic impact on small entities. This FRFA
considers these points and the potential impact of the regulation on
small entities.
(a) Need for, and Objectives of, the Rule
SBA believes that the amendments to the definition of the term
``employee'' will ease HUBZone program eligibility requirements
perceived to be burdensome on concerns, and streamline the operation of
the HUBZone Program.
(b) Summary of Significant Issues Raised by the Public in Response to
the Initial RFA
The SBA did not receive any comments on the IRFA. The SBA addressed
all of the comments it received on the rule in the preamble, set forth
above.
(c) Estimate of the Number of Small Entities to Which the Rule May
Apply
The RFA directs agencies to provide a description of and, where
feasible, an estimate of the number of small entities that may be
affected by the rule. The RFA defines ``small entity'' to include
``small businesses,'' ``small organizations,'' and ``small governmental
jurisdictions.'' SBA's programs do not apply to ``small organizations''
or ``small governmental jurisdictions'' because they are non-profit or
governmental entities and do not qualify as ``business concerns''
within the meaning of SBA's regulations. SBA's programs generally apply
only to for-profit business concerns. Therefore, the regulation (like
the regulation currently in effect) will not impact small organizations
or small governmental jurisdictions.
Small businesses that participate in Federal Government contracting
are the specific group of small entities affected most by this rule.
While there is no precise estimate for the number of SBCs that will be
affected by this rule, there are approximately 368,000 SBCs registered
in the Central Contractor Registration's (CCR's) Dynamic Small Business
Search (DSBS) database (formerly known as PRO-Net). The DSBS contains
profiles of SBCs that includes information from SBA's files and CCR.
While there is no precise estimate for the number of SBCs that will be
affected by this rule, SBA believes that over 30,000 SBCs will apply
for certification as qualified HUBZone SBCs over the life of the
program. This number is based upon 1992 census data, the number of
HUBZone SBCs registered in CCR, and a reasonable extrapolation of this
data to account for growth.
In the past few years, SBA has received thousands of applications
for the HUBZone Program and has certified over 10,000 SBCs into the
program. SBA believes that the incentives available through
participation in the program, i.e., HUBZone set-asides and price
evaluation preferences, will result in additional SBCs relocating to
HUBZones. SBA is unable to predict the number of SBCs that will
relocate to HUBZones and be eligible for the program, but estimates
that approximately 30,000 SBCs are now eligible or will become
eligible.
Of the 30,000 SBCs that have a principal office located in a
HUBZone, SBA believes that most will be directly affected by this rule.
This is based on the fact that of the over 10,000 HUBZone SBCs listed
in CCR, over 7,000 list services and construction as the general nature
of their business. Thus, it appears that most qualified HUBZone SBCs
are in those industries. According to the information received, SBCs in
the construction and services industries use temporary and leased
employees.
The final amendment to the definition of the term employee will
allow leased and temporary employees to be considered employees of a
concern. These leased and temporary employees would be counted toward
the 35% HUBZone residency and principal office requirements. At one
point, such employees comprised approximately 2-5% of the work force in
the U.S. economy. Labor Shortages, Needs, and Related Issues in Small
and Large Businesses, Nov. 2, 1999 (report prepared for the Office of
Advocacy) (available at: http://www.sba.gov/advo/research/rs195atot.pdf). In addition, the report stated that small businesses
accounted for the employment of about 40% of such employees. Id.
Although SBA does not know exactly how many SBCs eligible for the
HUBZone Program use leased or temporary employees, this data further
evidences that many concerns may be affected by this rule.
(d) Projected Reporting, Recordkeeping and Other Compliance
Requirements
This final rule imposes no new reporting requirement on small
businesses.
(e) Steps Taken to Minimize the Significant Economic Impact on Small
Entities
SBA has decided that this rule will not take effect until six
months after publication in the Federal Register.
[[Page 56702]]
This will allow HUBZone SBCs sufficient time to make any necessary
changes to remain eligible for the program and for HUBZone contracts.
SBA believes this will minimize the impact of this rule, if any, on
HUBZone small businesses.
List of Subjects in 13 CFR Part 126
Government procurement, Small businesses.
0
For the reasons set forth above, SBA amends 13 CFR part 126, as
follows:
PART 126--HUBZONE PROGRAM
0
1. The authority citation for 13 CFR part 126 continues to read as
follows:
Authority: 15 U.S.C. 632(a), 632(j), 632(p) and 657a.
0
2. Amend Sec. 126.103 by revising the definition of the term
``employee'' to read as follows:
Sec. 126.103 What definitions are important in the HUBZone program?
* * * * *
Employee means all individuals employed on a full-time, part-time,
or other basis, so long as that individual works a minimum of 40 hours
per month. This includes employees obtained from a temporary employee
agency, leasing concern, or through a union agreement or co-employed
pursuant to a professional employer organization agreement. SBA will
consider the totality of the circumstances, including criteria used by
the IRS for Federal income tax purposes and those set forth in SBA's
Size Policy Statement No. 1, in determining whether individuals are
employees of a concern. Volunteers (i.e., individuals who receive
deferred compensation or no compensation, including no in-kind
compensation, for work performed) are not considered employees.
However, if an individual has an ownership interest in and works for
the HUBZone SBC a minimum of 40 hours per month, that owner is
considered an employee regardless of whether or not the individual
receives compensation.
* * * * *
Dated: August 3, 2009.
Karen G. Mills,
Administrator.
[FR Doc. E9-26229 Filed 11-2-09; 8:45 am]
BILLING CODE 8025-01-P