1Q2019 Legislative and Regulatory Roundup

With the first quarter of the year turning the corner, we wanted to provide a quick overview of some key developments in the legislative and regulatory world affecting small business government contractors:

Proposed Law for SDVOSB and VOSB Verification

On October 1, 2018, the 2017 National Defense Authorization Act consolidated the VA and SBA eligibility rules for SDVOSB/VOSBs. The law requires the VA to rely on the SBA’s eligibility rules for the SBA’s SDVOSB/VOSB program instead of the VA’s existing rules. However, the VA still has the authority to verify the status of a SDVOSB/VOSB.

Under the VA’s verification process pursuant to the “Vets First” program, applicants move through four stages of the process to become verified SDVOSB/VOSBs with the VA. This is an onerous process that generally takes 90 days to complete. Moreover, verification for an SDVOSB does not provide verification for VOSB. Applicants who are service-disabled veterans must apply for both separately if they want verification for both. The SBA, on the other hand, verifies SDVOSB/VOSBs for all other Federal agencies and the SBA only requires self-certification. The status of the SDVOSB/VOSB only requires verification upon challenge in a protest.

On November 27, 2018, H.R. 7169, “Verification Alignment and Service-disabled Business Adjustment Act” or “VA-SBA Act,” was introduced in Congress to transfer the responsibility of verifying SDVOSB/VOSBs to the SBA. If passed, the “VA-SBA Act” would transfer the VA’s “Vets First” program to the SBA. This would create a government-wide verification program for veteran-owned businesses.

Proposed amendments to regulations for the Historically Underutilized Business Zone (HUBZone) program

SBA proposed rules would make significant changes to the requirements for HUBZones. Currently, small business concerns are eligible for HUBzone set-asides if its principal office is located within a “HUBZone” and at least 35% of its employees live in the HUBZone, among other requirements. 13 C.F.R. § 126.200. These set-asides are geographically-determined and the SBA publishes a map consisting of HUBZone overlays. The purpose of this set-aside is to ensure that funds from HUBZone contracts flow to HUBZone areas and the residents of those areas.
Proposed amendments include the following:
HUBZone Map

• The SBA is proposing to re-designate areas as within a HUBZone on a regular basis. Under the proposed rule, the SBA will freeze the 2017 HUBZone map for small business concerns currently certified until after the decennial 2020 census, which gives them until the end of 2021. It would then require the SBA to re-designate HUBZones every 5 years.

Changes to Key Definitions

• Employees

SBA proposes to amend the definition of the term “employee.” SBA believes that a clarification is necessary because the existing definition’s language—“a minimum of 40 hours per month”—is unclear. The proposed rule would explain that an individual is an employee if he or she works at least 40 hours during the four-week period immediately prior to the relevant date—either the date the concern submits its HUBZone application to SBA or the date of recertification.

The proposed definition clarifies that all owners of a HUBZone applicant or HUBZone small business who work at least 40 hours per month will be considered employees, regardless of whether they receive compensation.

The proposed definition clarifies that individuals who do not receive compensation and those who receive deferred compensation are generally not considered employees.

The proposed definition also clarifies that independent contractors who receive compensation through Internal Revenue Service (IRS) Form 1099 generally are not considered employees, as long as such individuals are not considered to be employees for size purposes under SBA’s Size Policy Statement No. 1.

The proposed definition states that employees of affiliates may be counted as employees of a HUBZone applicant or certified HUBZone small business concern, if the totality of circumstances demonstrates that there is no clear line of fracture between the concerns.

• Principal Office

SBA proposes to amend the definition of “principal office” to clarify the requirement. It seeks to clarify that when determining whether a concern’s principal office is located in a HUBZone, SBA counts all employees of the concern, other than those employees who work at jobsites. This includes both HUBZone residents and non-HUBZone residents.
SBA also proposes to add that in order for a location to be considered a concern’s principal office, the concern must demonstrate that it conducts business at this location.

• Reside

This term is used when analyzing whether an employee should be considered a HUBZone resident for purposes of determining a firm’s compliance with the 35% HUBZone residency requirement. SBA proposes to remove the reference to primary residence, to eliminate the requirement that an individual demonstrate the intent to live somewhere indefinitely, and to provide clarifying examples.

Regarding small businesses performing contracts overseas, SBA proposes that it will consider the residence located in the United States as that employee’s residence, if the employee is working overseas for the period of a contract.

• Attempt to maintain

SBA proposes to amend the definition of “attempt to maintain” to clarify what happens if a HUBZone small business concern’s HUBZone residency percentage drops too low.
The Small Business Act provides that a HUBZone small business concern must “attempt to maintain” compliance with the 35% employee HUBZone residency requirement during the performance of a HUBZone contract.

Regarding certification of a small business concern as a HUBZone, the proposed law would require annual certification vice the current, 3-year certification requirement.

FAR proposed rule regarding Limitations on Subcontracting

The Department of Defense (DoD), the General Services Administration (GSA), and the National Aeronautics and Space Administration (NASA) propose to amend the Federal Acquisition Regulation (FAR) to implement the final rule published by the Small Business Administration implementing section 1651 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2013, which revised and standardized the limitations on subcontracting including the nonmanufacturer rule, that apply to small business concerns under FAR part 19 procurements. Changes were made by the SBA in its final rule published in the Federal Register at 81 FR 34243 on May 31, 2016.

Prior to passage of section 1651 of the NDAA for FY 2013, the limitations on subcontracting and the nonmanufacturer rule were inconsistent across the small business programs. One example is that for awards under some small business programs, the prime contractor was required to perform a certain percentage of work itself, but under other programs, the prime contractor could include subcontracts to “similarly situated entities” in the percentage of work it performed.

Under the proposed rule, instead of requiring a percentage of work to be performed by a prime contractor, the limitations on subcontracting rules now limit subcontracting to a percentage of the overall award amount to be spent by the prime on subcontractors. As a result, the prime contractor no longer has to track the percentage of costs incurred that it spends performing work itself; it only has to track the percentage of the overall award amount (i.e., contract price) that it spends on subcontractors. This significantly reduces the burden on primes to demonstrate compliance.

Moreover, the percentage of the award amount that the prime contractor spends on subcontractors who are similarly situated entities is not considered subcontracted for purposes of compliance with the limitations on subcontracting. “Similarly situated entity” means a subcontractor that has the same small business program status as that which qualified the prime contractor for the award and that is considered “small” for the North American Industry Classification System (NAICS) code the prime contractor assigned to the subcontract the subcontractor will perform. Work done by similarly situated entities is counted as if it were performed by the prime contractor in determining compliance with the limitations on subcontracting.