On November 12-13, 2019, the U.S. Small Business Administration (SBA) hosted its 5th Annual Mentor Protégé Conference where SBA’s John Klein, Associate General Counsel for Procurement Law, answered questions from the audience regarding various mentor-protégé issues. Mr. Klein provided some key insights regarding recent and upcoming SBA rulemakings that will have a significant impact on small business government contractors. We outline some of these updates below, and will also host a breakfast seminar on November 18, 2019 where Mr. Klein and Pamela Mazza will offer an in-depth discussion on these and other changes (please visit this link for more information).
- On November 13, 2019,SBA sent a final rule to the Federal Register for publication that will implement comprehensive revisions to the regulations governing the Historically Underutilized Business Zone (HUBZone) Program. These revisions, as proposed in October 2018, are available here. A couple of the key changes are: (1) an individual will continue be treated as a HUBZone resident if that individual worked for the firm and resided in a HUBZone at the time the concern was certified or recertified as a HUBZone—even if the area where the individual lives no longer qualifies as a HUBZone or the individual has moved to a non-HUBZone area; (2) HUBZone firms will only be required to certify on an annual basis, meaning such concerns will no longer be required to expressly qualify as a HUBZone at the time of each offer for a HUBZone contract and award.
- In addition to the revisions proposed in October 2018, the final HUBZone rule will also implement a significant change to the regulations that was proposed during public comment. Specifically, the final rule will indicate that when a company buys an office located in a HUBZone or enters into a long-term, 10-year lease for such office space, intending the space to be its principal office, the concern will be able to meet the principle office HUBZone criterion for a period of at least 10 years—even if at some point after the property is purchased or leased, the office location no longer qualifies as a HUBZone. The idea behind this rule is that the HUBZone program should incentivize and reward companies that invest in HUBZones.
- Mr. Klein also noted that SBA’s proposed rule, issued on June 24, 2019, implementing the Small Business Runway Extension Act (Act) is being finalized and will be published in the Federal Register in the next couple of weeks. The Act has been the subject of much concern because although Congress intended the Act to change the relevant time period SBA uses to calculate average annual receipts for size purposes from 3 to 5 years, SBA has taken the position that the Act had no such effect because Congress inadvertently amended the wrong section of the Small Business Act. Nevertheless, to promote consistency, SBA’s soon to be finalized rule (which is available in its proposed form here) will change SBA’s size standards to provide for a 5-year averaging period for calculating annual average receipts for all receipts-based size standards. Notably, the final rule will include a 2-year “phase in” period, an item PilieroMazza attorneys advocated for during the public comment period. This “phase in” will allow contractors, for a period of two years, to choose whether they wish to certify using a 3-year or 5-year lookback. In other words, rather than thrusting some small business into the dicey waters of “other than small” status by immediately subjecting them to a 5-year receipts calculation, SBA will give these concerns two years to transition to the new 5-year rule, after which all companies will be subject to a 5-year calculation. That being said, it is unclear how the final rule will treat firms that assumed the Act was already effective and, as such, have already certified using a 5-year calculation. This is an issue we will ask Mr. Klein to address during our upcoming seminar.
- SBA’s final rule implementing the Act will also contain a provision that was not included in the proposed version and was adopted by SBA in response to public comment. Specifically, because of the alleged burden that the 5-year rule would impose on participants in SBA’s Section 7(a) loan programs, these programs will not be covered by the 5-year rule and, instead, SBA will issue a separate proposed rule to address these concerns.
Lastly, Mr. Klein gave a high-level overview of the comprehensive changes SBA recently proposed to its 8(a) and mentor-protégé programs. As we outlined previously, these changes would have significant implications for the government contracting community. Consequently, to update the industry and to facilitate a meaningful dialogue on this topic, PilieroMazza is hosting a seminar on November 18, 2019, from 7:30 AM – 10:30 AM EST at The Ritz-Carlton, Tysons Corner. During our two-hour seminar, Mr. Klein will join Pamela Mazza, Managing Partner of PilieroMazza, to provide government contractors with a comprehensive understanding of the proposed changes and an opportunity to comment. For more details and to register, please visit this link. All comments to this proposed rule must be submitted by January 17, 2020.
Samuel Finnerty, the author of this Client Alert, is a member of the Firm’s Government Contracts, Small Business Programs & Advisory Services, and Government Contracts Claims and Appeals practice groups.
Today, SBA published a proposed rule to merge its mentor-protégé programs and amend many of its rules governing the 8(a) program and small businesses. The proposed rule would have significant implications for the government contracting community. Comments are due by January 17, 2020, and PilieroMazza will host a seminar on November 18, 2019, from 7:30 AM – 10:30 AM EST at The Ritz-Carlton, Tysons Corner. Our seminar will feature Pamela Mazza, Managing Partner of PilieroMazza, and John Klein, Associate General Counsel for Procurement Law at the Small Business Administration (SBA) and one of the key drafters of the proposed rule, and it will provide a head start to government contractors in understanding the proposed changes and enable attendees to comment. For more details and to register, please visit this link. Below are our highlights.
The proposed rule would:
- Merge the 8(a) Mentor-Protégé Program into the All Small Mentor-Protégé Program;
- Clarify eligibility criteria for proposed mentors and request comments on whether mentors should be restricted to mid-sized firms;
- Provide flexibility for mentors with protégés with principle places of business in Puerto Rico;
- Provide relief from the two mentors over the life of a protégé rule; and
- Provide generally that protégés should be performing work under the North American Industry Classification System (NAICS) code used to qualify for the program.
The proposed rule would:
- Eliminate joint venture approval requirements for competitive 8(a) contracts, but not sole source awards;
- Eliminate the “three in two” rule;
- Disallow substitution of joint venture partners who exceed the size standard for long-term contracts prior to recertification; and
- Allow joint ventures to be populated with FSOs and provide guidance to agencies on when to allow joint ventures to bid on contracts requiring a clearance.
Multiple-Award Contracts (MAC)
The proposed rule would:
- Require contracting officers to assign the most appropriate single NAICS code to each order under a MAC, whether for a supply or a service to ensure compliance with the non-manufacturer rule, requiring that each NAICS code be included in the underlying MAC;
- Require an offeror to certify as to size and status in order to qualify at the time it submits its initial offer including price for an order under an UNRESTRICTED MAC, except for orders or BPAs issued under an FSS contract;
- Require that, where the socio-economic status is first required at the order level, firms must qualify at that time; and
- Permit size and status protests where the underlying MAC was unrestricted, except for BPAs and orders issued under an FSS schedule.
- The proposed rule would allow a prime to rely on the self-certification of its subcontractor, provided the prime does not have a reason to doubt the certification.
The proposed rule would that:
- If a party to a joint venture becomes acquired or merges, only that partner (and not the non-affected partner) must recertify in order to qualify the joint venture to recertify;
- A firm that merges between proposal submission and award does not qualify for award if it could not or did not recertify, though size protests are permitted; and
- Tribal entities are not required to recertify where ownership changes but the firm is owned to the same extent (i.e. 51%) by the ultimate entity.
The proposed rule would:
- Define “follow on contract” for purposes of retaining requirements in the program;
- Loosen the prohibition on immediate family members owning 8(a) firms;
- Allow for certain changes of ownership to occur without prior SBA approval;
- Clarify SBA policy on voluntary withdrawals and early graduations from the program; and
- Under some circumstances, allow firms to seek and obtain a multiple contract waiver from the sole-source restrictions for failure to comply with the business activity targets where certain extenuating circumstances exist that apply to multiple contracts.
Tribally-Owned Applicants and Participants
The proposed rule would require that:
- Where a tribe, ANC, NHO, or CDC is reorganizing but ultimate ownership does not change, no prior SBA approval is required;
- If SBA changes the primary NAICS code of a program participant because the participant has not been operating in its designated primary code for the past three years, another tribal entity be immediately qualified to apply using that code: although the program participant stated that code as its primary NAICS code, it really was not the primary NAICS code, so that code is now available for another 8(a) applicant;
- Appeals be authorized where SBA has changed a firm’s primary NAICS code;
- Potential for success be satisfied by a letter from a Section 17 corporation or some other economic development corporation or tribally owned holding company, so long as it can show financial strength;
- Tribal entities not be required to submit small business subcontracting plans, as long as they are small for the NAICS code assigned to the contract; and
- The excessive withdrawal rule generally not be applied to entities at least 51% owned by a tribe, ANC, NHO, or CDC.
Small Business Rules
The proposed rule would:
- Require that mixed contracts include any combination of services, supplies, or construction, though construction was inadvertently omitted from the proposed rule;
- Require that contracting officers consider past performance of first-tier subcontractors for certain bundled or consolidated contracts and for MACs over a certain dollar threshold;
- Clarify that affiliation may be found under the newly organized concern rule where both former and current officers, directors, principal stockholders, managing members, or key employees of one company organize a new company in the same or a related industry; and
- Request comments on how the non-manufacturer rule should be applied to multiple item procurements where one or more of the items are subject to a class waiver.
Pamela Mazza, the author of this Client Alert, is the Managing Partner of PilieroMazza.
On September 24, 2019, the Department of Labor (DOL) announced its final rule to change the Fair Labor Standards Act’s (FLSA) salary basis test, which is integral to classifying an employee as exempt from overtime payments. In order to designate an employee as FLSA overtime exempt, an employer must ensure that the employee meets both a salary basis test, which establishes a salary threshold, and a duties test, which establishes the types of responsibilities and knowledge required to be eligible for an exemption. The salary basis requirement is currently $455 per week, or $23,660 per year. PilieroMazza previously blogged about the proposed DOL overtime exemption rule here. Effective January 1, 2020, the final rule will increase the threshold amount to $684 per week or $35,568 per year, a slight increase from the originally proposed amount. Employers, including government contractors, with salaried employees making under $35,568 annually need to determine if it makes business sense to convert employees to non-exempt status or to raise their salary. Not understanding this requirement could lead to costly DOL violations.
The final rule also allows employers to include up to 10% of the salary in nondiscretionary bonuses and incentive pay. The rule also increases the compensation requirement for highly compensated employees—who are subject to minimal duties test requirements— from $100,000 to $107,432, significantly lower than what was proposed.
The DOL estimates that 1.2 million additional workers will be entitled to minimum wage and overtime pay as a result of the increase to the standard salary level. DOL also estimates that over 100,000 workers will be entitled to overtime pay as a result of the increase to the Highly Compensated Employees compensation level.
Like all employers, government contractors will face the prospect that some employees would be newly eligible for overtime under the new rule. In that case, the contractor may choose to convert them to hourly, non-exempt workers or raise their salaries as an alternative to paying overtime.
If a contractor chooses to convert employees to non-exempt and to pay an hourly rate, there could be a price impact on contracts bid before this rule is effective. For example, if a government contractor works on a contract covered by the Service Contract Act or the Davis-Bacon Act, designating an employee as non-exempt makes that employee eligible for the prevailing wages and fringe benefits. This could significantly impact cost of performance because those employees may have to work overtime.
Employers with salaried employees under $35,568 annually need to determine if it makes business sense to convert employees to non-exempt or raise their salary. It is also a good time to revisit whether these positions still meet the requirement of the duties test, the second component of exemption testing. Although the test has not changed, many violations stem from misunderstanding this requirement.
September 30, 2019 marks the newly announced deadline for employers who submit annual EEO-1 reports to report employee 2018 pay data to the Equal Employment Opportunity Commission (EEOC). The EEOC revealed the new deadline in a federal court submission last week. UPDATE: Since the original blog on this topic was published, the court issued an order confirming the September 30, 2019 deadline, and requiring the EEOC to collect a second year of data in addition to the 2018 pay information. The EEOC has also since announced its decision to collect 2017 pay data which will also be due this September. Employers (government contractors and commercial businesses) should work with an experienced labor and employment attorney to ensure they comply before the September 30, 2019 deadline.
Employers with 100 or more employees and federal contractors with 50 or more employees (and a contract or subcontract of $50,000 or more) have long been required to submit employment demographic data by race/ethnicity, gender, and job categories. Importantly, the new pay data reporting requirements apply only to businesses with 100 or more employees, regardless of government contractor status.
In September 2016, the Office of Management and Budget (OMB) approved revisions to the EEO-1 filings, including a new requirement to submit compensation and hours worked data. Implementation of this so-called “Component 2” was stayed, however, in August 2017, following a Trump administration OMB decision that the revisions were overly burdensome and posed privacy concerns.
OMB’s decision was recently overturned in a March 2019 court determination, which required employers to report the Component 2 data. However, the date that the EEOC would require that such data be submitted was unknown until the EEOC submitted its feedback in reaction to the court’s ruling.
The collection of Component 2 compensation and hours worked data will be a significant endeavor for employers and for the EEOC. Pay data for the year must be broken into 12 pay bands for each EEO job category by race/ethnicity and gender. An employee’s pay band is determined by the income listed in box 1 of the employee’s W-2 form. Regarding hours worked, employers will be required to report the total hours worked by all the employees accounted for in each pay band. For full-time, exempt employees, employers are permitted to report 40 hours per week for a full-time employee (or 20 hours for part-time employees).
According to the EEOC’s statement, due to the sheer volume of the data that is included in Component 2 collection, the EEOC will need to outsource the collection of the data to a contractor. Whereas the previous demographic collection only required 140 data fields, the Component 2 data will include 3,360 data fields of pay data. Importantly, the Component 2 deadline does not effect an employer's obligation to file EEO-1 demographic data, which was due by May 31, 2019.
Employers should immediately begin examining the data they will need to submit and comparing it against employees in protected classes to ensure there are no disparate impact concerns. UPDATE: On July 15, 2019, the Component 2 electronic filing system went live, meaning that companies can now submit data to the system. FAQs, sample forms, and upload file specifications are available online here.
Sarah Nash, the author of this Client Alert, is an Associate in the following practice groups: Labor & Employment, Litigation, Intellectual Property & Technology Rights, Audits & Investigations, and Native American Law.