In a recent decision, HUBZone Appeal of Q Services, Inc., the Small Business Administration (“SBA”) clarified that the number of hours worked by a person does not bar SBA from examining the totality of the circumstances to determine whether that individual qualifies as an employee for HUBZone program eligibility purposes. Under SBA’s HUBZone regulations, if a person works a minimum of 40 hours per month (whether employed on a full-time, part-time, or other basis), that individual will be treated as an employee. In addition, SBA will consider the totality of the circumstances, including criteria used by the Internal Revenue Service for federal income tax purposes and those set forth in SBA’s Size Policy Statement No. 1, when determining whether an individual is an employee of a concern.
In Q Services, the appellant argued that it satisfied the 35% HUBZone residency requirement because it had only two employees, one of whom resided in a HUBZone. With respect to its uncompensated, out-of-state owner, who worked less than 10 hours a month, the appellant argued that she should not be counted as an employee because SBA’s regulations state that a person must work 40 hours a month to qualify as an employee. The appellant also contended that the totality of the circumstances test only applies to discrete employees (i.e., temporary employees, leased employees, union employees, and independent contractors) that work a minimum of 40 hours per month and, thus, that SBA need not resort to reviewing the totality of the circumstances that pertained to the owner.
SBA disagreed, noting that the totality of the circumstances analysis is in place to further the HUBZone program goals and avoid potential fraud, waste, and abuse. SBA also discussed how the regulatory history of the HUBZone definition of “employee” makes it clear that the 40-hour minimum requirement was never meant to be mechanically applied in a manner that would categorically exclude a broad class of individuals from consideration. Examining the totality of the circumstances with respect to the appellant’s owner, SBA determined that she must be treated as an employee because she holds herself out to be the sole owner, officer, and manager of appellant. This brought the appellant’s total number of employees up to three and, with only one residing in a HUBZone, SBA concluded that the appellant fell short of meeting the 35% HUBZone residency requirement and was ineligible for award.
Maintaining compliance with the HUBZone program requirements is not an easy task, and SBA’s decision in Q Services confirms just that. As with many of SBA’s rules, this one is ambiguous, leaving no black-and-white test for defining a HUBZone employee. Because it is a grey area, be mindful of the circumstances.
ABOUT THE AUTHOR: Peter Ford heads our Boulder, Colorado office and is a partner in our government contracts group. He may be reached at [email protected].