On July 25, 2016, SBA released its long-awaited final rule creating the new mentor-protégé program for all small businesses. Many aspects of the new rule are very exciting and should be beneficial for the small business community at large. However, buried in the lengthy rulemaking are a few provisions that will be problematic for small businesses when the rules go into effect on August 24, 2016. One of the problematic provisions will adversely effect how many small businesses form joint ventures with their mentors.

A primary benefit of the mentor-protégé relationship is the ability of the mentor and protégé to form joint ventures. SBA’s rules require the joint venture to have a project manager that is responsible for performance of the contract. The new rules state that the project manager must be an employee of the protégé by the time of contract performance. SBA helpfully clarified that the protégé does not need to employ the project manager at the time of proposal submission, as long as the protégé has a letter of commitment from the individual to confirm he or she will become an employee of the protégé and serve as project manager by the time of contract award.

SBA then added a further “clarification” in the final rule to prohibit the protégé from hiring the project manager from its mentor. This was not a clarification of existing rules, however. SBA did not previously propose this significant change and, therefore, the public was not given an opportunity to comment on it. As a result, this rule was not the product of proper notice and comment rulemaking and should not be implemented, at least not before the public has an opportunity to weigh in.

If SBA had sought public comment on this new requirement, the small business community (as well as large business mentors) surely would have voiced strong objections. When a protégé needs to hire a project manager, the mentor is an excellent resource. Indeed, assisting with personnel in this manner is often precisely the type of mentoring envisioned under the mentor-protégé relationship. But SBA’s new rule will force small businesses to forgo the mentor as a source of a new hire for the project manager position. This undercuts a key aspect of the mentoring relationship and makes the mentor-protégé joint venture harder to form than it should be.

SBA believes the new rule is necessary because it is concerned that the project manager could easily go back to the mentor at the end of the contract because project manager has no previous ties to the protégé and is not bound to stay with the protégé after performance of the contract. If that happens, in SBA’s eyes, the business development of the protégé firm would be diminished.

What SBA overlooks here is that these concerns would be present any time the protégé goes outside its existing workforce to hire the project manager; the concerns are not unique to hiring from the mentor. Moreover, many contract workforces follow the contract, so if the protégé does not retain the contract it would expect to lose its project manager and perhaps other personnel. Again, this would be true whether the personnel came from the mentor or another previous employer. In the new rule, SBA recognized the importance of giving protégés the flexibility to hire a project manager from outside its workforce. There was no reason to make a distinction and prevent that hiring from the mentor.

Additionally, we disagree with SBA’s conclusion that the protégé’s business development would be diminished if the project manager leaves at the end of the contract. The new mentor-protégé program does not permit open-ended mentoring relationships. At most, the protégé can have a six-year mentoring term with one mentor. Therefore, the protégé has to plan for the end of the mentoring by maximizing the time while that relationship exists. To this end, the project manager can impart significant institutional knowledge and assistance, both in terms of performing the contract and more generally for the protégé’s operations, while the project manager is an employee of the protégé.

This will not all evaporate if the project manager leaves at the end of the contract. Like with the end of the mentor-protégé relationship itself, the protégé can continue to benefit after the end of the contract from the experience and expertise the project manager imparted while employed by the protégé and working on the contract. Even if just for a few years, having an experienced project manager on staff with the protégé is the type of assistance that can make a real difference for the protégé and should be encouraged, rather than prohibited, by the new rules.

Unless SBA changes this rule, or pulls it back for public comment before it goes into effect, small and large businesses must plan around the new requirement. That means for new and existing mentor-protégé joint ventures, once the rule goes into effect on August 24th, the protégé cannot propose to use a project manager that is hired from the mentor.

About the Author: Jon Williams is a partner with PilieroMazza and a member of the Government Contracts Group. He may be reached at [email protected].