[Federal Register Volume 69, Number 93 (Thursday, May 13, 2004)]
[Proposed Rules]
[Pages 26511-26512]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10853]


 ========================================================================
 Proposed Rules
                                                 Federal Register
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 69, No. 93 / Thursday, May 13, 2004 / 
Proposed Rules  

[[Page 26511]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 126

RIN 3245-AF13


HUBZone Program

AGENCY: Small Business Administration.

ACTION: Advance notice of proposed rulemaking.

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SUMMARY: The U.S. Small Business Administration (SBA) is seeking 
comments on an issue involving the Historically Underutilized Business 
Zone (HUBZone) Program and agricultural commodities purchased by the 
U.S. Department of Agriculture (USDA). According to the Small Business 
Act, in the case of a contract for the procurement by the USDA of 
agricultural commodities, a qualified HUBZone Small Business Concern 
(SBC) may not purchase the commodity from a subcontractor if the 
subcontractor will supply the commodity in substantially the final form 
in which it is to be supplied to the Government. The SBA is seeking 
comments on how to define ``substantially the final form'' with respect 
to this statutory requirement.
    In addition, on January 28, 2002, the SBA proposed amendments to 
its regulations that implement the HUBZone Program. SBA believes that 
one issue in the proposed rule merits further public comment. This 
issue, which is addressed in this Advance Notice of Proposed Rule 
Making (ANPRM), relates to a provision in the proposed regulation that 
defined the term ``employee.''
    This ANPRM and request for comments are intended to stimulate 
dialogue on these two issues.

DATES: All interested parties are invited to submit written comments. 
Comments must be received on or before July 12, 2004.

ADDRESSES: Mail written comments to Michael P. McHale, Associate 
Administrator for the HUBZone Program (AA/HUB), 409 3rd Street, SW., 
Washington, DC 20416, via facsimile (202) 205-7167, or submit them via 
e-mail to [email protected]. You may also submit comments electronically 
to http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Michael P. McHale, AA/HUB, (202) 205-
8885 or [email protected].

SUPPLEMENTARY INFORMATION: The HUBZone Program was established pursuant 
to the HUBZone Act of 1997 (HUBZone Act), Title VI of the Small 
Business Reauthorization Act of 1997, Public Law 105-135, enacted 
December 2, 1997. The purpose of the HUBZone Program is ``to provide 
for Federal contracting assistance to qualified HUBZone small business 
concerns.'' 15 U.S.C. 657a(a).
    On January 28, 2002, the U.S. Small Business Administration (SBA) 
published a proposed rule (67 FR 8739) to address amendments to the 
HUBZone Act made by the Small Business Reauthorization Act of 2000 
(Reauthorization Act). Those amendments included provisions affecting 
the eligibility requirements for small business concerns owned by 
Native American Tribal Governments and Community Development 
Corporations, and the addition of new HUBZone areas called redesignated 
areas. The proposed rule addressed these statutory amendments, 
clarified several regulations, and made some technical changes, 
including changes to Web site addresses.
    The proposed rule also addressed the statutory amendments made by 
the Reauthorization Act regarding agricultural commodities purchased by 
the U.S. Department of Agriculture (USDA). The amendment provides that, 
in connection with a USDA HUBZone procurement of agricultural 
commodities, or an unrestricted procurement for such commodities in 
which a qualified HUBZone SBC seeks a price evaluation preference, a 
qualified HUBZone SBC prime contractor may not purchase a commodity 
from a subcontractor if the subcontractor will supply the commodity in 
substantially the final form in which it is to be supplied to the 
Government. 15 U.S.C. 632(p)(5)(A)(i)(III)(cc). The Reauthorization Act 
defines ``agricultural commodity'' as having the same meaning as in 
section 102 of the Agricultural Trade Act of 1978 ( 7 U.S.C. 5602). 
According to 7 U.S.C. 5602, an ``agricultural commodity'' means any 
agricultural commodity, food, feed, fiber, or livestock (including 
livestock and insects), and any product thereof.
    These statutory provisions were intended to address a perceived 
inequity that could result due to application of the HUBZone price 
evaluation preference. Because offers for commodities tend to fall 
within a narrow range of prices, application of the HUBZone 10% price 
evaluation preference could create a windfall for a small group of 
HUBZone SBCs that could, after contract award, simply subcontract to 
purchase the commodity being procured and sell the commodity to the 
Government at inflated or other than fair and reasonable prices. 
Congress believed that this scenario is more problematic when the USDA 
purchases raw products, as opposed to processed ones. With processed 
commodities, other variables come into play that can increase the range 
of costs and hence the range of offers, as well as the need to 
subcontract.
    Thus, a qualified HUBZone SBC prime contractor that is awarded a 
HUBZone contract to supply commodities to the USDA may subcontract 
unless the subcontractor or vendor supplies the commodity in 
``substantially the final form in which it is to be supplied to the 
Government.'' In other words, the qualified HUBZone SBC may subcontract 
the requirement, but the HUBZone SBC is expected to ``process'' or 
somehow change the commodity in some way, rather than merely acting as 
a pass-through.
    SBA is seeking comments addressing the amount or level of 
processing necessary to satisfy the requirement that the subcontracted 
product not be in substantially the same form as that supplied to the 
Government. Specifically, SBA seeks comments relating to whether 
cleaning, blending, sorting/sizing or bagging a commodity, or any 
combination of these processes, results in the changed commodity that 
is contemplated by the statute.
    For example, let us assume that the USDA has a requirement for 
shelled peanuts and a qualified HUBZone SBC bids on the requirement. 
Which, if any, of the following processes if performed by the HUBZone 
SBC would sufficiently change the commodity so that it was not in 
substantially the final form in which

[[Page 26512]]

it is to be supplied to the Government: (1) Bagging already cleaned and 
shelled peanuts; (2) cleaning, sorting and bagging already shelled 
peanuts; and (3) shelling, cleaning, sorting and bagging peanuts?
    In addition, assume that the qualified HUBZone SBC had received a 
shipment of shelled and bagged peanuts several months ago, before 
submitting a bid on the USDA's requirement, and that this shipment was 
now simply part of the qualified HUBZone SBC's inventory. Would a 
contract to that qualified HUBZone SBC violate the statute?
    Similarly, should the blending of grains or the sizing of peas, 
beans and lentils be considered sufficient processes by themselves to 
receive a HUBZone price evaluation preference, or would they have to be 
in conjunction with other processes (e.g., bagging)?
    SBA notes that the HUBZone program is designed to create jobs and 
promote economic development in distressed areas through small 
businesses. Where a HUBZone firm makes a capital investment in 
equipment (e.g., bagging equipment) and hires five to ten people to run 
that equipment, the underlying purposes of the program are being met. 
The question becomes whether capital investment and job creation 
generally should have any effect on whether the HUBZone price 
evaluation preference should be applied.
    SBA invites comments on this issue regarding agricultural 
commodities, including: (1) Comments specifically addressing the 
examples set forth above; (2) other examples pertinent to the issue; 
(3) comments on definitions for ``substantially the final form in which 
it is to be supplied to the Government;'' (4) any other comments 
relating to the purchase of commodities by the USDA and the HUBZone 
program; (5) whether SBA needs to define or address the difference 
between producer and manufacturer as it relates to the purchase of 
agricultural commodities; and (6) whether SBA should redefine the term 
subcontract as it relates to agricultural commodities, and if so, how.
    In the same proposed rule, SBA also proposed to amend the 
definition of the term ``employee.'' Currently, the regulations provide 
that an ``employee'' of a concern includes ``full-time equivalents.'' 
SBA proposed removing the provision concerning ``full-time 
equivalents'' because SBA believes it is confusing. Instead, SBA 
proposed a definition that would allow persons employed on a full-time 
or part-time basis to be considered employees of the concern. The rule 
also stated that SBA would use a ``totality of circumstances'' analysis 
to determine whether a person is an employee. The proposed definition 
is similar to the one used for size, set forth in part 121 of SBA's 
regulations.
    Relatedly, SBA proposed allowing leased or temporary employees to 
be counted as employees of the concern for purposes of HUBZone 
eligibility. It is believed that such employees comprise approximately 
2-5% of the U.S. work force. Further, small businesses employ 
approximately 40% of these types of workers. SBA believes that counting 
leased, temporary and part-time employees as employees for HUBZone 
eligibility would fulfill the statutory purpose and intent of the 
HUBZone Act by providing more job opportunities for HUBZone residents, 
albeit temporary or part-time.
    The proposed definition of the term ``employee'' also stated that 
volunteers would not be counted. The proposed rule defined a volunteer 
as a person who receives no compensation for work performed. SBA 
intended the term compensation to be read broadly and to encompass more 
than wages. Thus, a person who receives food, housing, or other non-
monetary compensation in exchange for work performed would not be 
considered a volunteer under that proposed regulation. SBA believes 
that allowing volunteers to be counted as employees would not fulfill 
the purpose of the HUBZone Act--job creation and economic growth in 
underutilized communities.
    SBA received three comments expressing concerns over the proposed 
definition of employee. One commenter believed the proposed rule could 
cause a large-scale shift of workers from full-time equivalent to 
leased or part-time status with reduced benefits. Another commenter 
asserted that this change would weaken the nexus between participating 
firms and the HUBZone areas. In addition, one commenter expressed 
concern that companies could intentionally exploit the change and hire 
temporary employees for the sole purpose of obtaining HUBZone 
certification, or to receive HUBZone contracts. One commenter 
recommended that, to prevent such abuse, the definition of employee 
should include a requirement that a certain percentage of HUBZone 
employees must be paid the same as, or have the same classifications 
as, non-HUBZone employees. Another commenter believed that an 
individual should be required to work a certain number of hours before 
he or she is counted as an employee for the purpose of the 35% HUBZone 
residency requirement, registering a concern that a company could 
circumvent the 35% requirement by hiring various HUBZone residents to 
work one, two or some other number of minimum hours per week. We 
believe that the approach suggested by this commenter makes sense, and 
ask for comments as to what minimum number of hours an employee should 
work to count in determining compliance with the 35% residency 
requirement.
    One commenter stated that using a totality of circumstances test to 
determine whether part-time employees are bona fide employees and 
permitting non-monetary compensation to be relevant in the calculation 
invites arbitrariness. Another commenter stated that the definition of 
volunteer was too narrow.
    Meanwhile, several commenters believed that the proposed rule would 
create more job opportunities for HUBZone residents and agreed that 
leased and temporary employees represent a substantial portion of 
today's workforce. One commenter alleged that several firms are using 
the current exemption for leased and temporary employees to qualify for 
the program by claiming only a few employees, when in reality, they 
have many employees, all of whom are leased and very few of whom live 
in HUBZone. One commenter supported the proposed rule, but suggested 
that SBA expand the definition to allow employees of co-employer 
arrangements to be treated as employees of a HUBZone SBC.
    In light of the foregoing, SBA believes it needs further input from 
the public on the definition of the term ``employee'' for HUBZone 
Program purposes. Specifically, SBA encourages comments addressing: (1) 
Why part-time employees should not be included as ``employees;'' (2) 
the impact of including leased and temporary employees as 
``employees;'' (3) whether SBCs understand and properly calculate full-
time equivalents; (4) whether employees from co-employer arrangements 
should be treated as ``employees;'' and (5) any other issue relevant to 
the definition of ``employee'' for HUBZone program purposes.
    Comments on any other aspect of the HUBZone Program are also 
welcome. SBA reminds commenters that all submissions by commenters are 
available to the public upon request.

    Dated: May 6, 2004.
Hector V. Barreto,
Administrator.
[FR Doc. 04-10853 Filed 5-12-04; 8:45 am]
BILLING CODE 8025-01-P