[Federal Register Volume 72, Number 17 (Friday, January 26, 2007)]
[Proposed Rules]
[Pages 3750-3756]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-1284]


 ========================================================================
 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. 72, No. 17 / Friday, January 26, 2007 / 
Proposed Rules  

[[Page 3750]]



SMALL BUSINESS ADMINISTRATION

13 CFR Part 126

RIN: 3245-AF44


HUBZone and Government Contracting

AGENCY: Small Business Administration.

ACTION: Proposed rule.

-----------------------------------------------------------------------

SUMMARY: This rule proposes to amend the U.S. Small Business 
Administration's (SBA or Agency) Historically Underutilized Business 
Zone (HUBZone) program's definition of the term ``employee.'' SBA 
believes that the proposed amendment will simplify the existing 
definition and increase employment of HUBZone residents.

DATES: Comments must be received on or before February 26, 2007.

ADDRESSES: You may submit comments, identified by RIN 3245-AF44 by any 
of the following methods: (1) Federal Rulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments; 
(2) E-mail: [email protected]. Include RIN number in the subject line of 
the message; (3) Fax: (202) 481-5593; or (4) Mail or Hand Delivery: 
Michael McHale, Associate Administrator for the HUBZone Program, 409 
Third Street, SW., Washington, DC 20416.

FOR FURTHER INFORMATION CONTACT: D.J. Caulfield, HUBZone Program 
Office, at (202) 205-6457 or by e-mail at: [email protected].

SUPPLEMENTARY INFORMATION:

Statutory Authority and Background

    The HUBZone program was established pursuant to the HUBZone Act of 
1997 (HUBZone Act), Title VI of the Small Business Reauthorization Act 
of 1997, Pub. L. 105-135, enacted December 2, 1997. The stated purpose 
of the HUBZone program is to provide for Federal contracting assistance 
to qualified HUBZone small business concerns. 15 U.S.C. 657a(a). The 
HUBZone Act authorizes the Administrator of SBA to publish regulations 
implementing the program. Pub. L. 105-135, sec. 605.
    On January 28, 2002, SBA published a proposed rule seeking to amend 
several regulations including the definition of the term ``employee'' 
for the HUBZone program. 67 FR 3826. In this proposed rule, SBA sought 
to remove the provision concerning full-time equivalents. In addition, 
SBA proposed allowing leased or temporary employees to be counted as 
employees of the HUBZone small business concern (SBC).
    SBA decided not to implement any of the proposed changes to the 
definition of employee as a result of the comments received and issues 
raised by those comments. Instead, on May 13, 2004, SBA published an 
Advance Notice of Proposed Rulemaking (ANPRM) and sought further public 
comment on the definition of the term ``employee'' as it related to the 
HUBZone program. 69 FR 26511.

Summary of Comments to ANPRM and Response to Comments

    SBA received 9 comments to its ANPRM on this issue. All of the 
comments offered recommendations and creative approaches for defining 
the term ``employee'' for HUBZone program purposes. SBA reviewed each 
of the comments in drafting its proposed regulation and addresses its 
reasons for accepting or not accepting the comment when drafting the 
proposal. SBA notes that it has issued this rule as proposed and 
therefore will review again all comments received on the proposal, 
including any comments that are the same or similar to those received 
on the ANPRM. In addition, SBA notes that this proposed definition 
applies only to the HUBZone program, and the eligibility requirements 
of that program, with the exception of size. To be eligible for the 
HUBZone program and for a HUBZone contract, the SBC must be a small 
business as set forth in 13 CFR part 121 (this includes the calculation 
of number of employees for size purposes in 13 CFR 121.106).
    One comment noted that the full-time equivalent requirement is a 
good concept and should not be changed because it ensures that a 
maximum number of good jobs are created in the HUBZones. The commenter 
does not believe that the definition of full-time equivalent is 
confusing. Three commenters, however, supported any change that would 
allow part-time employees to be counted the same as full-time 
employees. These commenters believed it would be beneficial to those 
SBCs in the construction or services industry, since both industries 
employ part-time and temporary workers.
    In response to these comments, SBA has proposed mirroring, in 
general, the current size definition of the term ``employee'' and 
counting all individuals employed on a full-time, part-time, or other 
basis. SBA believes that it is important to have consistency among its 
various programs to the maximum extent practicable, unless a valid 
policy reason exists for differing policies. Thus, SBA has proposed 
some deviations from the size regulations regarding part-time and 
temporary employees, which is discussed in further detail in the next 
section of this preamble.
    SBA received one comment stating that subcontractors must be 
excluded from the definition of the term ``employee.'' The Agency notes 
that, generally, subcontractors are not treated as employees of a 
concern. However, there may be instances where the employees of a 
subcontractor are treated as employees of the HUBZone SBC based upon 
the totality of circumstances. This might occur, for example, if the 
prime and subcontractor are affiliated and the subcontractor had 
recently hired the HUBZone SBCs' former employees, so that the HUBZone 
SBC could maintain its HUBZone eligibility. Thus, SBA believes that 
there is no need to discuss the issue of subcontractor employees or to 
provide a specific exclusion for them in the regulations.
    One comment argued that SBA should exclude employees hired to 
perform on specific construction contracts from the calculation of the 
35% HUBZone residency requirement because construction contractors 
typically perform work in non-HUBZone locations and must hire workers 
from those areas. As a result, the comment stated that those in the 
construction industry have a difficult time meeting the 35% HUBZone 
residency requirement.
    SBA understands the concerns expressed by the SBC. However, the 
purpose of the program is to infuse HUBZones with revenue by hiring 
residents of the HUBZones and having

[[Page 3751]]

businesses located in HUBZones. If the SBC does not count a large 
percentage of its workforce toward the HUBZone residency requirement, 
the purpose of the program could be thwarted. In addition, SBA notes 
that the statute and implementing regulations allow the HUBZone SBC to 
``attempt to maintain'' the requisite HUBZone residency requirement 
during the performance of a HUBZone contract. Thus, the statute 
recognizes that qualified HUBZone SBCs performing construction and 
service contracts may have a difficult time meeting the residency 
requirement during the performance of the HUBZone contract and has 
already addressed the issue. Therefore, SBA does not believe it is 
necessary to address this issue again in its regulations, in the 
definition of the term ``employee.''
    One comment stated that the definition of the term ``employee'' 
should include a requirement that HUBZone SBCs pay its HUBZone and non-
HUBZone employees the same or ``classify'' them the same. The commenter 
believes this would create a firewall against manipulation of employee 
status to qualify for HUBZone contracting preferences. In response to 
the comment, SBA notes that it does not have the authority to require 
companies to pay its employees certain amounts or to internally 
``classify'' their employees a certain way. These are business 
decisions to be made by the company.
    The Agency received several comments addressing the issue of 
temporary and leased employees. The current definition provides that 
temporary and leased employees are not considered employees of a 
HUBZone SBC. SBA received one comment stating that SBA should delete 
the requirement that only ``permanent'' employees be considered 
employees of the HUBZone SBC. The comment stated that there was no 
clear meaning of ``permanent.''
    Similarly, SBA also received comments recommending that SBA allow 
qualified HUBZone SBCs to count temporary employees as employees of the 
concern (or, at a minimum, to define the term ``temporary employee''). 
One comment stated that temporary employees should be deemed employees 
of the HUBZone SBC only if they have been employed for at least 180 
consecutive days. The comment stated that several SBCs, such as those 
dealing with agricultural commodities, retain a fluctuating number of 
temporary, leased employees to supplement a core of full-time 
employees. Because these employees generally have a history of 
transitory residences, and because they are not ``permanent'' but 
temporary, it is difficult for the HUBZone SBC to keep track of and 
maintain its HUBZone status. Specifically, the comment states it is 
difficult to keep track of and maintain the 35% residency requirement. 
The comment believes that counting a temporary worker as an employee 
only if they have worked a minimum of 180 consecutive days would ease 
this burden and allow the HUBZone SBC to take appropriate steps to 
ensure that its employees meet the program's residency requirement.
    Another commenter recommended that SBA add the concept of seasonal 
employee since many HUBZone SBCs need to add a large number of 
personnel for a very short period, such as agricultural crop harvesters 
during a short harvest season. These seasonal employees would be 
employed for less than 90 days at a time and their work requirement 
would be driven by a seasonal event. In addition, this commenter 
believed that the HUBZone SBC should be allowed to decide for itself 
whether or not to count the seasonal employees as employees of the 
concern.
    Similarly, one commenter supported including in the definition of 
employee those workers employed through a co-employee arrangement with 
a Professional Employer Organization (PEO). According to this comment, 
such an amendment to the HUBZone regulations would provide consistency 
with SBA's size rules set forth at 13 CFR 121.106. That regulation 
provides that for purposes of determining the size of a business 
concern, SBA generally considers employees obtained from a PEO as 
employees of the concern.
    In addition, this commenter noted that the HUBZone SBC with the PEO 
arrangement still has the ability to hire and fire the co-employees, as 
well as supervise them. In fact, the commenter stated that if a PEO 
fires an employee, the employee is still considered an employee of the 
HUBZone SBC. Therefore, this commenter believed that the HUBZone 
regulations should recognize that workers of a PEO employed by a 
qualified HUBZone SBC are ``employees'' of the HUBZone SBC.
    In comparison, one commenter suggested that the determination of 
whether someone is an employee of a HUBZone SBC should be based solely 
upon whether the SBC issues that person a W-2 form. This would exclude 
leased or co-employees who may work for the HUBZone SBC but receive 
their W-2's from another source.
    SBA agrees with most of these comments, and has proposed deleting 
the requirement that only ``permanent'' employees be considered 
employees of the HUBZone SBC. Thus, SBA proposes allowing HUBZone SBCs 
to count temporary employees, employees obtained from a temporary 
agency, leased employees, and co-employees of PEOs as employees of the 
HUBZone SBC. As discussed in more detail in the next section, many SBCs 
are using PEO and leasing arrangements for economic and business 
reasons. Ultimately, the leased or co-employees are truly employees of 
the HUBZone SBC (hired and fired by the HUBZone SBC, receive wages from 
the HUBZone SBC, etc.). Thus, SBA believes that, in general, they 
should be considered employees of the HUBZone SBC and has proposed a 
regulation addressing this issue. The Agency also proposes to address 
those cases where employees have union contracts, but ultimately work 
for the HUBZone SBC. SBA believes that because these individuals 
perform work for the HUBZone SBC, they should therefore be considered 
employees of the concern, not the union.
    However, the Agency believes that requiring a minimum or maximum 
number of workdays for temporary or ``seasonal'' or any other type of 
employee would create a burden because the SBC would have to calculate 
the HUBZone residency, full-time equivalency, principal office 
requirement and an additional minimum/maximum work requirement. This 
would likely be a great burden to a HUBZone SBC and it is not clear how 
such an additional requirement would prevent abuse of the program, 
further the mission of the HUBZone program or help HUBZone SBCs. One of 
the purposes of the program is to stimulate job growth in HUBZones. SBA 
believes that if the HUBZone SBC hires a HUBZone resident, even on a 
temporary basis, then this purpose is met.
    SBA received one comment stating that employees should be 
``grandfathered.'' In other words, if an employee resides within a 
former HUBZone area, the employee should nonetheless still be 
considered a HUBZone resident for a minimum number of years. SBA does 
not believe it can make this change. The statute specifically defines 
the term HUBZone and requires, in general, that HUBZone SBCs meet a 35% 
HUBZone residency requirement. We do note that if the employee resides 
within a redesignated area (an area that was formerly a HUBZone but 
that remains a HUBZone for three years after it loses its HUBZone 
status), then the employee is considered to reside within a HUBZone. 
Thus, there is already a ``grandfathering'' provision for certain 
HUBZone areas and their residents.

[[Page 3752]]

Proposed Regulation

    The current definition of the term ``employee'' for the HUBZone 
program (i.e., principal office and 35% HUBZone residency requirement) 
reads as follows:

    Employee means a person (or persons) employed by a HUBZone SBC 
on a full-time (or full-time equivalent), permanent basis. Full-time 
equivalent includes employees who work 30 hours per week or more. 
Full-time equivalent also includes the aggregate of employees who 
work less than 30 hours a week, where the work hours of such 
employees add up to at least a 40 hour work week. The totality of 
the circumstances, including factors relevant for tax purposes, will 
determine whether persons are employees of a concern. Temporary 
employees, independent contractors or leased employees are not 
employees for these purposes.
    Example 1: 4 employees each work 20 hours per week; SBA will 
regard that circumstance as 2 full-time equivalent employees.
    Example 2: 1 employee works 20 hours per week and 1 employee 
works 15 hours per week; SBA will regard that circumstance as not a 
full-time equivalent.
    Example 3: 1 employee works 15 hours per week, 1 employee works 
10 hours per week, and 1 employee works 20 hours per week; SBA will 
regard that circumstance as 1 full-time equivalent employee.
    Example 4: 1 employee works 30 hours per week and 2 employees 
each work 15 hours per week; SBA will regard that circumstance as 1 
full-time equivalent employee.

13 CFR 126.103. SBA is proposing to revise the definition of the term 
``employee'' to: (1) Delete the phrase ``permanent'' basis and the 
full-time equivalency requirement; (2) allow HUBZone SBCs to count 
leased or temporary employees or employees obtained through a temporary 
agency, PEO arrangement or union agreement, as employees; (3) 
specifically state that SBA relies on the totality of circumstances as 
further defined by Size Policy Statement No. 1 when determining whether 
individuals are employees of a concern; (4) explain that volunteers are 
not employees; (5) define volunteers as those persons that receive no 
compensation; and (6) address the status of individuals that own all or 
part of the SBC but receive no compensation for work performed.
    First, SBA proposes to allow HUBZone SBCs to count full-time, part-
time and those employed on an ``other basis,'' as well as leased and 
temporary employees, and employees obtained through temporary agencies, 
co-employer agreements and union agreements as employees, rather than 
only count employees hired on a ``full-time,'' ``full-time 
equivalency'' or ``permanent'' basis. We note that this would be 
consistent with SBA's size regulations, which state that in determining 
a concern's number of employees, SBA counts such persons, including 
persons obtained from a temporary employee agency, PEO or leasing 
concern. 13 CFR 121.106(a).
    However, SBA has proposed some deviations from the treatment of 
``employee'' as compared to the size regulations. While all part-time 
and temporary employees are counted equally for size purposes, this 
proposed rule will count only those employees employed by the 
businesses concern for at least 40 hours per month (e.g., 40 hours in 
January, 40 hours in February etc.), for HUBZone program purposes. SBA 
does not want a firm to be able to claim HUBZone eligibility (e.g., the 
35% residency requirement) where it merely hired a few HUBZone 
residents to work one or two hours a week. SBA believes that this 
minimum work requirement provides flexibility to the HUBZone SBCs and 
the employees who choose to work part-time, but at the same time 
minimizes possible abuses of the rule.
    With respect to leased and temporary employees, it is our 
understanding that for many reasons, including rising employee health 
care costs, small businesses are increasingly hiring temporary or 
leased employees, or co-employees from a PEO. See e.g., ``Putting a 
band-aid on small firm's health care costs,'' USA Today (April 18, 
2006) (available at http://www.usatoday.com/money/smallbusiness/2006-04-18-health-costs-usat_x.htm?csp=34). Thus, SBA believes that 
counting such persons as ``employees'' for HUBZone Program purposes 
will fulfill the statutory purpose and intent of the HUBZone Act by 
providing more job opportunities for HUBZone residents.
    Further, SBA notes that SBCs could qualify for the HUBZone program 
under the current regulations 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 a HUBZone. SBA believes that counting leased and 
temporary employees, as well as persons obtained through a PEO 
arrangement, will prevent such an abuse.
    SBA notes that if the totality of circumstances, however, dictates 
otherwise, then the individuals employed on a temporary or leased basis 
(or co-employees or union employees) may not be considered employees of 
the HUBZone SBC. Because of the numerous types of agreements in the 
public domain concerning these types of employees, SBA cannot state 
definitively that each of those types of employees are ``employees'' of 
the HUBZone SBC. However, in general, those employees are counted if 
the HUBZone SBC can hire and fire the employee, pays the employees' 
wages, supervises the employee, and meets any or all of the factors set 
forth in SBA's Size Policy Statement No. 1 (discussed in detail below).
    Second, SBA's HUBZone regulations state that the totality of the 
circumstances, including factors relevant for tax purposes, will 
determine whether persons are employees of a concern. 13 CFR 126.103. 
That means that SBA will review the totality of circumstances to 
determine whether those persons who ``work'' for another company are 
truly employees of the HUBZone SBC. The totality of circumstances 
language set forth in the HUBZone regulations can also be found in 
SBA's size regulations. When determining the size of a particular 
concern under an employee-based size standard (i.e., the number of 
employees that the concern has), SBA's size regulations require that 
the Agency count all individuals employed by the concern, including 
those employed on an ``other basis.'' 13 CFR 121.106(a). Like the 
HUBZone regulations, the size regulations also direct SBA to consider 
the totality of the circumstances when determining whether certain 
individuals are to be considered employees of the concern in question. 
Id.
    The totality of the circumstances language first appeared in SBA 
Size Policy Statement No. 1, published in the Federal Register on 
February 20, 1986, 51 FR 6099. Size Policy Statement No. 1 gave notice 
of SBA's intended application and interpretation of the definition of 
number of employees. Id. According to Size Policy Statement No. 1, the 
intended application of the regulation was to broaden SBA's authority 
to find that certain individuals be considered employees of the concern 
on an ``other basis.'' Id. Specifically, SBA stated its concern that 
administrative precedent had interpreted the size regulation in an 
overly mechanical way and therefore could subject SBA's size 
determinations to abuse.
    Size Policy Statement No. 1 directs that SBA consider any 
information or data relevant to the question of whether an employer is 
deriving the usual benefits incident to employment of such individuals, 
and the circumstances under which the situation came to exist. Id. The 
Size Policy Statement directs SBA to consider the ``totality of the 
circumstances,'' including the following eleven factors:


[[Page 3753]]


    Did the company engage and select the employees?
    Does the company pay the employees wages and/or withhold 
employment taxes and/or provide employment benefits?
    Does the company have the power to dismiss the employees?
    Does the company have the power to control and supervise the 
employees' performance of their duties?
    Did the company procure the services of the employees from any 
employment contractor involved in close proximity to the date of 
self-certification as a small business?
    Did the company dismiss employees from its own payroll and 
replace them with the employees from any employment contractor 
involved? Were they replaced soon after their dismissal?
    Are the individual employees supplied by any employment 
contractor involving the same individuals that were dismissed by the 
company?
    Do the employees possess a type of expertise or skill that other 
companies in the same or similar lines of business normally employ 
in-house (as opposed to procuring by sub-contract or through an 
employment contractor)?
    Do the employees perform tasks normally performed by the regular 
employees of the business or which were previously performed by the 
company's own employees?
    Were the employees procured through an employment contractor to 
do other than fill in for regular employees of the company who are 
temporarily absent?
    Does the contract with the independent contractor have a term 
based on the term of an existing Government contract?

Id. at 6100-6101. The presence of one or more of the factors in a 
particular case may but does not necessarily support a finding that the 
employees should be attributed to the business whose size (or HUBZone 
status) is an issue. Id. at 6101.
    SBA uses the guidance set forth in this Size Policy Statement in 
determining whether a person is an employee of a HUBZone SBC under the 
totality of circumstances test. At least one court has ruled that this 
is permissible and consistent with the HUBZone regulations. Metro 
Machine Corp. v. SBA, 305 F.Supp.2d 614 (E.D.Va. 2004), aff'd, 102 
Fed.Appx. 352 (4th Cir. 2004). Thus, SBA intends to clarify in the 
regulations that it uses the guidance set forth in SBA's Size Policy 
Statement No. 1 in determining who is an employee of a HUBZone SBC.
    Third, SBA's proposed definition of the term ``employee'' provides 
that volunteers or any person who does not receive compensation for 
work performed for the HUBZone concern are not considered employees of 
the concern. SBA proposes to define the term ``volunteer'' to mean a 
person who receives no compensation, including no in-kind compensation, 
for work performed. Thus, a person who receives food, housing or other 
non-monetary compensation in exchange for work performed would not be 
considered a volunteer, and thus included as an employee of the HUBZone 
SBC. This proposal would make the HUBZone regulations consistent with 
SBA's size regulations, which provide the same. In addition, SBA 
believes that allowing volunteers to be counted as employees would not 
fulfill the purposes of the HUBZone Act--job creation and economic 
growth in underutilized communities.
    Along the same lines, SBA proposes to address the treatment of 
owners of a company who often work many long hours for the SBC, but 
refrain from receiving monetary compensation until the SBC is making a 
profit. SBA proposes to allow such owners to be considered 
``employees'' of the concern, regardless of whether they receive 
compensation from the SBC. SBA believes that although these owners are 
not necessarily receiving monetary compensation for their work, they 
are nonetheless investing considerable time and energy into the SBC 
with the hope and expectation that their efforts ultimately will be 
rewarded. Therefore, SBA believes these persons should be considered an 
employee for HUBZone program purposes so long as they work a minimum of 
40 hours a month. This would be consistent with the proposed general 
requirement that only persons employed by the HUBZone SBC and that work 
at least 40 hours per month are counted as employees of the concern.
    SBA seeks comments on these proposed amendments to the HUBZone 
definition of the term ``employee.'' The SBA would specifically like 
comments addressing the following: (1) Whether 40 hours per month is a 
suitable minimum work requirement; and (2) whether temporary employees 
should be employed for a specific period of time (i.e., 6 months) in 
order to be considered employees.

Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork 
Reduction Act (44 U.S.C. Ch. 35), and the Regulatory Flexibility Act (5 
U.S.C. 601-602)

    SBA has determined that this proposed rule does not impose 
additional reporting or recordkeeping requirements under the Paperwork 
Reduction Act, 44 U.S.C., chapter 35. Further, this proposed rule meets 
applicable standards set forth in Sec. Sec.  3(a) and 3(b)(2) of 
Executive Order 12988, Civil Justice Reform, to minimize litigation, 
eliminate ambiguity, and reduce burden. This action does not have 
retroactive or preemptive effect.
    This proposed rule will not have substantial direct effects on the 
States, on the relationship between the Federal government and the 
States, or on the distribution of power and responsibilities among the 
various levels of government. Therefore, for the purposes of Executive 
Order 13132, SBA determines that this rule has no federalism 
implications warranting preparation of a federalism assessment.
    OMB has determined that this rule constitutes a ``significant 
regulatory action'' under Executive Order 12866. SBA's Regulatory 
Impact Analysis is set forth below.

Regulatory Impact Analysis

1. Is There a Need for the Regulatory Action?

    SBA's statutory mission is to aid and assist small businesses 
through a variety of financial, procurement, business development, and 
advocacy programs. To assist the intended beneficiaries of these 
programs, SBA must establish distinct definitions regarding eligibility 
for its various programs. In the present case, SBA issued a proposed 
rule, and an ANPRM, to determine whether there was a need to amend the 
definition of the term ``employee'' for HUBZone program purposes. SBA 
received several responses to both the proposed rule and ANPRM. After 
evaluating these responses, as well as reviewing application of the 
current regulation in the certification, protest and appeal, and 
program examination processes, SBA has determined that the definition 
of employee must be amended to better serve the needs of SBCs and 
advance the goals of the HUBZone Act. The reasons for each of the 
proposed amendments is set forth in the preamble.

2. What Are the Potential Benefits and Costs of This Regulatory Action?

    The baseline for measuring the potential benefits of the rule is 
the status quo, i.e., no change in the regulation. SBA believes that 
the proposed rule will maximize the net benefits to society, including 
potential economic advantages. Specifically, the benefits of these 
proposed amendments would accrue to those SBCs that utilize part-time, 
temporary or leased employees (as well as PEOs and union workers) 
because they would no longer be ``penalized'' for using those types of 
workers. If the rule is finalized as proposed, SBCs that utilize such 
workers would be able to count them toward the HUBZone program's 35% 
residency and principal office

[[Page 3754]]

requirements. In addition, this proposed rule would aid small, start-up 
companies where the owner works for the company but receives no 
compensation for his/her efforts.
    SBA also believes that the Historically Underutilized Business 
Zones--the areas that the HUBZone program are meant to help--will 
benefit from the rule. HUBZone SBCs can now hire leased and temporary 
employees in order to ``circumvent'' the 35% HUBZone residency and 
principal office requirement. In other words, these companies hire only 
a few employees and then lease or hire several temporary workers. 
Because SBA does not count the leased and temporary workers as 
``employees,'' these workers are not part of the 35% residency 
calculation or principle office calculation. This means that there are 
fewer jobs and other benefits flowing to the HUBZones. SBA believes the 
proposed rule would increase the number of jobs and other benefits to 
HUBZones.
    SBA believes that if the proposed rule is published as final, there 
may be current qualified HUBZone SBCs that no longer qualify for the 
program because they hire leased and temporary employees that are non-
HUBZone residents, and would have to count those personnel as employees 
of the concern. However, SBA also believes that this rule will allow 
other SBCs to qualify for the program. SBA believes that if there are 
increases in the number of concerns participating in the HUBZone 
program and in the number of HUBZone contract dollars awarded, there 
may be attendant cost increases to the government in terms of the costs 
of goods and services sold and administrative costs. However, existing 
provisions of the Federal Acquisition Regulation concerning the 
determination of ``fair and reasonable'' pricing will mitigate any 
significant monetary costs to the government as a result of this 
proposed rule.
    In addition, SBA believes that the rule will provide greater 
administrative efficiency and program integrity. Because the amendments 
in this proposed rule clarify some of the program's requirements, the 
rule will likely streamline and improve the effective administration of 
the HUBZone program. It will also enhance SBA's ability to administer 
the program with existing resources and better focus the program 
benefits on the businesses that operate in areas of low income or high 
unemployment. Further, as explained in detail above, SBA believes that 
allowing SBCs to count temporary and leased employees (as well as co-
employees and union employees) will protect the integrity of the 
program.
    Overall, projecting winners and losers from regulatory changes in 
the HUBZone program cannot be done with certainty. SBA believes that 
increasing the efficiency and access to the HUBZone program will, over 
time, result in increased use of the program and a higher probability 
that the HUBZone Program will meet its original objectives to create 
jobs and increase capital investment in HUBZone communities. Thus, SBA 
believes that the benefits of the proposed rule outlined above, 
including the benefits to the HUBZone areas (and the fact that many new 
HUBZone SBCs will employ HUBZone residents) maximizes the net benefits 
to society.

3. Were Any Alternatives Considered?

    SBA considered many alternatives to the rule proposed. First, SBA 
considered not amending the rule. However, during the certification, 
protest and appeal, and program examination process, the same issues 
would materialize. These issues relate to the use of temporary or 
leased employees, as well as co-employees. In addition, issues arise 
concerning start-up companies and whether their owners who work many 
long hours for the company could be counted as an employee despite the 
fact the owner receives no compensation. Thus, SBA considered issuing 
policy notices, for example, rather than amending the regulations. 
These notices, however, are generally not published material like 
regulations, and would hinder a SBC's access to this needed 
information.
    In addition, SBA considered amending the definition of the term 
``employee'' by retaining the provision regarding full-time 
equivalents. SBA received several comments on the issue of full-time 
equivalent in response to its prior proposed rule and the ANPRM, which 
are discussed above, including at least one stating the use of full-
time equivalents is appropriate. SBA, however, believes that this 
provision has caused confusion amongst SBCs and therefore, the SBCs may 
not be strictly following the full-time equivalent requirement.
    SBA had also considered deleting the full-time equivalent 
requirement with the caveat that the individual work a minimum of 10 
hours per week. However, SBA was concerned that SBCs could easily 
circumvent the regulation and have employees, including those that do 
not reside in a HUBZone work, less than 10 hours for just one week, and 
not be counted toward the principal office or 35% HUBZone residency 
requirement.
    SBA also considered requiring the employees work a minimum of 10 
hours per week averaged over a single payroll period. However, one 
problem with this alternative is that businesses have different payroll 
periods and thus, a person could be an employee of one concern, but not 
another, depending on how the company defines the term payroll period.
    SBA also considered calculating a HUBZone SBCs employees similar to 
the requirements set forth for size in 13 CFR part 121 (e.g., total 
hours for year divided by 2080). However, SBA believed this would 
conflict with the HUBZone definition of principal office.
    In addition, SBA had considered setting forth all eleven criteria 
considered under the totality of circumstances test set forth in Size 
Policy Statement No. 1. However, SBA reviewed the Size Policy Statement 
and believes that the entire policy statement must be reviewed, in 
addition to the eleven criteria, in order to determine whether or not a 
person is an ``employee.'' Thus, SBA believes it would be best to 
simply reference the policy notice, which is a publicly available 
document, rather than set forth all of the criteria and other factors 
in the regulation.

Initial Regulatory Flexibility Analysis for the HUBZone Proposed 
Regulations

    SBA certifies that this proposed rule may have a significant 
economic impact on a substantial number of small entities within the 
meaning of the Regulatory Flexibility Act (RFA), 5 U.S.C. 601, et seq. 
Thus, SBA has prepared this Initial Regulatory Flexibility Analysis 
(IRFA).
    The RFA provides that when preparing such an analysis, an agency 
shall address all of the following: the reasons, objectives, and legal 
basis for the proposed rule; the kind and number of small entities that 
would be affected; the projected recordkeeping, reporting, and other 
requirements; Federal rules that may duplicate, overlap, or conflict 
with the proposed rule; and any significant alternatives to the 
proposed rule. This IRFA considers these points and the impact of these 
proposed regulations on small entities.

1. Reasons for and Objectives of the Proposed Rule

    The HUBZone Program was established pursuant to the HUBZone Act of 
1997 (HUBZone Act), Title VI of the Small Business Reauthorization Act 
of 1997, Pub. L. 105-135, enacted December 2, 1997. The purpose of the 
HUBZone Program is ``to provide for

[[Page 3755]]

Federal contracting assistance to qualified HUBZone small business 
concerns.'' 15 U.S.C. 657a(a). The HUBZone Act directed SBA's 
Administrator to promulgate regulations to implement the HUBZone 
Program. SBA's HUBZone regulations are set forth in 13 CFR part 126. 
Part 126 sets forth key definitions, eligibility criteria for 
certification into the HUBZone Program, and information on HUBZone 
contracts, among other things.
    Since the inception of the program, SBA has received thousands of 
applications for certification into the HUBZone Program and has 
certified over 13,000 concerns into the program. In addition, Federal 
agencies have awarded thousands of HUBZone contracts. As a result, SBA 
has become aware of amendments that should be made to the program's 
regulations. These amendments include a revised definition for the term 
``employees.''
    SBA believes that the proposed amendment to the definition of the 
term ``employee'' will ease program eligibility requirements perceived 
to be burdensome on concerns, and streamline the operation of the 
HUBZone Program.

2. Legal Basis

    This action, including publication of proposed rules, is authorized 
pursuant to Pub. L. 105-135, sec. 601 et seq., 111 Stat. 2592 and 15 
U.S.C. 632(a).

3. Definition of Small Entity

    In making its determination that this proposed rule may have a 
significant economic impact on a substantial number of small entities, 
SBA used the definition of small business set forth in section 3 of the 
Small Business Act, 15 U.S.C. 632(a)(1) & (2). According to that 
section, a ``small business concern'' is one that: (1) Is independently 
owned and operated; (2) is not dominant in its field of operation; and 
(3) satisfies any additional criteria established by SBA. Id. SBA has 
established such additional criteria in its regulations at 13 CFR part 
121. SBA used this criteria for its analysis as well.

4. The Small Entities to Which the Proposed Rules Will Apply

a. Description and Estimate
    The RFA directs agencies to provide a description of, and where 
feasible, an estimate of the number of SBCs that may be affected by the 
proposed rule, if adopted. The specific group of SBCs affected the most 
by this proposed rule are those who participate in Federal Government 
contracting and are in the services or construction industry.
    While there is no precise estimate for the number of SBCs that will 
be affected by this proposed rule, SBA has reasoned the following. SBA 
believes that over 30,000 SBCs will apply for certification as 
qualified HUBZone SBCs over the life of the program. This number is 
based upon 1992 census data, the number of HUBZone SBCs registered in 
Central Contractor Registration (CCR), and a reasonable extrapolation 
of this data to account for growth.
    In the past few years, SBA has received thousands of applications 
for the HUBZone Program and has certified over 13,000 SBCs into the 
program. SBA believes that the incentives available through 
participation in the program, i.e., HUBZone set-asides and price 
evaluation preferences, will result in additional SBCs relocating to 
HUBZones. SBA is unable to predict the number of SBCs that will 
relocate to HUBZones and be eligible for the program, but estimates 
that approximately 30,000 SBCs are now eligible or will become 
eligible.
    Of the 30,000 SBCs that have a principal office located in a 
HUBZone, SBA believes that most will be directly affected by this 
proposed rule. This is based on the fact that of the over 13,000 
HUBZone SBCs listed in CCR, over 11,000 list services and construction 
as the general nature of their business. Thus, it appears that most 
qualified HUBZone SBCs are in those industries. According to the 
comments received, SBCs in the construction and services industries use 
temporary and leased employees.
    The proposed amendment to the definition of the term ``employee'' 
will allow leased and temporary employees to be considered employees of 
a concern. These leased and temporary employees would be counted toward 
the 35% HUBZone residency and principal office requirements. At one 
point, such employees comprised approximately 2-5% of the work force in 
the U.S. economy. Labor Shortages, Needs, and Related Issues in Small 
and Large Businesses, Nov. 2, 1999 (report prepared for the Office of 
Advocacy) (available at www.sba.gov/advo/research/rs195atot.pdf). In 
addition, the report stated that small businesses accounted for the 
employment of about 40% of such employees. Id. Although SBA does not 
know exactly how many SBCs eligible for the HUBZone Program use leased 
or temporary employees, this data further evidences that many concerns 
may be affected by this rule.
b. How Each Small Entity Will Be Affected
    As discussed above, the SBCs that will be affected by this rule are 
those who participate in federal government contracting, and use leased 
or temporary employees. For those SBCs that participate in Federal 
Government contracting and use leased or temporary employees, the 
proposed rule will allow the concern to count these employees toward 
the 35% HUBZone residency and principal office requirement. Thus, a 
larger portion of the concern's workforce would have to be counted 
toward this requirement.

5. Projected Recordkeeping, Reporting and Other Compliance Requirements

    The proposed rule does not impose new reporting or recordkeeping 
requirements on concerns applying to be certified as qualified HUBZone 
SBCs or concerns already certified. The regulations have always 
required an application for certification and re-certification.

6. Relevant Federal Regulations Which May Duplicate, Overlap or 
Conflict With the Proposed Rule

    SBA's size regulations also define the term ``employee.'' The 
proposed amendments to the HUBZone program's definition of the term 
``employee'' will overlap, but will be consistent with, the size 
regulations because both will count leased and temporary employees as 
well as co-employees. In addition, both will address volunteers, and 
define the term.

7. Significant Alternatives

    In general, one alternative is not to amend the current 
regulations. SBA believes, however, that amendments to the current 
regulations are necessary because it would be in the best interest of 
SBCs to streamline the regulations and clarify the definition of the 
term ``employee.''
    SBA also reviewed several alternatives to specific amendments. The 
current HUBZone definition of the term ``employee'' states that an 
employee of a SBC includes full-time equivalents. 13 CFR 126.103. Full-
time equivalents are defined as employees who work 30 or more hours a 
week. It also includes the aggregate of employees who work less than 30 
hours a week, where the work hours of such employees add up to at least 
a 40-hour work week. SBA does not currently consider leased or 
temporary employees, or independent contractors, to be employees of a 
concern for HUBZone program purposes. SBA had several choices when 
amending this definition, including: (1) Keeping the

[[Page 3756]]

definition the same; (2) including leased and temporary employees as 
HUBZone employees, but keeping the use of full-time equivalents; or (3) 
not including leased and temporary employees as HUBZone employees, and 
not using full-time equivalents. (For a detailed discussion on the 
alternatives considered, see the discussion above in the Regulatory 
Impact Analysis.)
    The purpose of the current definition of employee is to focus on 
those jobs that best fulfill the statutory purpose of the HUBZone Act. 
That is why SBA proposes to allow a concern to count part-time 
employees, but only if the part-time employees work a minimum of 40 
hours per week. SBA believes that counting part-time, leased and 
temporary and full-time equivalents as employees of the HUBZone SBC 
will still fulfill the statutory purpose and intent of the HUBZone Act 
by providing more job opportunities for HUBZone residents, albeit 
temporary ones.
    For example, if a concern has 15 employees and 5 are temporary or 
leased employees, then, under the current rule, 35% of 10 of the 
concern's employees must be HUBZone residents. Under the proposed rule, 
35% of all 15 of the concern's employees must be HUBZone residents. 
Thus, this proposed definition would impose a more stringent standard 
on the concern, which SBA believes will increase employment 
opportunities in HUBZones.
    Finally, SBA believes that this definition of employee is similar 
to the definition set forth in its size regulations, 13 CFR part 121. 
The size regulations define employee as all individuals employed on a 
full-time, part-time, or other basis. 13 CFR 121.106(a). SBA will 
consider the totality of the circumstances, including factors relevant 
for tax purposes, in determining whether individuals are employees of 
the concern in question. This totality of the circumstances language 
stems from SBA Size Policy Statement No. 1, published in the Federal 
Register on February 20, 1986, 51 FR 6099. Basically, Size Policy 
Statement No. 1 states that SBA will consider temporary or leased 
employees to be employees of a SBC on an ``other basis'' if the SBC is 
deriving the usual benefits incident to employment of such individuals 
and the totality of the circumstances requires so. 51 FR 6099-6101.
    SBA decided to refer to this Size Policy Statement, rather than 
include all of the criteria and factors, in the regulation. SBA 
believes that referring SBCs and the general public to the policy 
document on the issue would provide everyone with a better 
understanding of the totality of circumstances.
    In sum, the proposed definition of employee chosen by SBA for its 
HUBZone program is similar to SBA's size regulations and this should be 
less confusing and less of a burden on small businesses. However, we 
note that while the SBA is seeking comments on all aspects of this 
proposed rule, the Agency would specifically like comments addressing 
whether 40 hours per month is a suitable minimum work requirement.

8. Cost Analysis

    The proposed rule may impact those qualified HUBZone SBCs that hire 
temporary and leased employees and do not count them toward their 35% 
HUBZone residency requirement or principal office requirement. These 
HUBZone SBC may or may not still be eligible for the program, once the 
rule becomes final. If these HUBZone SBCs are no longer qualified for 
the program, they will lose future HUBZone contract opportunities. 
However, the proposed rule will allow other SBCs to become eligible for 
the program. These HUBZone SBCs will have the opportunity to compete 
for future HUBZone contracts.
    The proposed rule will not impact substantially SBA's costs. SBA 
does not know the economic impact or costs of the proposed rule on 
other Federal agencies. Federal agencies issuing HUBZone contracts will 
have to train and educate their employees on the proposed rule, if 
adopted. This cost should be minimal. The increase in the number of 
HUBZone SBCs in the program will increase competition and this may 
result in lower prices/awards, thereby reducing Federal procurement 
costs.

9. Conclusion

    Based upon the foregoing, SBA has determined that this proposed 
rule has a significant economic impact on a substantial number of small 
entities within the meaning of the RFA.

List of Subjects in 13 CFR Part 126

    Government procurement, Small businesses.

    For the reasons set forth above, SBA proposes to amend 13 CFR part 
126, as follows:

PART 126--HUBZONE PROGRAM

    1. The authority citation for 13 CFR part 126 continues to read as 
follows:

    Authority: 15 U.S.C. 632(a), 632(j), 632(p) and 657a.

    2. Amend Sec.  126.103 by revising the definition of the term 
``employee'' to read as follows:


Sec.  126.103  What definitions are important in the HUBZone program?

* * * * *
    Employee means all individuals employed on a full-time, part-time, 
or other basis, so long as that individual works a minimum of 40 hours 
per month. This includes employees obtained from a temporary employee 
agency, professional employee organization, leasing concern, or through 
a union agreement. SBA will consider the totality of the circumstances, 
including criteria used by the IRS for Federal income tax purposes and 
those set forth in SBA's Size Policy Statement No. 1, in determining 
whether individuals are employees of a concern. Volunteers (i.e., 
individuals who receive no compensation, including no in-kind 
compensation, for work performed) are not considered employees. 
However, if an individual has an ownership interest in and works for 
the HUBZone SBC a minimum of 40 hours per month, that owner is 
considered an employee regardless of whether or not the individual 
receives compensation.
* * * * *

    Dated: September 21, 2006.
Steven C. Preston,
Administrator.

    Editorial Note: This document was received at the Office of the 
Federal Register on January 23, 2007.
 [FR Doc. E7-1284 Filed 1-25-07; 8:45 am]
BILLING CODE 8025-01-P