By: Lane F. Kelman

On May 3, 2010, the SBA’s definition of the term "employee" of a Historically Underutilized Business Zone ("HUBZone") was amended. The new definition establishes a more definitive but stringent reading of when a person is considered an employee for HUBZone eligibility purposes. (See the SBA’s HUBZone regulations). The construction industry in particular will be impacted. The amended definition states:

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, leasing concern, or through a union agreement or co-employed pursuant to a professional employer organization 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 deferred compensation or 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.

13 CFR § 126.103

Among other criteria, in order to qualify as a HUBZone, at least 35% of the firm’s employees must reside in a designated HUBZone. Previously, when calculating the 35% threshold, only "full-time" or "permanent" employees were considered. In many industries, such as manufacturing, the distinction between a "permanent" and "temporary" employee is clear. In other industries, such as construction, the distinction wasn’t always quite as clear. As a result, construction companies did not include its temporary, project specific field labor when calculating the percentage of its employees residing in a HUBZone. Now, however, if "that individual works a minimum of 40 hours per month" then the person is considered an employee.

It is anticipated that the amendment will result in many construction companies being unable to meet the 35% threshold and therefore ineligible as a qualified HUBZone. The change also creates a new dynamic between a contractor and a trade union that supplies manpower, as the contractor, if certified as a HUBZone SBC, will want to draw from a labor pool that resides in a HUBZone. Although the proposed change was made in November of 2009, the construction industry did not provide substantive comments to the proposal.

See the SBA’s HUBZone website for more details.

Lane F. Kelman is a Partner in the firm and a member of the Federal Contracting Practice Group