February 27, 2020 Procurement Lawyer

Counting Employees for HUBZone Purposes: The Clear Line of Fractured Standard

by John Mattox

John Mattox is a senior associate attorney with Koprince Law LLC in Lawrence, Kansas. His practice addresses a broad array of federal procurement law matters.

Certification in SBA’s1 HUBZone Program requires firms, among other things, to meet two employee- based conditions. So, to ensure compliance, a firm must first grasp how SBA counts “employees.” In addition, an applicant firm must also realize that, in some cases, SBA will count the employees of its affiliates  (for size purposes under SBA’s regulations)2 as if they were the applicant firm’s own employees. Indeed, SBA, using the totality of the circumstances, will aggregate a firm’s employees with its affiliate’s employees unless a clear line of fracture separates the two.

Despite this policy — which SBA has used for years — public guidance on the clear line of facture standard, and its application, remains relatively sparse and scattered. As perhaps a primary purpose, this article seeks to consolidate and compile the publicly available tidbits into a single, robust (to the extent it can be) resource. Beyond that, it explores SBA’s application of the standard in real cases (all of which are unpublished) to harvest, if possible, further insight into the enigmatic standard. Ultimately, I hope, this article will serve as a communal starting point for practitioners who know little or nothing about this arcane topic.

SBA’s HUBZone Program and Employee-Based Requirements

Before delving headfirst into a discussion about the clear line of fracture standard, we need a little context. In this regard, let’s talk briefly about SBA’s HUBZone Program and the two principal, employee-based certification requirements impacted by the clear line of fracture standard.

The HUBZone Program3 is all about injecting federal money into geographical areas, or zones, that are historically underutilized — hence the name. Through it, the federal government seeks to increase employment opportunities, investment, and economic development in these “HUBZones.”4 These zones include tracts identified through Census data, certain non-metropolitan counties, Indian reservations, areas surrounding closed military bases, and disaster areas.5

Like SBA’s 8(a) Program, entry into the HUBZone Program requires formal SBA certification.6 Of course, this requires an applicant to satisfy (and a certified firm to maintain) certain requirements.7 Two significant ones demand our attention here: the 35% residency requirement and the principal office requirement. As we shall see, compliance with both requirements turns on a firm’s employee count.

First, to qualify as a HUBZone firm,8 35% of the firm’s employees must live in a HUBZone.9 Employees — used by a firm to meet this condition — do not have to live in the same HUBZone; they can live in different ones. Nor must these employees reside in the same HUBZone in which the firm’s principal office is located (more on that below).

Second, the more complicated principal office requirement: “[T]he concern’s principal office must be located in a HUBZone.”10 This requirement is more complex because “principal office” does not have an intuitive definition. Indeed, for HUBZone purposes, a firm’s principal office “means the location where the greatest number of the concern’s employees at any one location perform their work.”11 So “principal office” is not synonymous with a firm’s headquarters or main corporate office, as it might be colloquially. Rather, “principal office” focuses on the number of employees at a single company location.

So, as a prerequisite for meeting the 35% residency and principal office requirements, a HUBZone firm must firmly grasp who SBA reckons its employees are. With that foundation, let’s proceed to a discussion of HUBZone employees and the clear line of fracture standard.

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