[Federal Register: June 6, 2000 (Volume 65, Number 109)]
[Rules and Regulations]               
[Page 35810-35813]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jn00-4]                         

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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

 
Small Business Size Standards; Help Supply Services

AGENCY: Small Business Administration.

ACTION: Final rule.

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SUMMARY: The Small Business Administration (SBA) is establishing a size 
standard of $10 million in average annual receipts for Help Supply 
Services--Standard Industrial Classification (SIC) 7363. The current 
size standard for this industry is $5.0 million. This revision is made 
to better define the size of business in this industry that SBA 
believes should be eligible for Federal small business assistance 
programs. SBA is also clarifying language about affiliation when a 
Professional Employer Organization (PEO) is co-employer of a firm's 
employees.

DATES: This rule is effective on July 6, 2000.

FOR FURTHER INFORMATION CONTACT: Patricia B. Holden, Office of Size 
Standards, (202) 205-6618 or (202) 205-6385.

SUPPLEMENTARY INFORMATION: SBA proposed a revision to the size standard 
for the Help Supply Services industry (SIC 7363) from $5.0 million to 
$10.0 million average annual receipts (64 FR 55873, dated October 15, 
1999). The proposal was made following comments from the public 
expressing concern that the size standard has not kept pace with the 
rapid growth in the industry due in part to the trends of outsourcing 
and downsizing. The industry has changed in two ways--help supply firms 
are larger and they are providing a wider range of personnel to 
businesses. We also had a request to allow help supply

[[Page 35811]]

firms to exclude funds collected for and remitted to unaffiliated third 
parties from gross receipts, as is currently done for travel agents and 
real estate agents, since 60 percent to 85 percent of revenues on many 
Federal contracts are ``passed-through'' to a firm's employees or 
associates.
    The current size standard for this industry, $5.0 million, is based 
on gross billings including funds paid to employees (sometimes referred 
to as ``associates''). Based on a review of industry data, SBA proposed 
increasing the size standard for the Help Supply Services industry to 
$10 million in average annual receipts. SBA did not propose a change to 
the way average annual receipts are calculated for firms in the Help 
Supply Services industry. Under SBA's size regulations (13 CFR 
121.104), the size of a firm for a receipts-based size standard is 
based on information reported on a firm's Federal tax returns. 
Generally, receipts reported to the Internal Revenue Service (IRS) 
include a firm's gross receipts or sales from provision of goods or 
services. Only when firms in an industry generally display certain 
characteristics will we exclude certain pass-though revenues from the 
calculation of gross receipts. As explained in the proposed rule, SBA 
evaluated this issue and concluded that gross receipts is appropriate 
in calculating the size of a firm in this industry.
    The final rule adopts the proposed size standard of $10 million 
based on our analysis of the industry as presented in the proposed 
rule. The comments received on the proposed rule did not provide us 
with sufficient reasons to alter our assessment of the industry data or 
the position that the size standard should be based on gross receipts. 
The comments to the proposed rule and our position are discussed below.

Discussion of Comments

    We received six timely comments on the proposed size standard--four 
from individual firms, one from an association and one from an SBA 
attorney. The association representing over 1,400 firms supported 
adopting the proposed rule. Of the four firms who commented, two were 
opposed, one was for and one was for a size standard increase, but 
higher than the one proposed. The comments raised four major issues. 
Each of these issues is discussed below along with our response.

Small Firms May Be Harmed by the Increase in the Size Standard

    Two comments raised the issue of small firms being at a 
disadvantage if they would have to compete with firms in the $5.0 
million to $10.0 million range. They contend that companies with $5 
million to $10 million in receipts have established themselves in the 
industry. If these businesses were defined as small, they would take 
away work from the presently defined small businesses. This issue is 
raised often when we proposes to increase the size standard, and it is 
a valid concern. However, we believe our analysis of the industry 
clearly supports that firms of up to $10 million in receipts are small 
businesses within this industry. The average firm in the industry 
generates almost $3 million in receipts and firms of $10 million or 
less in receipts account for only a little more than a third of total 
industry receipts. Given these and the characteristics discussed in the 
proposed rule, we believe we have identified the firms reasonably 
considered small in this industry.
    Related to this issue, we are looking into ways to protect the 
smaller firms while having a size standard that includes firms of 
sufficient size to handle the typical Federal procurement. One pilot 
program currently being tested is the Very Small Business Set-Aside 
Program. This program reserves procurements of $50,000 or less for very 
small businesses--defined as a business with not more than 15 employees 
and not more than $1.0 million revenues. The pilot program is being 
conducted within the geographical area of ten SBA district offices. 
(For more information on this program, please call the SBA's Office of 
Government Contracting at (202) 205-6460, or visit our web site at 
http://www.sba.gov/GC/vsbqa.html.)

Size Standards Methodology and Data

    One comment disagreed with our use and analysis of the 1992 Census 
data to evaluate the size standard for this industry. The comment 
recommended a size standard to $20.0 million based on more recent data 
on the industry. In particular, the comment presented data (without 
citing its sources) showing average firm size and the four-firm 
concentration ratio to be much higher than our calculations shown in 
the proposed rule. We used the latest available Census Bureau data on 
this industry. We recognize that the industry has grown since the last 
data were collected, but until more complete data are available, we 
must continue to rely on the 1992 Census data as the most complete and 
representative data available on the Help Supply Services industry for 
establishing size standards. We expect to get newer data later this 
year based on the 1997 Economic Census. If these data show the $10 
million to be an inappropriate size standard, we will consider 
publishing another proposal based on an analysis of that new data.

Calculation of Average Annual Receipts

    SBA received one comment stating that firms in this industry do 
indeed work on commissions, but it is called a ``rate'' and that 
revenues are artificially inflated if labor costs are not excluded from 
the calculation. The comment asserts that the labor rate is a pass-
through and only the mark-up rate is the firm's revenues. They 
disagreed with the analysis done by SBA on the factors such as agent-
like relationship in arriving at the position not to exclude labor 
costs for this industry. Further, the comment argued that staffing for 
this industry is like inventory in other industries.
    We disagree. The proposed rule stated five characteristics that we 
consider in assessing whether or not to exclude certain types of 
``pass-through'' revenues. The argument that we should view the 
personnel supplied by help supply services firms to their client firms 
as inventory did not convince us that an agent-like relationship 
exists. Help supply services firms are providing their own resources 
(or ``inventory'') under their control to another firm. On the other 
hand, the role of an agent is to represent the agent's principal. Often 
an agent negotiates a transaction bringing parties together, but always 
acts on behalf of the principal as required by their fiduciary 
relationship. The comment did not identify which party would be the 
principal, but it would not be the employees/associates (also described 
by the comment as ``inventory'') and it would not be the firm using the 
employees. Rather, help supply services firms act on their own behalf 
and in their own interest when negotiating to obtain personnel or to 
supply staffing to a firm. For an agency to exist, there must be a 
principal-agent relationship and that is not evident in this industry.
    We also do not agree with the position that the labor costs of help 
supply services firms are the same as funds held in trust for another. 
While there is a close connection between the wages and benefits of 
personnel supplied by a help supply services firm and the firm using 
the personnel, it is the help supply services firm that is responsible 
for paying the employees' wages and benefits. The revenues paid to the 
help supply services firm by the firm using the employees legally 
belong to the help supply services firm even though the help supply 
services firm has a legal obligation to pay its employees. This is

[[Page 35812]]

a much different arrangement than holding funds in trust for an 
unaffiliated third party. Such trust funds are legally owned by the 
unaffiliated third party, but collected and distributed by the holder 
on the owner's behalf. An association representing over 1,400 firms in 
the help supply services industry also rejected the notion that help 
supply services firms should be viewed as agents. It also stated that 
the wages and benefits of the help supply services employees are not 
earmarked for the purpose of paying employees.
    Finally, we recognize that the help supply service firms often 
apply a rate to labor costs in arriving at a price for supplying 
personnel to a client. The comment estimated an average rate for the 
industry. However, there does not appear to be a standard rate provided 
by the industry, which is one necessary characteristic for allowing an 
exclusion of certain pass-through revenues. Rather, the comment itself 
acknowledged that rates vary by firm. An average rate charged by firms 
in the industry is not the same concept as a common or standard rate 
applied by firms throughout the industry. Also, we note that many 
industries operate on a cost plus mark-up basis, but are not agents and 
their costs are not recognized as ``pass-through'' funds.

Impact of the Proposal on Prior Findings of Affiliation

    One comment raised the issue of prior findings of affiliation 
between a franchisor and franchisee in the staffing industry where the 
franchisor controlled the ``associates'' of the franchisee. His 
question was how would the proposal to exempt ``Professional Employee 
Organizations'' (PEOs) from the presumption of affiliation with the 
firms to whom they supply personnel affect these earlier decisions. 
Changing the size standard will not affect prior or subsequent findings 
of affiliation. The clarification regarding PEOs is narrowly written so 
as not to impact findings of affiliation based on control or other 
grounds. It addresses the issue of affiliation between the firm using 
the employees and the PEO supplying the employees under a co-employment 
arrangement. It does not address the issue of where or how the PEO 
obtains the employees it subsequently provides to the firm. In many 
cases, they were formerly the sole employees of the firm using their 
services before the firm contracted out the professional administration 
of its employees. If the PEO obtains its employees from a franchisor, 
affiliation could still be found between the franchisor and the 
franchisee where a franchise agreement gives control of the 
franchisee's ``associates'' to the franchisor. In such cases, the 
receipts or employment of both the franchisor and the franchisee must 
be included in the calculation. This is a separate issue from what the 
clarification addresses, namely, how the firm (using the employees) 
calculates its size.

Affiliation and Professional Employer Organizations

    SBA is also clarifying the language in 13 CFR 121.103(b)(4). 
Section (b) discusses exclusions from affiliation rules while paragraph 
(4) specifically excludes business concerns that lease employees. We 
are inserting ``Professional Employee Organizations (PEOs)'' in this 
section along with leasing companies. Their relationship with the firms 
to whom they provide employees and staffing services are similar, yet 
questions arise from time-to-time because PEOs were not specifically 
mentioned in the exclusion. SBA will not find a firm affiliated with a 
leasing company or PEO merely because it uses the services of a leasing 
company or PEO. However, SBA might find affiliation based on other 
conditions. Nothing in the clarification of the exclusions to the 
affiliation rule is intended to change the way a firm must count its 
employees when determining size. All employees must be counted; whether 
permanent, part-time, temporary, leased or covered by a contract with a 
PEO. How a firm obtains its staffing is a business decision, and size 
standards are not intended to influence its decision in that regard.

Compliance With Executive Orders 12866, 12988, and 13132, the 
Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork 
Reduction Act (44 U.S.C. 3501 et seq.)

    SBA has determined that this rule will not be a significant rule 
within the meaning of Executive Order 12866 since it will not have an 
impact of $100 million or more. The total amount of Federal procurement 
and SBA guaranteed loans combined is less than $160 million to this 
industry annually, and a change to the size standard is unlikely to 
significantly affect these programs.
    For purposes of the Regulatory Flexibility Act, this rule would not 
have a substantial impact on a significant number of small entities. 
Although potentially 576 additional firms could gain small business 
status as a result of this rule, only a very small percentage of firms 
in the industry compete for Federal procurements or obtain guaranteed 
loans through SBA's financial assistance programs.
    For the purpose of the Paperwork Reduction Act, 44 U.S.C. 3501 et 
seq., SBA has determined that this rule would not impose new reporting 
or record-keeping requirements other than those already required of 
SBA.
    For purposes of Executive Order 13132, SBA has determined that this 
rule does not have any federalism implications warranting the 
preparation of a Federalism Assessment.
    For purposes of Executive Order 12988, SBA certifies that this rule 
is drafted, to the extent practicable, in accordance with the standards 
set forth in Section 3 of that order.

List of Subjects in 13 CFR Part 121

    Government procurement, Government property, Grant programs-
business, Loan programs-business, Small businesses.


    For reasons stated in the preamble, SBA is amending part 121 of 13 
CFR as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

    1. The authority citation of Part 121 continues to read as follows:

    Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c), and 
662(5); and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188.


    2. Revise Sec. 121.103(b)(4), to read as follows:


Sec. 121.103  What is affiliation?

* * * * *


Sec. 121.201  Table [Amended]

    (b) * * *
    (4) Business concerns which lease employees from concerns primarily 
engaged in leasing employees to other businesses or which enter into a 
co-employer arrangement with a Professional Employer Organization (PEO) 
are not affiliated with the leasing company or PEO solely on the basis 
of a leasing agreement.
* * * * *

    3. In Sec. 121.201, in the table ``SIZE STANDARDS BY SIC 
INDUSTRY,'' under the heading DIVISION I--SERVICES, add a new entry for 
SEC Code 7363 in numerical order to read as follows:

[[Page 35813]]



                     Size Standards by SIC Industry
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                                                                Size
                                                            standards in
                                                              number of
                 SIC code and description                   employees or
                                                             millions of
                                                               dollars
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                  *        *        *        *        *
DIVISION I--SERVICES......................................          $5.0

                  *        *        *        *        *
EXCEPT:

                  *        *        *        *        *
  7363  Help Supply Services..............................          10.0

                  *        *        *        *        *
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    Dated: May 30, 2000.
Aida Alvarez,
Administrator.
[FR Doc. 00-14015 Filed 6-5-00; 8:45 am]
BILLING CODE 8025-01-P