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Panoptic Enterprises' FEDERAL CONTRACTS DISPATCH

DATE: May 13, 2004

SUBJECT: Small Business Administration; Revisions to the Historically Underutilized Business Zone (HUBZone) Program

SOURCE: Federal Register, MaY 13, 2004, Vol. 69, No. 93, page 26511

AGENCIES: Small Business Administration (SBA)

ACTION: Advance Notice of Proposed Rulemaking

SYNOPSIS: The SBA is seeking comments on two issues involving its HUBZone program: (1) what sort of subcontractor-supplied agricultural commodities may a HUBZone concern provide the U.S. Department of Agriculture (USDA)?; and (2) how should the term "employee" be defined?

EDITOR'S NOTE: The SBA's regulations are in Title 13 of the Code of Federal Regulations (CFR). The SBA HUBZone program regulations are in Chapter 1, Small Business Administration; Part 126, HUBZone Program.

For more on the proposed rule that would revise 13 CFR Part 126 to implement changes to the HUBZone program made by the Small Business Reauthorization Act of 2000 (Public Law 106-554), see the January 28, 2002, FEDERAL CONTRACTS DISPATCH "Small Business Administration; Miscellaneous Amendments."

DATES: Comments must be received on or before July 12, 2004.

ADDRESSES: Comments are to be sent to Michael P. McHale, Associate Administrator for the HUBZone Program (AA/HUB), 409 3rd Street, SW, Washington, DC 20416; fax: 202-205-7167; e-mail: hubzone@sba.gov; or electronically to http://www.regulations.gov.

FOR FURTHER INFORMATION CONTACT: Michael P. McHale, AA/HUB, 202-205-8885 or e-mail: hubzone@sba.gov.

SUPPLEMENTAL INFORMATION: On January 28, 2002, the SBA published a proposed rule that addressed amendments to the HUBZone program made by Public Law 106-554. Among the amendments addressed by the proposed rule was one regarding subcontractor-supplied agricultural commodities provided to the USDA (7 U.S.C. 5602 defines an "agricultural commodity" as any agricultural commodity, food, feed, fiber, or livestock (including livestock and insects), and any product thereof). In a USDA HUBZone procurement of agricultural commodities, or an unrestricted procurement of agriculture commodities in which a qualified HUBZone concern seeks a price evaluation preference, the amendment states that a qualified HUBZone 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."

Congress intended this to address a inequity that could result from the application of the HUBZone price evaluation preference. Because offers for agricultural commodities tend to fall within a narrow range of prices, application of the HUBZone 10% price evaluation preference could create a windfall for HUBZone concerns that could, after contract award, simply subcontract to purchase the commodity and sell the commodity to the government at inflated or other than fair and reasonable prices. Therefore, a HUBZone prime contractor that is awarded a HUBZone contract to supply commodities to the USDA may subcontract unless the subcontractor supplies the commodity in "substantially the final form in which it is to be supplied to the government." In other words, the HUBZone concern is expected to "process" or somehow change the commodity, rather than merely acting as a pass-through agent.

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 is seeking 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, assume the USDA has a requirement for shelled peanuts and a HUBZone concern bids on the requirement. Which, if any, of the following processes, if performed by the HUBZone concern, would sufficiently change the commodity so that it was not in substantially the final form in which it is to be supplied to the government: (1) bagging already cleaned and shelled peanuts; (2) cleaning, sorting and bagging already shelled peanuts; or (3) shelling, cleaning, sorting and bagging peanuts? What if the HUBZone concern had received a shipment of shelled and bagged peanuts several months ago, before submitting a bid on the USDA's requirement, and this shipment is now part of the HUBZone concern's inventory? Would a contract to that HUBZone concern 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 (such as bagging)?

SBA is inviting: (1) comments specifically addressing the above examples; (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 through 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 -- if so, how?

Also in the January 28, 2002, proposed HUBZone changes, SBA proposed to amend the definition of "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 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 proposed rule also would have stated that SBA would use a "totality of circumstances" analysis to determine whether a person is an employee. The proposed definition was similar to the one used for size in 13 CFR Part 121, Small Business Size Regulations.

In addition, 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, although those jobs may be temporary or part-time.

SBA received several comments on the proposed definition of "employee." Some believed the proposed definition could cause a large-scale shift of workers from full-time equivalent to leased or part-time status with reduced benefits. Others believed that companies could intentionally exploit the change and hire temporary employees for the sole purpose of obtaining HUBZone certification or to receive HUBZone contracts. Conversely, 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 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 concern.

Based on the comments, SBA has decided it needs further input from the public on the definition of the term "employee" for HUBZone program purposes. Specifically, SBA is encouraging 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 HUBZone concerns 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.

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2004 by Panoptic Enterprises. All Rights Reserved.

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