SBA Proposes Move Towards Employee-Based Size Standards
On March 19, 2004 , the Small Business Administration (“SBA”) issued proposed regulations that would significantly change the manner in which the SBA determines whether or not a business is small. Although the SBA currently uses both revenue-based and employee-based size standards, the proposed regulations would generally translate existing revenue-based size standards into employee-based ones. In addition, the proposed regulations would impose a revenue cap on certain industries. As a result, some existing small businesses may discover that, if the proposed regulations become final, they may no longer qualify as small. Conversely, firms that have outgrown their revenue-based size standards may find that they qualify as small under the new employee-based standard.
The proposed regulations would concentrate on 10 employee size standard levels, from 50 to 1,500 employees. The method for determining the number of employees would remain the same as in the current regulations. According to the SBA, the reduction in the number of different size standards from approximately will simplify determinations of size and eliminate confusion to small businesses. Although the shift in size standards would result in approximately the same number of eligible small businesses as under the current revenues-based size standards, the SBA arrives at this number only after potentially ineligible firms have been subtracted from the count and newly eligible firms have been added.
The SBA suggests that such changes to the size standards are required because it believes that businesses intentionally misclassify their primary industry activity to apply a higher size standard. The SBA claims that employment is a more stable measure of the size of a business and that by reducing the number of size standards, businesses operating in several different industries will be categorized under one or two employee-based standards rather than a wider array of receipts-based standards.
In developing the conversion from receipts-based to employee-based standards, the SBA has attempted to use a scientific approach. Taking figures from the 1997 Economic Census, the SBA calculated the average receipts per employee for the majority of the industries with receipts-based size standards. After adjustments for inflation, the SBA divided the current size standard by the average receipts per employee and rounded the result to the nearest size standard. In some cases, however, further adjustments were deemed necessary.
Generally, the current $6 million size standard would be converted to a 50-employee size standard. If the conversion of receipts to employees in this category would result in an average of 75 employees or more, SBA chose a higher size standard only if it would appropriately reflect the structure of the industry or result in a significant number of currently eligible small businesses becoming ineligible. The SBA also attempted to assign similar size standards within industry subsectors and industry groups. In total, of the 337 industries with a current size standard of $6 million, 21 industries were given a size standard higher than 50 employees. Many of these industries have a high impact on Federal procurement, including Land Subdivision, Other Airport Operations, Other Support Activities for Air Transportation, Web Search Portals and Hotels (except Casino Hotels) and Motels. As a result of these conversions, any business with fewer than 50 employees is now considered small.
In addition to the employee-based size standards, the SBA proposes to impose a maximum receipts cap on 31 industries. Businesses in these categories would be required to fit within both the employee size standard and the receipts cap. Many of the industries affected by this rule fall within the construction industry, including, for example, New Single-Family Housing Construction (except Operative Builders), New Multifamily Housing Construction (except Operative Builders) and New Housing Operative Builders. Many of these industries, currently under a $28.5 million size standard, would be required to fall under a 150-employee size standard with a $35 million receipts cap. The receipts caps were prompted by the SBA’s concern that in certain industries, businesses may be able to circumvent employee size standards by subcontracting a large portion of their work. Although companies subject to the receipts cap may initially benefit from the increase in their receipts-based size standard, they will be subject to an additional restriction not imposed on other small businesses.
Among the industries subject to the receipts cap, the SBA has imposed a size standard of 400 employees/$40 million for Facilities Support Services. Previously, a $30 million size standard applied to this industry. Under Other Technical and Trade Schools, which would have a 50-employee size standard and no receipts cap, the SBA created a new sub-category for Job Corps Centers. The new category would have a 400-employee size standard and would be capped at $30 million.
In keeping with its stated goal of keeping related industries under similar size standards, the SBA proposes to raise the size standard for Web Search Portals from a $6 million size standard to a 150 employee size standard that would correspond with the proposed size standard for eight other computer service industries. These industries, including Software Publishers, Internet Service Providers and Custom Computer Programming Services, currently have a $21 million size standard that would be changed to a 150-employee size standard.
The proposed regulations would also revise the size standard that nonmanufacturers must meet in order to qualify for requirements to provide manufactured products. The SBA would decrease this size standard from 500 to 100 employees in order to be consistent with the size standard that would apply to the majority of nonmanufacturers under the Wholesale Trade industries (NAICS Sector 42). The SBA claims that 97% of all wholesalers have fewer than 100 employees, implying that this major decrease would have a minor impact on currently eligible firms. This decrease is somewhat inconsistent with the SBA’s assertion that the existing employee-based size standards will be retained at their current levels and it appears to target nonmanufacturers unfairly.
In the end, if the proposed regulations are adopted, the SBA anticipates that out of approximately 4.4 million businesses categorized in the industries with revised size standards, 35,200 businesses would become eligible small businesses, and 34,100 currently small businesses could lose their status. Although the net result is that 1,110 more businesses would be small under the Proposed Rules, the impact on the 34,100 businesses that may become ineligible could pose a substantial hardship unless such companies begin to diversify their contract portfolios. They should be prepared so that they will be well ahead of the curve if and when the regulations become final.
The SBA is requesting general comments on the proposed regulations, in addition to specific comments on a variety of issues, including (1) whether all of the small business size standards should be based on number of employees; (2) whether the proposed regulations would have an adverse impact on the number of eligible firms in a particular industry; (3) whether the receipts cap should be required for certain industries; (4) whether it is appropriate to reduce the 500-employee size standard for nonmanufacturers to a 100-employee size standard; and (5) whether the use of employee-based size standards places a heavier burden on businesses verifying their size status.
We strongly urge all businesses to study the new list of size standards to determine whether there will be an increase or decrease in the number of firms in their industry. The SBA is encouraging individual firms, as well as trade organizations, to submit their views. If you own or operate a small business, be certain that the SBA’s conversion ratio and new employee size standard are appropriate for your industry. Comments should be addressed to: Gary M. Jackson, Assistant Administrator for Size Standards, 409 Third Street, SW. , Mail Code 6530,Washington, D.C. 20416, or by e-mail to: or by fax to: 202-205-6390.
We are also interested in your comments, so please copy us at:
Pamela J. Mazza
Piliero, Mazza & Pargament, PLLC
888 17th Street, NW, Suite 1100
Washington D.C. 20006
By e-mail to: , or by fax to: 202-857-0200.
The due date for comments has been extended to July 2, 2004 . As always, if we can be of assistance please give us a call.
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