The U.S. Small Business Administration (SBA) recently published a list of frequently asked questions (with the SBA’s answers) about recent changes to the Historically Underutilized Business Zone (or HUBZone) program, which is a program for small federal contractors that operate and employ people in HUBZones. Among the more notable recent changes to the HUBZone program are those involving the HUBZone employee residency requirements. As such, the SBA’s recent answers to FAQs about the employee residency requirements (see below) are, themselves, particularly noteworthy because they provide additional clarity about the new HUBZone employee residency requirements.

1. What type of information will SBA require to confirm that the employee resided 180 days prior and post recertification?

SBA Answer: For each HUBZone resident employee, SBA may require the submission of a driver’s license or voter registration card showing an issuance date at least 180 days prior to the date of application. Where an employee’s driver’s license was issued less than 180 days prior to the date of application, SBA may require any of the following information, if available: a copy of an expired driver’s license showing a HUBZone address; copies of utility bills showing a HUBZone address covering the previous 180 days; a written statement signed under penalty of perjury attesting to an individual’s HUBZone residency for the previous 180 days and explaining why primary documentation is not available.

2. How will the new HUBZone employee rule apply retroactively?

SBA Answer: This new regulation applies to currently certified firms, with employees who resided in HUBZones for 180 days before and after the date of the firm’s initial certification (or recertification) and never left the employment of the firm. Such firms will have to provide documentation to SBA demonstrating these requirements are met in order for this new rule to apply.

3. Please explain how the SBA will consider the residency of an employee who lived in a HUBZone at time of certification but who moved out prior to the effective date of the rule change (December 26, 2019) but has remained an employee of the firm. Can the certified HUBZone enterprise still count that employee as a HUBZone resident?

SBA Answer: The new regulatory language of § 126.200(d)(3) specifies that an employee who resides in a HUBZone at the time of certification or recertification shall continue to count as a HUBZone resident employee as long as the individual continues to live in the HUBZone for at least 180 days after certification. There are three requirements in this provision. First, the individual must live in a HUBZone at the time he or she is counted as a HUBZone resident in order to qualify a firm as a certified HUBZone small business concern. Second, the individual must continue to live in a HUBZone for at least 180 days after the certification. Third, the individual must continuously work for the certified HUBZone small business concern. In the case questioned in the comment, the individual lived in a HUBZone at the time he or she was counted as a HUBZone resident to qualify a firm as a certified HUBZone small business concern. That individual has continued to work for the certified HUBZone small business concern since its certification. Thus, as long as the individual continued to live in a HUBZone for at least 180 days after the certification date, that individual would count today as a HUBZone employee.

4. What will prevent companies from submitting proof of residency for an employee to confirm they resided 180 days following their certification even though the individual may have relocated?

SBA Answer: Where an individual relocates to a non-HUBZone location less than 180 days after certification, the individual would not be considered a HUBZone resident at the time of recertification. If a firm claimed the individual lived in a HUBZone for 180 days after certification despite its knowledge that the individual had relocated, this would constitute a false statement and the HUBZone program office could refer the matter to OIG.

5. If a HUBZone employee moves out of the HUBZone when is the company required to notify SBA of this change?

SBA Answer: Starting 12/26/2019, the HUBZone regulations no longer make reference to “material changes” and no longer contain a requirement to notify SBA if fewer than 35% of employees reside in HUBZones (aside from the requirement that a firm performing a HUBZone contract notify SBA if it falls below 20%). There is no requirement to notify SBA if an employee moves out of a HUBZone.

At the time of recertification, a firm will be required to inform SBA if 35% of its employees continue to count as HUBZone employees. This may include employees who resided in a HUBZone at the time of certification but moved out of a HUBZone beyond 6 months after certification. If the firm wants to count such an employee as a HUBZone resident for the duration the individual’s employment, then at the time of recertification, the firm will be required to identify any such employee and provide supporting documentation demonstrating that the individual resided in a HUBZone for 180 days before and after certification and that the individual has been an employee of the firm for the entire period of time since the firm’s certification.

6. What type of information will the SBA require to prove that the employee was consistently employed and being compensated for their employment with a company?

SBA Answer: To demonstrate consistent employment, SBA may require payroll records covering the period in question. If a temporary employee was not consistently employed by a HUBZone firm during the period in question, the employee would not be considered a HUBZone resident for purposes of the 35% requirement.

7. How is the term legitimate defined with respect to the rule change indicating an individual may be counted as an employee so long as the work performed was considered legitimate?

SBA Answer: Legitimate employment means performing actual work for the company. Simply appearing on payroll would not be sufficient to meet this requirement.

8. If a company supplied a voter registration card rather than documentation confirming the individual residing within a HUBZone for at least 180 days, will that be considered acceptable?

SBA Answer: For new applications, SBA will review the issuance date of driver’s licenses and voter registration cards to determine whether these documents were issued 180 or more days prior to the date of application. If they were issued less than 180 days prior to application, SBA may require supplemental documentation demonstrating the individual lives in a HUBZone for at least 180 days.

9. Are employees permitted to move from one HUBZone to another and be considered a HUBZone employee?

SBA Answer: An employee is not required to live in the same HUBZone for the 180-day period. An employee may move between HUBZones and still be considered a HUBZone resident, as long as the employee lived in a HUBZone continuously for the entire 180-day period.

10. Can a firm pay employees to live in a HUBZone?

SBA Answer: A firm cannot simply pay an individual to live in a HUBZone and have the person count as an employee. The individual must be performing legitimate work for the firm. We addressed this in the final rule where we discuss how to treat third-party businesses that specialize in providing HUBZone employees:

SBA requested comments on how SBA should treat individuals who are employed through an agreement with a third-party business that specializes in providing HUBZone resident employees to prospective HUBZone small business concerns for the specific purpose of achieving and maintaining HUBZone eligibility. Under such an arrangement, one individual could work 10 hours per month for four separate businesses and be counted as a HUBZone resident employee for each of those businesses. SBA requested public input on whether such an arrangement is consistent with the purposes of the HUBZone program and how such arrangements could be structured in order to be consistent with the goals of the program. SBA received two comments in favor of allowing firms to count individuals employed through third-party businesses as employees and one comment opposed. One commenter noted that these arrangements help HUBZone firms connect with potential employees who may not otherwise be familiar with the program or its benefits. By connecting HUBZone firms with eligible employees, third-party businesses serve the program goal of increasing employment opportunities for individuals in HUBZones. Another commenter noted that an applicant seeking HUBZone status (or one already in the program) may not need a full-time employee, and that concern should not be burdened with employing someone beyond its needs. Thus, arrangements allowing one individual to be counted as a HUBZone employee for more than one concern provides flexibility to firms to meet their needs and provides the opportunity for an individual to be fully employed where they otherwise might not be. SBA has considered all the comments received and is not changing the current policy allowing these arrangements where the arrangement appears legitimate and the HUBZone applicant (or participant) shows that the individuals being hired through the third-party business are doing legitimate work.

If, alternatively, a firm paid an employee an additional amount beyond the individual’s normal salary/wages to live in a HUBZone, this would not necessarily be a problem.

11. Will firms be able to count former HUBZone employees as ongoing HUBZone employees if there’s a temporary break in employment (e.g., maternity leave or extended illness)?

SBA Answer: The new rule allowing a former HUBZone employee to be counted as a HUBZone employee for the duration of their employment, if he/she resided in a HUBZone for 180 days before and after certification, requires that the employee continue to be employed by the firm without a break in service. There are circumstances in which an employee may be in an unpaid status with the firm due to maternity leave or extended illness of the employee. In these circumstances, SBA will continue to count the employee as a HUBZone employee if the firm can demonstrate that the following conditions apply:

• The individual must have been an employee of the firm for at least 12 months prior to the break in service.
• The individual’s time in unpaid status cannot exceed 12 weeks within a 12-month period.
• The cumulative leave in any 12-month period cannot exceed 12 weeks.
• In addition to the above, the firm must provide evidence that the employee was still considered an employee and demonstrate when the unpaid leave began and ended and when the employee returned to full paid status.

If you have any questions about the recent changes to the HUBZone program, please do not hesitate to contact Aron Beezley.