Landmark Change to HUBZone SBC Employee Definitions

As the COO of a HUBZone set aside woman owned and SBA small and disadvantaged business, I find many of my colleagues ignorant of the seriously changing rules on employee classifications.

As a Blackfeet Indian, I have been contracting with the government for over 20 years and executed over $200 million in contracts, the changes implemented in mid-2010 represent some of the widest reaching in the programs history.

It's important to understand, the history of these changes prior to 2010 and now as we enter 2011. Pre 2010, an employee meant a person (or persons) employed by a HUBZone Small Business Concerns (SBC) on a full-time (or full time equivalent) permanent basis.

Full-time equivalent included employees who worked 30 hours or more per week. Full time also included the aggregate of employees who worked less than 30 hours a week, where the work hours of such employees added up to at least a 40 hour work week. The totality of the individual circumstances, including varied factors relevant for tax purposes, determined whether persons were employees of a concern. Temporary employees, independent contractors or leased employees were not technically employees for those purposes.

Starting in 2010 though, the definition of what is an employee changes quite extensively.

Specifically, the new definition revises the term "employee" to: (A) remove full time equivalency requirement; (B) now allows HUBZone SBCs to count leased or temporary employees or employees obtained through a temporary agency, or even professional employee organization (PEO) arrangement and union agreement, as employees; (C) specifically state that the SBA will rely on the totality of circumstances as further defined by Size Policy Statement No. 1 when working to determining whether individuals are employees of a concern; (D) clearly defines that volunteers are not employees; (E) explains that volunteers are those persons that receive no compensation; and (F) clarifies the status of individuals that own all or part of the SBC but who receive no compensation for they work they performed with the organization.

The details behind these changes are quite considerable.

The definition of employees is now extended to include all individuals employed on a full time, part time or other basis, so long as those individuals work a minimum of 40 hours per month. This includes any employees obtained from a temporary employee agency, leasing relationship, or though some sort of union agreement or even co-employed pursuant to a professional employer organization agreement. The Small Business Administration (SBA) now considers the totality of the circumstances, including criteria used by the IRS for Federal income tax purposes and those set forth in the SBA's Size Policy Statement No. 1, in determining whether individuals are employees of a specific organization or concern.

The rule also clearly determines that volunteers (any individual who receives deferred or no compensation, including no in-kind types of compensation for work performed) are not considered employees. However, if an individual has an ownership interest in the work of a HUBZone SBC a minimum of 40 hours per month, that owner is considered an employee regardless of whether or not the individual receives compensation.

These represent major changes to the way the SBA is running its HUBZone program.

Important to understand these rules and plan accordingly as a HUBZone SBC. Your ability to continue to work for the government and continue to stay in compliance with the rule and regulations requires being up to date on these ever changing requirements.