How To Maintain HUBZone Status

The following is a guest article contributed by Jerrod Mallinger, CEO of Softek Global Services, a sister company of GovContractPros.

 

Let’s explore some of the requisite conditions of the SBA HUBZone program and strategies to maintain compliance and status once your business is certified. 

The HUBZone Program 

The HUBZone program is a fantastic opportunity to gain a competitive advantage and potentially leverage your small business location if it is designated as a Historically Underutilized Business Zone. 

The federal government has a mandated target to award 3% of all federal contract dollars to HUBZone firms – a goal that the federal government has not yet achieved! This is a great incentive to get your HUBZone-certified firm in a qualified position to sell to the many buyers who need you to help meet this goal.

In pursuit of HUBZone status, there are some significant factors to consider along with the potential opportunity this program can provide. Failing to properly monitor and comply with the requirements of the program could get you kicked out of the program faster than you got in (not to mention…it could carry some hefty legal consequences).

If you are not familiar with the HUBZone program, you can find more information, including eligibility requirements on the US Small Business Administration’s website here. 

What companies are eligible for the HUBZone program? In short, most US owned small businesses, if their principal place of business resides in a HUBZone (see HUBZone Map) and 35% or more of their staff are “HUBZone resident employees”, there is a good chance they are eligible for the program (with some special exceptions for businesses owned by Indian Tribal Governments, which we will address later in this article).  

Struggles to Maintain Compliance 

Once having entered the program, companies must constantly review their staff records and ensure they maintain a threshold of 35% HUBZone resident employees. For most entities this can be a monumental challenge. Consider the following of many possible scenarios: 

1. Smaller companies can be affected by a single hire. When you only have a few employees, the hire of a needed payroll specialist, IT admin, or financial controller could push you from eligible to not.  
2. For mid-size companies of 40-60 employees, even if you are well-staffed with HUBZone eligible employees, winning a single contract in a non-HUBZone area has the potential to knock you out of eligibility.  

Any time one of these (or many other) scenarios threatens your company’s ability to maintain the eligibility requirements of the HUBZone program, it is imperative to act quickly and take necessary actions to stay in compliance. There are only a few circumstances where the SBA will explicably allow a company to temporarily fall outside of the parameters of compliance and for those few exceptions, the expectations, options, and time to return to compliance are limited. One example of this narrow exception is during ramp up when a new HUBZone contract is won. The SBA will recognize that you need to hire the best people to support that HUBZone contract, so there is a short period where dipping below that 35% requirement is allowed so long as the company is making substantive, documented efforts to “attempt to maintain” the requirement. However, the SBA does not extend this same level of explicable allowance to new non-HUBZone contracts (as strange and inconsistent as that may seem). 

On top of HUBZone resident employee requirements, firms must also consider the limitations on subcontracting for HUBZone contracts as well.  

All these concurrent factors require clear, structured, and documented collaboration between accounting, human resources, recruiting, sales, and program leadership to ensure that a business is properly planning for upcoming pipeline demands in every aspect of the business. Numerous small businesses lack the experience or capacity to maintain these coexisting demands and lose sight of compliance. They fail to consider both the contractual obligations with their customer and simultaneously, the requirements of the certifications they hold. 

Successfully Navigating Compliance 

It can often be helpful to engage a specialist to understand the nuances of the HUBZone requirements and dig into the details of compliance. There are a few strategies and subtleties which a company can utilize to facilitate their compliance with the program. There are changes to the program all the time and it is important to be aware and adjust for the changes. 

One example of this is understanding the current definition of a HUBZone Resident Employee. In 2020, the SBA implemented a change where an employee that qualified as a HUBZone Resident Employee at the time of certification, maintained HUBZone residency for at least 180 days after certification, and subsequently moved and no longer resides in a HUBZone, can still count as a company’s HUBZone Resident Employee as long as they maintain continuous employment with the HUBZone company.  

Another strategy involves employing part-time workers (even interns) that live in a HUBZone and work at least 40 hours per month for the company. It is also possible to hire temporary, leased, or co-employed labor (with limitations).  

A third strategy is outsourcing functions of business operations so that the company does not need to hire as many non-HUBZone employees. Some great examples of operations services which can be outsourced include accounting, HR, IT, and recruiting (which can be sourced here). This strategy not only keeps your overhead costs low, it keeps your employee pool small to make HUBZone compliance easier. 

Special Exception for Businesses Owned by Indian Tribal Governments 

There is a special qualification exception for businesses owned by indian tribal governments. These concerns are often referred to as “Tribally Owned” and may choose an alternative method of qualification for the HUBZone Program, wherein the business must ”certify that when performing a HUBZone contract, at least 35% of its employees engaged in performing that contract will reside within any Indian reservation governed by one or more of the Indian Tribal Government owners, or reside within any HUBZone adjacent to such Indian reservation” (See 13 CFR 126.200(c)(2)(ii)). 

The key to this exception is that in order for those employees to be eligible, they have to live on the Tribe’s Reservation or an adjacent HUBZone. That means if you are a Michigan Tribe and win a construction HUBZone contract in Washington D.C., to use the Tribal exception, you may have to pay for temporary lodging for 35% of the contract employees traveling from Michigan to Washington D.C. to work. 

Moving Forward with Confidence 

At the end of the day, consider the following points to successfully maintain HUBZone compliance: 

1. Regularly consult a professional to review with you and educate you on the constantly changing HUBZone program requirements. 
2. Consider not only your contractual requirements to your customers, but also the requirements of your certification programs.
3. Constantly review your HR records and reporting to maintain at least 35% HUBZone Resident Employee requirements. Don’t go a month without evaluation.
4. Don’t be too creative in your HUBZone compliance strategies. Though there are some aspects of the regulations which are subjective, there are very clear lines of bounds to draw within. Any effort to subvert the intentions of the program will be met with swift dismissal at the least, but may be also burdened with much weightier legal consequences – as many have found out the hard way.  

Join GovContractPros and Softek Global Services for a free webinar on how to maintain HUBZone status and navigate the HUBZone program on Wednesday March 6. Register now. 

Softek Global Services is an Operations Shared Services provider for Small Business Government Contractors. We help our clients navigate government programs like HUBZone, 8(a), SDVOSB, Mentor-Protégé, and more. We can provide you with the Accounting, HR, IT, Recruiting, and Program support and visibility you need as a business owner/operator to stay focused on delivery and compliance simultaneously. If you find yourself wondering if you are in compliance with your current obligations or have already been decertified, we can help. We will advise you and help resolve the situation based on our understanding of the programs and experience with many other clients which have faced similar circumstances. Find out more at www.softekgs.com.