On July 27, 2007, the Small Business Administration (“SBA”) issued a proposed rule that could affect many government contractors.  In essence, the proposed rule would change the way the SBA calculates a firm’s number of employees in determining its small business size status.  See 72 Fed. Reg. 41239 (2007).  Rather than using a rolling average of a concern’s payroll records over the preceding twelve-month period, the proposed rule would average the number of employees as reported on a firm’s Internal Revenue Service (“IRS”) Form W-3 (Transmittal of Wage and Tax Statements), over the preceding three-year period.  The number of employees reported on Form W-3 is the number of W-2 forms issued during that reporting year.  The proposed rule does not make any changes to the way the SBA calculates the number of employees to include full-time equivalents (“FTEs”).

Under the proposed rule, firms would be required to calculate their number of employees once a year based on the number of W-2 forms dispensed to employees and reflected in the Form W-3.  This calculation would apply until the beginning of the next calendar year.  In contrast, under the current rule, since a firm’s number of employees may fluctuate from pay period to pay period, the concern calculates the number of employees reflected in payroll records, and the calculation is the result of the rolling average of employees over the preceding 12-month period.  The SBA believes that the new annual calculation would reduce the number of times a firm is required to update its Central Contractor Registration (“CCR”) and On-line Certifications and Representations (“OCRA”) information, as firms are required to update their information at least once a year and every time it small business size status changes.

The SBA estimates that on average a business spends approximately four hours preparing size information in response to a size determination.  In some cases where a firm must provide extensive payroll records to substantiate its employment size, preparation and copying expenses may be much greater than four hours.  By using the W-3 Form, size inquiry costs could be reduced as firms could simply provide the SBA with its W-3 Forms rather than providing extensive payroll records.

While there is some benefit in the simplicity the SBA is attempting to provide to small business owners, many in the small business community feel that the current method of calculation is not burdensome.  In addition, there is also some concern that an annual review based on the number of W-2 forms issued may artificially inflate a firm’s number of employees.  High turnover rates, and the need to hire part-time and seasonal workers may skew the annual average under the proposed rule.  If a concern’s size is inflated, the result may be that a concern is unable to remain small as it would under the current method of calculation.

Public comments on the proposed rule were due by September 25, 2007.  PilieroMazza submitted comments concerning how we feel that the proposed rule could adversely affect small businesses.  We will continue to monitor the rulemaking process.  Please do not hesitate to contact us should you have questions regarding this rule.

About the Authors:

Pamela Mazza, managing partner at PilieroMazza PLLC, represents commercial companies, government contractors, trade associations, Indian tribes, and Alaska Native Corporations in the practice areas of corporate counseling, government contracts, government relations and Native American law.  She can be reached at pmazza@pilieromazza.com.

Antonio Franco, a partner with PilieroMazza PLLC, practices in all aspects of federal government contracting and administration.  Mr. Franco’s primary focus is in areas relating to commercial and government contracting with an emphasis on procurement programs, such as the small business, 8(a) and HUBZone programs, representing large, mid-size and small business concerns.  He can be reached at afranco@pilieromazza.com.