September 21, 2022
Control Requirements and Outside Employment
The Proposed Rule anticipates a significant change to the current SBA regulations that limit outside employment by women owners. Under those regulations, in order to qualify as a WOSB or EDWOSB, a company's management and daily business operations must be controlled by one or more women or one or more economically disadvantaged women. Control, under the regulations, means that both the long-term decision making and the day-to-day management and administration of the business operations are conducted by one or more women or one or more economically disadvantaged women.
The SBA's regulations currently go further by specifying how the control requirements place limitations on outside employment. Specifically, the regulations state that the woman or economically disadvantaged woman who holds the highest officer position of the business must manage it on a full-time basis and must devote full-time to the business during the normal working hours of companies that are in the same or similar line of business as the WOSB or EDWOSB applicant. Further, the woman or economically disadvantaged woman who holds the highest officer position may not engage in outside employment that prevents her from devoting enough time and attention to the daily affairs of the concern to control its management and daily business operations.
As a result, under the current regulations, a women or economically-disadvantaged woman can engage in outside employment, but only if the employment is outside the normal working hours of companies that are in the same line of business as the WOSB or EDWOSB applicant and doesn’t prevent her from devoting enough time and attention to control the applicant’s management and daily operations.
In the preamble to the Proposed Rule, the SBA recognized that this requirement is overly restrictive. Although not acknowledged by the SBA, the current regulation also ignores the reality that many of today’s successful small business startups might not have seen the light of day if their owners had been forced to give up their day jobs to endure weeks or months without pay during early cash-strapped startup phases. What the SBA did acknowledge was that if a woman starts a small business that she alone operates, it does not make sense to conclude she does not control the business simply because she operates it outside the normal hours of similar businesses.
Consequently, under the Proposed Rule, although a woman or economically-disadvantaged woman who holds the highest officer position still may not engage in outside obligations that prevent her from devoting sufficient time and attention to the business to control its management and daily operations, gone is the hard ban on outside employment during the business’ normal working hours. Rather, where a woman claiming to control a business devotes fewer hours to the business than its normal hours of operation, there is only a rebuttable presumption that she does not control the business concern. A woman can rebut the presumption by providing evidence that she has ultimate managerial and supervisory control over both the long-term decision making and day-to-day management and administration of the business.
Uniform Definition of WOSB
The SBA proposes to change the definition of “WOSB” in 13 CFR 127.102 by adding a clarification at the end of that definition. Specifically, the clarification states that the definition applies to any certification of a company’s status as a WOSB and not solely to certifications relating to a WOSB contract. The substantive provisions of the WOSB definition in the SBA’s regulation - namely that a WOSB must be at least 51 percent owned and controlled by one or more women who are citizens - remain unchanged. According to the SBA, there was uncertainty as to whether the definition of WOSB under the regulation applies for all purposes, including when a firm simply certifies as a WOSB for goaling purposes on an unrestricted procurement. The regulation, as it is proposed to be amended, now makes clear that the WOSB definition in 127.102 applies in all instances in which a business certifies as a WOSB.
Requirement For Being Small
The SBA also proposes to change the requirements found in 13 CFR 127.200 that determine when a potential Economically Disadvantaged Women-Owned Small Business (EDWOSB) or a potential WOSB is considered small. Currently, the regulation sets out a different formulation for WOSB’s and EDWOSB’s. Specifically, under 127.200(a)(1), an EDWOSB has to be a small business for its primary industry classification, while127.200(b)(1) states only that a company has to be a small business to qualify as a WOSB.
The Proposed Rule now sets one standard for determining if a WOSB or EDWOSB applicant is small. Specifically, the Proposed Rule requires an applicant to demonstrate that it qualifies as small under the size standard for any NAICS code under which it currently conducts business activities. The SBA reasoned that since companies must qualify as small under the size standard that corresponds to the NAICS code assigned to a WOSB or EDWOSB contract in order to be eligible for a contract award, whether a firm qualifies as small under its primary industry classification is not relevant. Even in instances in which the size standard for a company’s primary industry classification matches the size standard for the NAICS code assigned to a contract, the relevant size standard is still only the one corresponding to a contract’s assigned NAICS code. Moreover, the SBA believes that a business that does not qualify as small under its primary industry classification, but does qualify as small for a WOSB or EDWSB contract should not be prevented from seeking and being awarded the WOSB or EDWOSB contract. Consequently, the SBA determined it was more appropriate to require a business to show that it qualifies as small for any industry it conducts business in.
Under the SBA’s current regulations, WOSB’s and EDWOSB’s must be unconditionally owned by one or more women or or one or more economically disadvantaged women. Unconditional ownership under the current regulations, in turn, means ownership that is not subject to any conditions, executory agreements, voting trusts, or other arrangements that cause or potentially cause ownership benefits to go to another. Consistent with the unconditional ownership requirements under the SBA’s 8(a) BD program, the Proposed Rule now carves out transfers and potential transfers resulting from death or incapacity from the prohibition against conditions and arrangements that cause or potentially cause ownership benefits to go to another.
Maintaining WOSB or EDWOSB Certifications
Currently, 13 CFR 127.400 requires certified WOSB’s and EDWOSB’s to annually represent to the SBA that they meet all eligibility requirements and to undergo an examination and recertification every three years. The Proposed Rule aligns the WOSB and EDWOSB requirements with those that apply to veteran-owned certified small businesses by removing the annual representation requirement and by requiring only a program examination every three years.
SBA Processing of WOSB and EDWOSB Applications
The current regulation under 13 CFR 127.304 provides that if a business does not provide information requested by the SBA within the time allotted or submits incomplete information, the SBA may presume that the missing information would adversely affect, or demonstrate a lack of, program eligibility. The Proposed Rule changes now go even further by adding provisions that are consistent with those that apply to the 8(a) BD program. Specifically, under the Proposed Rule, if the SBA is unable to determine a business’ compliance with any of the WOSB/EDWOSB eligibility requirements because of inconsistent information contained in the application, the SBA will decline the application. Also under the Proposed Rule, if, during the processing of an application, the SBA determines that an applicant has knowingly submitted false information, regardless of whether correct information would cause SBA to deny the application, and regardless of whether correct information was given to SBA in accompanying documents, SBA will deny the application.