The Small Business Administration’s HUB Zone program seeks to encourage development in historically underutilized business (or HUB) zones.  Like the SBA’s other socio-economic programs, HUBZone contractors are eligible for certain set-aside contracting opportunities, as well as participation in the SBA’s new All Small Mentor Protégé Program.

The HUBZone program is different from other SBA programs in that owning a HUBZone business depends less on who you are (unlike, for example, the SBA’s women-owned or service disabled veteran-owned programs) and more on where your business and its employees live and work.  For example (and among several other requirements), the SBA’s HUBZone rules require that at least 35% of the business’s employees must reside in a HUBZone approved area.

This 35% rule can be particularly problematic for HUBZone contractors.  If a company is close to the line, something as simple as one employee moving (from a HUBZone address to a non-HUBZone address) can be enough to tip the scale away from compliance.  For that reason, we recommend that HUBZone contractors implement a vigorous compliance program that tracks employee residency – and emphasizes to employees the vital importance of keeping the company in the know.

Moreover, a recent Court of Federal Claims decision highlights that HUBZone contractors must keep an eye not only on employee residences – but also the HUBZone map itself.  Much like how voting districts can be redrawn, the SBA periodically publishes updated maps defining what areas are – or are not – included in a designated HUBZone.  So, an employee that lived in a HUBZone five years ago might not live in one today – and the Court’s decision makes clear that it is the business’s responsibility to know that and adjust accordingly.

So what do you do if you fall out of compliance (based on an employee change of residence, an updated HUBZone area map, or for any other reason)?

  • Don’t Panic.  The SBA understands that HUBZone eligibility rests on shifting sands.  In fact, there is an “attempt to maintain” exemption that the SBA uses to avoid decertifying firms that temporarily dip below the 35% threshold.
  • Be Proactive.  By running a compliance program like the one described above, you should be able to avoid falling below the 35% threshold.  However, if a perfect storm arises, you should immediately take affirmative steps (like posting job ads in HUBZones) to show SBA that you are doing what it takes to regain compliance.
  • Notify the SBA Immediately.  Even if you will only be out of compliance with the 35% residency requirement for a matter of weeks or even days, it is always better to keep the SBA on notice of the situation.  Notifying the government upfront will almost always have a better overall outcome (when compared to the government uncovering a lack of compliance during an audit or investigation).  If the SBA finds out about your firm’s non-compliance on its own, it is far more likely to decertify your business – or even take steps to suspend or debar you or your company.
  • Do Not Bid on Any HUBZone Jobs.  While your firm is out of compliance, you can continue to perform existing HUBZone set-aside contracts – but should not bid on any new HUBZone work.  After your regain compliance you can, of course, get back on the horse.