Small Business Size Standards; Calculation of the Number of Employees, 41239-41243 [E7-14492]

Agencies

• SMALL BUSINESS ADMINISTRATION

[Federal Register Volume 72, Number 144 (Friday, July 27, 2007)]
[Proposed Rules]
[Pages 41239-41243]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E7-14492]


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SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

RIN 3245-AF60


Small Business Size Standards; Calculation of the Number of 
Employees

AGENCY: U.S. Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The U.S. Small Business Administration (SBA) proposes to 
change the way it calculates a concern's number of employees in 
determining its small business size status. SBA proposes to alter the 
period used for calculating average number of employees from the 
current method, which uses a rolling average over the preceding 12 
months, to an average over the last 3 completed calendar years. This 
proposal simplifies the calculation of the average number of employees, 
reduces the burden on small businesses, and better defines the size of 
a small business where number of employees is the measure for the size 
standard.

DATES: Comments must be received by SBA on or before September 25, 
2007.

ADDRESSES: You may submit comments, identified by RIN 3245-AF60 by one 
of the following methods: (1) Federal eRulemaking Portal: https://
www.regulations.gov. Follow the instructions for submitting comments; 
or (2) Mail/Hand Delivery/Courier: Gary M. Jackson, Division Chief for 
Size Standards, 409 Third Street, SW., Mail Code 6530, Washington, DC 
20416.

FOR FURTHER INFORMATION CONTACT: Diane Heal, Office of Size Standards, 
(202) 205-6618 or sizestandards@sba.gov.

SUPPLEMENTARY INFORMATION: SBA is proposing to revise its method of

[[Page 41240]]

calculating the number of employees of a business concern from a 12-
month rolling average to an average over the last 3 completed calendar 
years. Calculation of size would be based on, and coincide with, a 
concern's calendar year submission of Form W-3, ``Transmittal of Wage 
and Tax Statement,'' to the Internal Revenue Service (IRS) (found at 
https://www.irs.gov/pub/irs-pdf/fw3.pdf). This policy would also 
coincide with the regulatory requirement for a concern to update its 
size status on an annually basis in the Central Contractor Registration 
(CCR) and On-line Certifications and Representations (ORCA) databases. 
Using the IRS W-3 Form would also give SBA a government-validated 
document to use in verifying employment size. Currently, SBA reviews a 
concern's payroll records to determine size where the size standard is 
number of employees. For receipts-based size standards, SBA requires 
concerns to submit their IRS tax returns (13 CFR 121.104). This method 
of validating receipts has worked well.
    If a concern has been in business for less than 3 calendar years, 
average annual number of employees will be calculated based on an 
annualized figure for the time it has been in operation. For example, a 
concern that has been in business for 1 year and 3 months will divide 
its total number of employees by 1.25 (1 year + 3 months/12 months). 
For this calculation, the time period includes all completed pay 
periods as of the date of self-certification.
    If a concern has not filed an IRS Form W-3 for a period that must 
be included within the period of measurement, SBA may calculate the 
concern's average annual using other information. SBA prefers to use 
other relevant government documents reporting the number of employee of 
a concern, such as IRS Form 941, Employer's Quarterly Federal Tax 
Return. In lieu of government documents, SBA will consider any other 
available information, such as payroll records, which show the total 
number of employees for the relevant period.
    Why is SBA proposing a 3-year average: SBA is proposing to revise 
its method of calculating the number of employees of a business concern 
because it considers the current method to be burdensome to small 
businesses, and because of changes in the Federal procurement process 
regarding the development of e-government and the acquisition process. 
This proposal is also in the spirit of SBA's efforts to simplify its 
size standards where possible.
    With the current system of calculating employees, a concern's size 
can fluctuate from pay period to pay period, necessitating a new 
calculation after each pay period. SBA's proposal to calculate the 
number of employees of a concern as an average over the concern's last 
3 calendar years provides consistency and stability in calculating 
size. The proposed calculation, if adopted, would require a concern to 
calculate its employment size only once a year and it would apply until 
the beginning of the next calendar year. The time period for 
calculation would also be similar to the method used for calculating 
receipts for size purposes, i.e., an average annual receipts over the 
concern's last 3 completed fiscal years. Furthermore, for those 
concerns with fiscal years that end at the calendar year, both 
employment and receipts averages would be calculated at the same time.
    With the advent of e-government systems in the Federal acquisition 
process, a concern must update its CCR and ORCA information at least 
once a year and every time its small business size status changes, 
which could occur many times during the year using the current employee 
calculation method. This is extremely burdensome on small businesses, 
especially if a concern has different pay periods for different types 
of employees (e.g., bi-weekly for hourly employees and monthly for 
salaried employees).
    The proposed method of calculation would also be less burdensome 
and costly to small businesses and the Federal Government. Currently, 
if a concern's small business size status is protested, the concern 
must provide to SBA its own, and all of its affiliates, extensive 
payroll records for the 12 months preceding the date of self-
certification. By going to an average number of employees over a 
calendar year basis, a concern could supply SBA with copies of its own 
and its affiliates' IRS Form W-3, along with other requested documents 
as needed, that would show the concern's total number of employees for 
each of the 3 preceding calendar years.
    What SBA is not proposing: On December 3, 2004, SBA published an 
Advanced Notice of Proposed Rulemaking (ANPRM) in the Federal Register 
(69 FR 70197) that sought comments from the public on issues raised 
during the public comment period concerning SBA's withdrawn proposal to 
simplify and restructure its small business size standards (69 FR 
13130, dated March 19, 2004). Many comments received as a result of the 
withdrawn proposal recommended that SBA modify its method for 
calculating the number of employees of a business concern. In the 
December 3, 2004, ANPRM, SBA sought additional comments on alternative 
methods of calculating the size of a business concern based on number 
of employees, including the feasibility of using full-time equivalents 
(FTEs). SBA also requested comments on whether the period for 
calculating average employment should be modified from SBA's current 
method, which uses a rolling average over the preceding 12 months. 
During June of 2005, SBA conducted 11 hearings throughout the country 
to receive additional comments on the ANPRM issues.
    SBA received more than 5,000 comments addressing or mentioning the 
subject of calculating a concern's number of employees; however, only 
10 commenters made substantive comments regarding this subject. The 
remaining commenters gave one-sentence responses without providing any 
reasoning for their position. All but 86 of the comments were from 
organizations that submitted as their own a form comment prepared by 
and representing the position of a particular small business 
association. Of the remaining 86 commenters, there were 11 business or 
trade associations, 2 Alaskan Native Corporations, 1 Community 
Development Corporation, and one large business prime contractor.
    Many commenters misunderstood the request for comments on the 
employee issue to be a request for a single employee-based size 
standard to be used government-wide. SBA received recommendations of 25 
employees and $100,000; 25 employees and $5 million; 50 employees; 75 
employees; 100 employees; 500 employees, and 1,500 employees. One 
commenter recommended two size standards of 100 and 750 employees, but 
gave no reasoning for the selection of the two numbers.
    Most of the comments received supported the concept of FTEs, with 
only three commenters discussing how to calculate FTEs. One commenter 
believed that FTEs should be based upon the number of man hours divided 
by the average work year for a small business within a given industry 
and recommended that a man-year equate to 1,080 hours. One commenter 
recommended SBA define FTEs for a week, month, or full-time year, 
because it would add consistency between companies. The other 
recommended that SBA use a 1,920 hours per year standard. The remainder 
of the commenters just stated their support for the idea.

[[Page 41241]]

    Six commenters stated their opposition to FTEs. Of the six, four 
discussed their reasons. Two trade associations strongly opposed the 
use of FTEs because their industry relies heavily on part-time, 
temporary and seasonal employees. They believed that this change would 
place a tremendous administrative recordkeeping burden on their member 
firms. One of the other commenters believed the use of FTEs would lead 
to endless disputes and size status protest concerning how to compute 
the number of FTEs. Another believed that FTEs would create incentives 
to increase temporary jobs and reduce full time jobs. SBA did not 
receive any substantive comments on FTEs from concerns in industries 
that would be impacted by this change, i.e., industries that calculate 
their size by number of employees. Rather, all of the substantive 
commenters that addressed FTEs were from concerns and trade 
associations in industries where the size standards are calculated in 
receipts and not employees.
    Based on these comments, SBA has decided not to convert any 
industries where the size standard is measured by average annual 
receipts to employee-based size standards. Also, the voluminous 
supportive comments provided no basis for SBA to justify a significant 
change in policy of this nature. Therefore, SBA will not make any 
changes to the way it calculates number of employees to include FTEs.
    Thirteen commenters advocated no change to the way SBA calculates 
the number of employees. Only one of the commenters gave a reason, 
i.e., he believed the current method was not complex. SBA believes that 
the calculation is not complicated, but the current method is 
burdensome to small businesses, as they need to recalculate their size 
from pay period to pay period.
    As part of SBA's review of comments from the ANPRM on the FTE 
issue, it explored alternative data sources besides payroll records by 
which to calculate a concern's number of employees. For the reasons 
discussed above, SBA believes the use of IRS Form W-3 is a viable 
alternative to payroll records and lessens the burdens on small 
businesses and the Federal Government. SBA had decided to propose this 
change pertaining to employment size rather than other changes offered 
by the commenters.
    Alternative Methods for Calculating Number of Employees: As an 
alternative, SBA considered using a concern's total number of employees 
for only its last calendar year. This method would also lessen the 
burden and instability of the current method that fluctuates pay period 
to pay period. However, trends in the economy fluctuate over a period 
of years. SBA's use of a 3-year average for calculating receipts has 
always taken these fluctuations into account, which provides for a more 
stable measure of a concern's size. By extending the 3-year period to 
the calculations of number of employees, SBA is providing consistency 
in the way it determines size by both receipts and employees. For this 
reason, SBA has determined that a 3-year average for calculating the 
number of employees of a concern is more appropriate.
    SBA welcomes public comments on its proposal to adopt a 3 calendar 
year average to calculate a concern's number of employees and the use 
of IRS Form W-3. Comments on alternatives, including the option of 
retaining the current method of calculating employment size, should 
explain why the alternative would be preferable to the proposed method 
of calculating the number of employees.

Compliance With Executive Orders 12866, 12988, and 13132, the Paperwork 
Reduction Act (44 U.S.C. Ch. 35), and the Regulatory Flexibility Act (5 
U.S.C. 601-612)

    The Office of Management and Budget (OMB) has determined that this 
proposed rule is a significant regulatory action for purposes of 
Executive Order 12866. Accordingly, the next section contains SBA's 
Regulatory Impact Analysis. This is not a major rule, however, under 
the Congressional Review Act, 5 U.S.C. 800.

Regulatory Impact Analysis

1. Is there a need for the regulatory action?

    SBA's mission is to aid and assist small businesses through a 
variety of financial, procurement, business development, and advocacy 
programs. To assist effectively the intended beneficiaries of these 
programs, SBA must establish distinct definitions of which businesses 
are deemed small businesses. The Small Business Act (15 U.S.C. 632(a)) 
delegates to SBA's Administrator the responsibility for establishing 
small business definitions. The supplementary information section of 
this proposed rule explains SBA's reasons for revising the way it 
defines small businesses in industries where the size standards are 
employee-based. SBA believes that it can simplify the calculation of 
employee size and lessen the burden on small businesses.

2. What are the potential benefits and costs of this regulatory action?

    The most significant benefit to businesses in industries that 
calculate their size in number of employees is the lessening of the 
burdens placed upon these businesses when they calculate their small 
business size status for eligibility for Federal small business 
assistance programs and retaining small business status for a longer 
period of time. These programs include SBA's financial assistance 
programs; economic injury disaster loans; and Federal procurement 
preference programs for small businesses, including 8(a) concerns, 
small disadvantaged businesses, small businesses located in 
Historically Underutilized Business Zones (HUBZone), and service 
disabled veteran-owned small businesses. HUBZone small businesses are 
also eligible for Federal contracts awarded through full and open 
competition after application of the HUBZone price evaluation 
preference. Other Federal agencies also may use SBA size standards for 
a variety of regulatory and program purposes. Through the assistance of 
these programs, small businesses become more knowledgeable, stable, and 
competitive businesses.
    The benefits of redefining how the number of employees is 
calculated would accrue to two groups: businesses that use small 
business assistance programs and SBA officials that make formal size 
determinations. Besides reducing the burden on businesses, this 
proposed rule would reduce the burden on SBA officials performing size 
determinations. SBA officials could use a concern's IRS Form W-3 and 
not have to review a concern's payroll records, unless necessary.
    SBA estimates that on average a business spends approximately 4 
hours preparing size information in response to a size determination. 
In some cases where a concern must provide extensive payroll records to 
substantiate its employment size, preparation and copying expenses may 
be much greater than 4 hours. SBA's proposal to utilize the IRS W-3 
Form could significantly reduce these expenses by allowing businesses 
to provide already prepared information. SBA estimates that preparation 
time may decrease by at least 1 hour for size determinations based on 
employment size. SBA would also expend less time on size determinations 
by use of the IRS W-3 Form rather than verifying and calculating 
employment size from payroll records. This may save from a few hours to 
a few days in review time,

[[Page 41242]]

depending on the complexity of the case.

3. What are the alternatives to this proposed rule?

    SBA considered two alternative approaches to the proposed rule. 
First, it considered other sources of information on a concern's 
employment, such as from the U.S. Department of Labor and the Social 
Security Administration. SBA found that the IRS' W-3 Form provides the 
most reliable and cost effective alternative source of employment 
information from payroll records. In addition, SBA would require that a 
concern calculate both its average annual receipts and number of 
employees from information submitted to the same Federal agency--the 
IRS. Second, SBA considered calculating employment size on an annual 
basis instead of over a 3-year period as a viable alternative. As 
explained above, a 3-year period has the advantages of providing more 
stability in small business status and of achieving consistency in 
policy with the 3-year average used to calculate average annual 
receipts.
    SBA's proposal could potentially impact up to 2,000 businesses, but 
the actual number is likely to be significantly less than this number. 
In the Dynamic Small Business Search, approximately 1,800 small 
businesses out of over 300,000 are near or above 500 employees that 
could grow or downsize to qualify as small under one of the SBA's 
employee-based size standards that range between 500 employees to 1,500 
employees. In addition, another 200 businesses are near or slightly 
above the 150-employee size standard for information technology value 
added resellers. Employment levels of businesses tend to be more stable 
than revenues, which limits the number of businesses that may become 
small or retain small business status if this proposal were adopted. 
SBA invites comment on the impact this proposed rule would have on the 
number of firms that could potentially do business with the Federal 
Government or on data to estimate the effect this change would have on 
the Federal contracting programs.
    Under SBA's 7(a) Guaranteed Loan Program, SBA estimates that 
potentially 10 additional loans totaling $8 million in new Federal loan 
guarantees could be made to businesses newly-defined as small or those 
retaining small business status. Additional loans under this program 
would likely be limited to businesses in the wholesale trade sector, 
which are subject to a 100-employee size standard. Using the 
relationships between SBA loan data and the 2002 Economic Census, 
approximately one-half of one percent of the 1,900 newly eligible small 
businesses will seek SBA financial assistance. On average, small 
businesses between 50 to 100 employees obtain 7(a) loans between 
$700,000 and $800,000 in value.
    Any newly defined small businesses could also benefit from SBA's 
Economic Injury Disaster Loan (EIDL) Program. Since this program is 
contingent upon the occurrence and severity of a disaster, no 
meaningful estimate of benefits can be projected for future disasters.
    SBA's proposed simplification of the way it calculates small 
business size standards in terms of number of employees is consistent 
with SBA's statutory mandate to assist small business. This regulatory 
action promotes the Administration's objectives. One of SBA's goals in 
support of the Administration's objectives is to help individual small 
businesses succeed through fair and equitable access to capital and 
credit, Government contracts, and management and technical assistance. 
Reviewing and modifying size standards and related eligibility 
criteria, when appropriate, ensures that intended beneficiaries have 
access to small business programs designed to assist them.
    For purposes of Executive Order 12988, SBA has determined that this 
rule is drafted, to the extent practicable, in accordance with the 
standards set forth in that Order.
    For purposes of Executive Order 13132, SBA has determined that this 
rule does not have any federalism implications warranting the 
preparation of a federalism assessment.
    For the purpose of the Paperwork Reduction Act, 44 U.S.C. Ch. 35, 
SBA has determined that this rule would not impose new reporting or 
record keeping requirements.

Initial Regulatory Flexibility Analysis

    Under the Regulatory Flexibility Act (RFA), this rule, if 
finalized, may have a significant impact on a substantial number of 
small entities in industries where the size standard is measured in 
number of employees. As described above, this rule may affect small 
entities seeking Federal contracts, SBA 7(a) Loans, SBA Economic Impact 
Disaster Loans, and assistance from other Federal small business 
programs.
    Immediately below, SBA sets forth an initial regulatory flexibility 
analysis (IRFA) of this proposed rule addressing the following 
questions: (1) What is the need for and objective of the rule, (2) what 
is SBA's description and estimate of the number of small entities to 
which the rule will apply, (3) what is the projected reporting, record 
keeping, and other compliance requirements of the rule, (4) what are 
the relevant Federal rules which may duplicate, overlap or conflict 
with the rule, and (5) what alternatives will allow the Agency to 
accomplish its regulatory objectives while minimizing the impact on 
small entities?

1. What is the need for and objective of the rule?

    SBA believes a change in the method of calculating the number of 
employees will simplify size standards and lessen the burden on small 
businesses in calculating their size status.

2. What is SBA's description and estimate of the number of small 
entities to which the rule will apply?

    The impact of this rule will almost exclusively be related to 
Federal contracting programs. The Dynamic Small Business Search 
contains more than 300,000 registrants. Of these, SBA's estimates that 
about 2,000 businesses near or above the current employee size 
standards may benefit from this proposal if adopted. However, the 
actual number is likely to be significantly less than this number 
because not all of these businesses will experience a sufficient change 
in size to alter their small business status or to have been awarded 
Federal contracts. SBA invites comment on the impact this proposed rule 
would have on the number of firms that could potentially do business 
with the Federal Government or on data to estimate the effect this 
change would have on these contracting programs.

3. What are the projected reporting, record keeping, and other 
compliance requirements of the rule and an estimate of the classes of 
small entities which will be subject to the requirements?

    A revised method of calculating the employment size of a concern 
does not impose any additional reporting, record keeping or compliance 
requirements on small entities. Changing the way the number of 
employees of a business is calculated does not impose a regulatory 
burden as they neither regulate nor control business behavior.

4. What are the relevant Federal rules which may duplicate, overlap or 
conflict with the rule?

    This proposed rule overlaps with other Federal rules that use SBA's 
size standards to define a small business. Under sec. 3(a)(2)(C) of the 
Small Business Act, 15 U.S.C. 632(a)(2)(c), Federal agencies must use 
SBA's size

[[Page 41243]]

standards to define a small business, unless specifically authorized by 
statute. In 1995, SBA published in the Federal Register a list of 
statutory and regulatory size standards that identified the application 
of SBA's size standards as well as other size standards used by Federal 
agencies (60 FR 57988-57991, dated November 24, 1995). SBA is not aware 
of any Federal rule that would duplicate or conflict with established 
size standards.
    Redefining the way size standards based on number of employees are 
calculated may also affect small businesses participating in programs 
of other agencies that use SBA size standards. As a practical matter, 
however, SBA cannot estimate the impact of this proposed change on each 
Federal program that uses its size standards. In cases where an SBA 
size standard is not appropriate, the Small Business Act and SBA's 
regulations allow Federal agencies to develop different size standards 
with the approval of the SBA Administrator (13 CFR 121.902). For 
purposes of a regulatory flexibility analysis, agencies must consult 
with SBA's Office of Advocacy when developing different size standards 
for their programs (13 CFR 121.902(b)(4)).

5. What alternatives will allow the Agency to accomplish its regulatory 
objectives while minimizing the impact on small entities?

    As an alternative, SBA considered using a concern's total number of 
employees for only its last calendar year. This method would also 
lessen the burden and instability of the current method that fluctuates 
pay period to pay period. However, trends in the economy fluctuate over 
a period of years. SBA's use of a 3-year average for calculating 
receipts has always taken these fluctuations into account, which 
provides for a more stable measure of a concern's size. By utilizing 
the 3-year period to calculate a concern's number of employees, SBA is 
providing consistency in the way it determines size by both receipts 
and employees. For this reason, SBA has determined that a 3-year 
average for calculating the number of employees of a concern is more 
appropriate.

List of Subjects in 13 CFR Part 121

    Administrative practice and procedure, Government procurement, 
Government property, Grant programs--business, Individuals with 
disabilities, Loan programs--business, Reporting and recordkeeping 
requirements, Small businesses.

    For the reasons set forth in the preamble, SBA proposes to amend 13 
CFR part 121 as follows.

PART 121--SMALL BUSINESS SIZE REGULATIONS

    1. The authority citation for part 121 continues to read as 
follows:

    Authority: 15 U.S.C. 632, 634(b)(6), 636(b), 637(a), 644, and 
662(5); and Pub. L. 105-135, sec. 401 et seq., 111 Stat. 2592.

    2. Revise Sec.  121.106 to read as follows:


Sec.  121.106  How does SBA calculate annual number of employees?

    (a) Employees include all individuals employed on a full-time, 
part-time, or other basis. This includes employees obtained from a 
temporary employee agency, professional employer organization or 
leasing concern. Part-time and temporary employees are counted the same 
as full-time employees. SBA will consider the totality of the 
circumstances, including criteria used by the IRS for Federal income 
tax purposes, in determining whether individuals are employees of a 
concern. Volunteers (i.e., individuals who receive no compensation, 
including no in-kind compensation, for work performed) are not 
considered employees.
    (b) Average annual number of employees. (1) Where the size standard 
is number of employees, a concern's size is based on an average annual 
number of employees.
    (2) Average annual number of employees means the total number of 
employees of the concern (including the employees of its domestic and 
foreign affiliates) for the preceding 3 calendar years divided by 3.
    (3) Average annual number of employees for a concern that has been 
in business for less than 3 years means the total number of employees 
over the period the concern has been in business divided by the number 
of completed calendar years and fraction of the calendar year the 
concern has been in business. For example, a concern that has been in 
business for 1 year and 3 months divides its total number of employees 
by 1.25 (1 year +3 months/12 months).
    (4) SBA will use a concern's IRS Form W-3, Transmittal of Wage and 
Tax Statement, and any corrections thereof, to calculate average annual 
number of employees. For purposes of counting employees obtained from a 
temporary employment agency, professional employer organization, or 
leasing concern, SBA will use contractual documents or invoices between 
the parties showing the number of individuals provided to the concern.
    (5) Where a concern has not filed an IRS Form W-3 for a period 
which must be included within the period of measurement, SBA may 
calculate the concern's average annual number of employees using IRS 
Form 941, Employer's Quarterly Federal Tax Returns, other accredited 
governmental documents or any other available information, such as 
payroll records, which show the total number of employees for that 
relevant period.
    (c) Employees of Affiliates. (1) The employee size of a business 
concern with affiliates is calculated by adding the average annual 
number of employees of the business concern with the average annual 
number of employees of each affiliate.
    (2) If a concern has acquired an affiliate or been acquired as an 
affiliate during the applicable period of measurement or before the 
date on which it self-certified as small, the employees counted in 
determining size status include the employees of the acquired or 
acquiring concern. Furthermore, this aggregation applies for the entire 
period of measurement, not just the period after the affiliation arose.
    (3) The employees of a former affiliate are not counted if 
affiliation ceased before the date used for determining size. This 
exclusion of employees of a former affiliate applies during the entire 
period of measurement, rather than only for the period after which 
affiliation ceased.

    Dated: April 30, 2007.
Steven C. Preston,
Administrator.
 [FR Doc. E7-14492 Filed 7-26-07; 8:45 am]
BILLING CODE 8025-01-P