As a result of a new Labor Department rule, HUBZone contractors will need to brace themselves for possible new changes to their hiring practices that may prove difficult and cumbersome.
Since 1998, Congress has provided for preferential treatment to HUBZone contractors — those firms servicing Historically Underutilized Business Zones — in competitions for federal government opportunities and contracts. This preference allows small businesses to obtain certification through the Small Business Administration as HUBZone contractors. It requires them to hire 35 percent of their employees from these zones and to establish a principal office in these designated districts. The intent of the law is to encourage economic development in HUBZone areas, which can be located anywhere from rural counties to densely populated urban centers.
However, a new final rule, announced by the Labor Department August 29 and stemming from a 2009 executive order issued by President Obama, may put some HUBZone contractors in an awkward position when it comes to hiring their own workers. The new rule is general in nature and does not relate specifically to HUBZones, but its interaction with the HUBZone program is problematic.
The new rule is entitled the “Nondisplacement of Qualified Workers Under Service Contracts” rule. It requires successor contractors to offer employment to the previous contractor’s employees when a new contractor steps in to a job to replace the previous one. The rule seeks to reduce distraction during a shift between contractors mid-job and to maintain the qualified workers familiar with the work site. While the rule may have safeguards in place to prevent poor-performance employees from staying on the job, the rule will interfere with other aspects of the hiring process for some contractors, such as some HUBZone contractors.
The rule notes that HUBZone contractors must still abide by HUBZone contract requirements regarding hiring practices. Not only does the new rule require that contractors offer jobs to previous employees (who may or may not live within a HUBZone), but it also still requires the contractors to hire at least 35 percent of their workers from those who reside within a HUBZone. While the rule will allow contractors to fall below the 35 percent level while performing work on a given HUBZone contract, the firm must be able to meet the recertification requirement for any subsequent HUBZone contract it wins.
Although the regulation stresses the importance of meeting HUBZone requirements in order to stay certified with the program, it still proclaims the importance of offering employment to previous employees. Moreover, the successor contractor may not offer employment under the contract to anyone else before fully complying with this new rule. This may inhibit many contractors from meeting their HUBZone requirements, even though HUBZones have historically been given special “preferences” in obtaining federal government contracts.
Regardless of the rule’s good intentions, it will create a hiring “double whammy” for HUBZone contractors. First, HUBZone contractors who “inherit” predecessor employees will have no confidence that the inherited hires are adequately skilled or motivated. Second, the contractor will have no way to ensure that the new hires live within a HUBZone. As a result, in assessing the value of a potential award, a HUBZone contractor must consider that the addition of “inherited” employees could render it ineligible for award of other HUBZone contracts.