We are often approached by business owners that want to apply their company for the 8(a) program but who at the same time, still hold full-time (or even part-time) employment with another company and/or have ownership interests in other companies. Quite honestly, this is understandable - most people don't have the financial resources to quit their job and start a business unless they have guaranteed customers and/or sources of revenue. However, when it comes to the 8(a) program, what many don't understand is that the program is not a program for startup businesses.
13 CFR 124.106(a) provides, in pertinent part:
(1) An applicant or Participant must be managed on a full-time basis by one or more disadvantaged individuals who possess requisite management capabilities.
(3) One or more disadvantaged individuals who manage the applicant or Participant must devote full-time to the business during the normal working hours of firms in the same or similar line of business.
(4) Any disadvantaged manager who wishes to engage in outside employment must notify SBA of the nature and anticipated duration of the outside employment and obtain the prior written approval of SBA. SBA will deny a request for outside employment which could conflict with the management of the firm or could hinder it in achieving the objectives of its business development plan.
In situations where a disadvantaged individual has outside employment and/or outside interests or activities such as ownership in other companies (i.e., where SBA may question whether the individual is devoting full-time to the 8(a) firm based on any involvement/management of the other firms resulting from such ownership), in determining whether to permit such outside employment, the SBA will evaluate first: (1) whether the individual is devoting full-time to the 8(a) firm during normal working hours; and (2) whether or not the outside employment interferes with the individual's management of the 8(a) firm.
Although the regulations do not define "full-time" or "normal working hours," absent evidence to the contrary, working 40 hours per week will constitute full-time devotion and the hours of 8:00 a.m. or 9:00 a.m. to 5:00 p.m. will constitute normal working hours. Of course, if you can provide evidence that your business has different hours and that those hours are customary for businesses in the same or similar industry, SBA may be willing to accept that alternate schedule.
As expected the SBA's analysis regarding outside employment is unique to the specific situation at hand and SBA will consider the following factors in making its determination: (1) the amount of time devoted to the 8(a) firm; (2) the amount of time devoted to outside employment and interests; and (3) the potential for conflicts between the 8(a) firm and time spent on outside pursuits.
In The Matter of BDS Protective Services, LLC, SBA No. BDP-422 (June 22, 2012), the SBA's Office of Hearings and Appeals (OHA) considered a case where an 8(a) application had been denied based on the SBA's determination that the disadvantaged owner did not manage the applicant firm on a full-time basis due to the fact that in addition to management of the applicant firm, he had a full-time job with the Government Printing Office (GPO). On appeal, OHA found that the denial was arbitrary, capricious and contrary to law and remanded it to SBA for further consideration in line with its ruling. In this case, the individual had been running the applicant firm for 10 years prior to applying for the 8(a) program, had worked for the GPO since 1988, and worked the 3rd shift for GPO which included the hours of 11:30 p.m. to 8:00 a.m.
Essentially, the OHA questioned many of SBA's conclusions and found:
*Although the presumption is that full-time employment equals 40 hours and normal working hours are from 9:00 to 5:00 p.m. (M-F), this presumption can be rebutted and in this particular case, OHA felt that SBA did not sufficiently consider the specific nature of this applicant business (i.e., a security firm) in determining full-time employment during normal working hours, but rather simply imposed the general presumption.
*It was not completely out of question for the individual to work 16 hour days (M-F), splitting his time between managing the applicant firm and his GPO job. In addition, OHA took issue with SBA's finding that such a schedule would impair his faculties and render him incapable of managing the 8(a) firm effectively.
*There was documentary evidence that supported the individual's claim that he was able to effectively manage the applicant business on a full-time basis during normal working hours of security firms while at the same time maintaining a full-time job with the GPO on 3rd shift.
I will point out that there were 2 prior OHA cases that addressed the same issue with divergent results, illustrating the principle noted above, which is that the analysis is case specific and the result will largely depending on the particular facts of any given situation. However, the general lesson(s) to be learned from this case and the previous cases are:
- Maintaining outside employment and/or ownership in outside companies can put you at risk of having your 8(a) application be denied;
- If you do have outside employment, be prepared to provide documentary evidence of your schedule (i.e., how much time is devoted per day to the 8(a) firm as well as any outside employment/interests), including possible witness statements that can attest to your schedule;
- If you are going to assert an alternative to the 40-hour 8/9 to 5 schedule, make sure you are able to justify this with industry-specific data; and
- Be prepared to provide legitimate, realistic and practical arguments as to how your outside employment does not conflict with your management of the 8(a) firm.
In addition, and as noted above in section (a)(4), you should keep in mind the fact that this full-time employment requirement is not just for initial certification purposes, but applies for the 8(a) participant's entire 9-year program term. Therefore, should you be presented with an opportunity for outside employment during your firm's 9-year term, please note that SBA's permission is required prior to engaging in such employment. In 2013, OHA upheld SBA's termination of a firm where the disadvantaged owner had accepted full-time employment with another company (without previously disclosing to and obtaining SBA's approval) and was unable to manage the 8(a) firm on a full-time basis. The consequences of failing to comply with this requirement can therefore be quite severe. For those of you wondering how SBA would find out about outside employment, in the case referenced, SBA began having concerns when they attempted to do a site visit and noted there was no office or operations at the address represented as the firm's principal address. Additionally, during the 8(a) Annual Review process, the disadvantaged owner is required to provide tax returns which will contain any W-2s and/or 1099s received from all sources.
If you have any questions about the full-time employment requirement, other 8(a) eligibility requirements or the application process, please feel free to contact us at: firstname.lastname@example.org or (808) 369-9710.