65FR35810A Small Business Size Standards; Help Supply Services
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Posting-number: Volume 65, Issue 109, Page 35810A
[Federal Register: June 6, 2000 (Volume 65, Number 109)]
[Rules and Regulations]
[Page 35810-35813]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jn00-4]
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SMALL BUSINESS ADMINISTRATION
13 CFR Part 121
Small Business Size Standards; Help Supply Services
AGENCY: Small Business Administration.
ACTION: Final rule.
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SUMMARY: The Small Business Administration (SBA) is establishing a size
standard of $10 million in average annual receipts for Help Supply
Services--Standard Industrial Classification (SIC) 7363. The current
size standard for this industry is $5.0 million. This revision is made
to better define the size of business in this industry that SBA
believes should be eligible for Federal small business assistance
programs. SBA is also clarifying language about affiliation when a
Professional Employer Organization (PEO) is co-employer of a firm's
employees.
DATES: This rule is effective on July 6, 2000.
FOR FURTHER INFORMATION CONTACT: Patricia B. Holden, Office of Size
Standards, (202) 205-6618 or (202) 205-6385.
SUPPLEMENTARY INFORMATION: SBA proposed a revision to the size standard
for the Help Supply Services industry (SIC 7363) from $5.0 million to
$10.0 million average annual receipts (64 FR 55873, dated October 15,
1999). The proposal was made following comments from the public
expressing concern that the size standard has not kept pace with the
rapid growth in the industry due in part to the trends of outsourcing
and downsizing. The industry has changed in two ways--help supply firms
are larger and they are providing a wider range of personnel to
businesses. We also had a request to allow help supply
[[Page 35811]]
firms to exclude funds collected for and remitted to unaffiliated third
parties from gross receipts, as is currently done for travel agents and
real estate agents, since 60 percent to 85 percent of revenues on many
Federal contracts are ``passed-through'' to a firm's employees or
associates.
The current size standard for this industry, $5.0 million, is based
on gross billings including funds paid to employees (sometimes referred
to as ``associates''). Based on a review of industry data, SBA proposed
increasing the size standard for the Help Supply Services industry to
$10 million in average annual receipts. SBA did not propose a change to
the way average annual receipts are calculated for firms in the Help
Supply Services industry. Under SBA's size regulations (13 CFR
121.104), the size of a firm for a receipts-based size standard is
based on information reported on a firm's Federal tax returns.
Generally, receipts reported to the Internal Revenue Service (IRS)
include a firm's gross receipts or sales from provision of goods or
services. Only when firms in an industry generally display certain
characteristics will we exclude certain pass-though revenues from the
calculation of gross receipts. As explained in the proposed rule, SBA
evaluated this issue and concluded that gross receipts is appropriate
in calculating the size of a firm in this industry.
The final rule adopts the proposed size standard of $10 million
based on our analysis of the industry as presented in the proposed
rule. The comments received on the proposed rule did not provide us
with sufficient reasons to alter our assessment of the industry data or
the position that the size standard should be based on gross receipts.
The comments to the proposed rule and our position are discussed below.
Discussion of Comments
We received six timely comments on the proposed size standard--four
from individual firms, one from an association and one from an SBA
attorney. The association representing over 1,400 firms supported
adopting the proposed rule. Of the four firms who commented, two were
opposed, one was for and one was for a size standard increase, but
higher than the one proposed. The comments raised four major issues.
Each of these issues is discussed below along with our response.
Small Firms May Be Harmed by the Increase in the Size Standard
Two comments raised the issue of small firms being at a
disadvantage if they would have to compete with firms in the $5.0
million to $10.0 million range. They contend that companies with $5
million to $10 million in receipts have established themselves in the
industry. If these businesses were defined as small, they would take
away work from the presently defined small businesses. This issue is
raised often when we proposes to increase the size standard, and it is
a valid concern. However, we believe our analysis of the industry
clearly supports that firms of up to $10 million in receipts are small
businesses within this industry. The average firm in the industry
generates almost $3 million in receipts and firms of $10 million or
less in receipts account for only a little more than a third of total
industry receipts. Given these and the characteristics discussed in the
proposed rule, we believe we have identified the firms reasonably
considered small in this industry.
Related to this issue, we are looking into ways to protect the
smaller firms while having a size standard that includes firms of
sufficient size to handle the typical Federal procurement. One pilot
program currently being tested is the Very Small Business Set-Aside
Program. This program reserves procurements of $50,000 or less for very
small businesses--defined as a business with not more than 15 employees
and not more than $1.0 million revenues. The pilot program is being
conducted within the geographical area of ten SBA district offices.
(For more information on this program, please call the SBA's Office of
Government Contracting at (202) 205-6460, or visit our web site at
http://www.sba.gov/GC/vsbqa.html.)
Size Standards Methodology and Data
One comment disagreed with our use and analysis of the 1992 Census
data to evaluate the size standard for this industry. The comment
recommended a size standard to $20.0 million based on more recent data
on the industry. In particular, the comment presented data (without
citing its sources) showing average firm size and the four-firm
concentration ratio to be much higher than our calculations shown in
the proposed rule. We used the latest available Census Bureau data on
this industry. We recognize that the industry has grown since the last
data were collected, but until more complete data are available, we
must continue to rely on the 1992 Census data as the most complete and
representative data available on the Help Supply Services industry for
establishing size standards. We expect to get newer data later this
year based on the 1997 Economic Census. If these data show the $10
million to be an inappropriate size standard, we will consider
publishing another proposal based on an analysis of that new data.
Calculation of Average Annual Receipts
SBA received one comment stating that firms in this industry do
indeed work on commissions, but it is called a ``rate'' and that
revenues are artificially inflated if labor costs are not excluded from
the calculation. The comment asserts that the labor rate is a pass-
through and only the mark-up rate is the firm's revenues. They
disagreed with the analysis done by SBA on the factors such as agent-
like relationship in arriving at the position not to exclude labor
costs for this industry. Further, the comment argued that staffing for
this industry is like inventory in other industries.
We disagree. The proposed rule stated five characteristics that we
consider in assessing whether or not to exclude certain types of
``pass-through'' revenues. The argument that we should view the
personnel supplied by help supply services firms to their client firms
as inventory did not convince us that an agent-like relationship
exists. Help supply services firms are providing their own resources
(or ``inventory'') under their control to another firm. On the other
hand, the role of an agent is to represent the agent's principal. Often
an agent negotiates a transaction bringing parties together, but always
acts on behalf of the principal as required by their fiduciary
relationship. The comment did not identify which party would be the
principal, but it would not be the employees/associates (also described
by the comment as ``inventory'') and it would not be the firm using the
employees. Rather, help supply services firms act on their own behalf
and in their own interest when negotiating to obtain personnel or to
supply staffing to a firm. For an agency to exist, there must be a
principal-agent relationship and that is not evident in this industry.
We also do not agree with the position that the labor costs of help
supply services firms are the same as funds held in trust for another.
While there is a close connection between the wages and benefits of
personnel supplied by a help supply services firm and the firm using
the personnel, it is the help supply services firm that is responsible
for paying the employees' wages and benefits. The revenues paid to the
help supply services firm by the firm using the employees legally
belong to the help supply services firm even though the help supply
services firm has a legal obligation to pay its employees. This is
[[Page 35812]]
a much different arrangement than holding funds in trust for an
unaffiliated third party. Such trust funds are legally owned by the
unaffiliated third party, but collected and distributed by the holder
on the owner's behalf. An association representing over 1,400 firms in
the help supply services industry also rejected the notion that help
supply services firms should be viewed as agents. It also stated that
the wages and benefits of the help supply services employees are not
earmarked for the purpose of paying employees.
Finally, we recognize that the help supply service firms often
apply a rate to labor costs in arriving at a price for supplying
personnel to a client. The comment estimated an average rate for the
industry. However, there does not appear to be a standard rate provided
by the industry, which is one necessary characteristic for allowing an
exclusion of certain pass-through revenues. Rather, the comment itself
acknowledged that rates vary by firm. An average rate charged by firms
in the industry is not the same concept as a common or standard rate
applied by firms throughout the industry. Also, we note that many
industries operate on a cost plus mark-up basis, but are not agents and
their costs are not recognized as ``pass-through'' funds.
Impact of the Proposal on Prior Findings of Affiliation
One comment raised the issue of prior findings of affiliation
between a franchisor and franchisee in the staffing industry where the
franchisor controlled the ``associates'' of the franchisee. His
question was how would the proposal to exempt ``Professional Employee
Organizations'' (PEOs) from the presumption of affiliation with the
firms to whom they supply personnel affect these earlier decisions.
Changing the size standard will not affect prior or subsequent findings
of affiliation. The clarification regarding PEOs is narrowly written so
as not to impact findings of affiliation based on control or other
grounds. It addresses the issue of affiliation between the firm using
the employees and the PEO supplying the employees under a co-employment
arrangement. It does not address the issue of where or how the PEO
obtains the employees it subsequently provides to the firm. In many
cases, they were formerly the sole employees of the firm using their
services before the firm contracted out the professional administration
of its employees. If the PEO obtains its employees from a franchisor,
affiliation could still be found between the franchisor and the
franchisee where a franchise agreement gives control of the
franchisee's ``associates'' to the franchisor. In such cases, the
receipts or employment of both the franchisor and the franchisee must
be included in the calculation. This is a separate issue from what the
clarification addresses, namely, how the firm (using the employees)
calculates its size.
Affiliation and Professional Employer Organizations
SBA is also clarifying the language in 13 CFR 121.103(b)(4).
Section (b) discusses exclusions from affiliation rules while paragraph
(4) specifically excludes business concerns that lease employees. We
are inserting ``Professional Employee Organizations (PEOs)'' in this
section along with leasing companies. Their relationship with the firms
to whom they provide employees and staffing services are similar, yet
questions arise from time-to-time because PEOs were not specifically
mentioned in the exclusion. SBA will not find a firm affiliated with a
leasing company or PEO merely because it uses the services of a leasing
company or PEO. However, SBA might find affiliation based on other
conditions. Nothing in the clarification of the exclusions to the
affiliation rule is intended to change the way a firm must count its
employees when determining size. All employees must be counted; whether
permanent, part-time, temporary, leased or covered by a contract with a
PEO. How a firm obtains its staffing is a business decision, and size
standards are not intended to influence its decision in that regard.
Compliance With Executive Orders 12866, 12988, and 13132, the
Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork
Reduction Act (44 U.S.C. 3501 et seq.)
SBA has determined that this rule will not be a significant rule
within the meaning of Executive Order 12866 since it will not have an
impact of $100 million or more. The total amount of Federal procurement
and SBA guaranteed loans combined is less than $160 million to this
industry annually, and a change to the size standard is unlikely to
significantly affect these programs.
For purposes of the Regulatory Flexibility Act, this rule would not
have a substantial impact on a significant number of small entities.
Although potentially 576 additional firms could gain small business
status as a result of this rule, only a very small percentage of firms
in the industry compete for Federal procurements or obtain guaranteed
loans through SBA's financial assistance programs.
For the purpose of the Paperwork Reduction Act, 44 U.S.C. 3501 et
seq., SBA has determined that this rule would not impose new reporting
or record-keeping requirements other than those already required of
SBA.
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 purposes of Executive Order 12988, SBA certifies that this rule
is drafted, to the extent practicable, in accordance with the standards
set forth in Section 3 of that order.
List of Subjects in 13 CFR Part 121
Government procurement, Government property, Grant programs-
business, Loan programs-business, Small businesses.
For reasons stated in the preamble, SBA is amending part 121 of 13
CFR as follows:
PART 121--SMALL BUSINESS SIZE REGULATIONS
1. The authority citation of Part 121 continues to read as follows:
Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c), and
662(5); and Sec. 304, Pub. L. 103-403, 108 Stat. 4175, 4188.
2. Revise Sec. 121.103(b)(4), to read as follows:
Sec. 121.103 What is affiliation?
* * * * *
Sec. 121.201 Table [Amended]
(b) * * *
(4) Business concerns which lease employees from concerns primarily
engaged in leasing employees to other businesses or which enter into a
co-employer arrangement with a Professional Employer Organization (PEO)
are not affiliated with the leasing company or PEO solely on the basis
of a leasing agreement.
* * * * *
3. In Sec. 121.201, in the table ``SIZE STANDARDS BY SIC
INDUSTRY,'' under the heading DIVISION I--SERVICES, add a new entry for
SEC Code 7363 in numerical order to read as follows:
[[Page 35813]]
Size Standards by SIC Industry
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Size
standards in
number of
SIC code and description employees or
millions of
dollars
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* * * * *
DIVISION I--SERVICES...................................... $5.0
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EXCEPT:
* * * * *
7363 Help Supply Services.............................. 10.0
* * * * *
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Dated: May 30, 2000.
Aida Alvarez,
Administrator.
[FR Doc. 00-14015 Filed 6-5-00; 8:45 am]
BILLING CODE 8025-01-P