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I was informed by an SBA rep that we would not be able to use individuals we subcontract with in our small business plan goals...does anyone know what hoops we could jump through to allow independent contractors to be included? The definition of "small business concern" includes sole proprietors so I guess I'm just not sure how an individual who was a woman couldn't be counted toward our WOSB goal. Any clarification would be great. Thanks.

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I would say, to protect yourself, have your independent contractor(s) 1) get a D&B no., 2) Register in SAM.gov, 3) follow the regs to register as a WOSB (including uploading the required documents to the WOSB repository (see sba.gov/wosb)), 4) complete their Reps & Certs in sam.gov identifying themselves as a WOSB, and 5) Provide you a copy of their final Reps & Certs. I know it's a lot of work, but it would CYA and the SBA wouldn't have credible reason to deny you at that point. If you have someone in your organization that is familiar with all of these steps that could walk all of your (women) independent contractors through it, it may ease the burden a bit and help them all in the long run.

I hope this helps.

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Nebraska, have you looked closely at the arrangements you have with these so called "independent contractors" to make sure that they are "independent contractors" and not employees of your company?

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I was informed by an SBA rep that we would not be able to use individuals we subcontract with in our small business plan goals...does anyone know what hoops we could jump through to allow independent contractors to be included? The definition of "small business concern" includes sole proprietors so I guess I'm just not sure how an individual who was a woman couldn't be counted toward our WOSB goal. Any clarification would be great. Thanks.

In a recent GAO decision, the GAO and SBA seemed to agree with each other concerning whether Form 1099, independent contractors are subcontractors and not employees. See GAO's decision in Mindpoint Group LLC, B-409562, May 8, 2014, at http://www.gao.gov/assets/670/663099.pdf

See more discussion at: http://smallgovcon.com/gaobidprotests/limitations-on-subcontracting-1099-contractors-work-didnt-count/#sthash.fFbFUSm7.dpuf,

where the GAO said that the Agency properly determined that a 1099 independent contractor was a subcontractor for purposes of meeting the self-performance requirements, not an employee of the company.

Of course, this wasn't the SBA. The GAO contacted the SBA (See NOTE 2 of the above referenced decision): "In response to the agency’s dismissal request, we sought the views of the Small Business Administration (SBA)on the issue of whether the protester’s proposal was responsive to the solicitation’s limitation on subcontracting provisions. GAO Email to SBA,Mar. 25, 2014. The SBA did not agree with DOJ’s characterization of MindPoint’s proposal as taking exception to the subcontracting limitation, although the SBA did acknowledge that MindPoint’s proposal identified a key individual as an independent contractor see SBA Comments at 5. Nonetheless, in our view, DOJ reasonably concluded that MindPoint’s proposal, as written, violated the limitations on subcontractingand was therefore unacceptable. See TYBRIN Corp., supra, at 6 (noting that whether a bidder or offeror has specifically taken exception to the subcontracting limitation requirement on the face of its bid or proposal is a determination of proposal acceptability, rather than responsibility)."

The Decision did not include the SBA's detailed position, so I don't know what the basis for it was. If the SBA agrees that such personnel are independent contractors, is the problem whether or not they qualify for classification purposes in the Subcontracting Plan? Nebraska, in your discussion with the SBA rep, did he/she explain why you would not be able to use individuals we subcontract with in your small business plan goals??? What is "the rest of the story", as Paul Harvey would say?

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Some "independent contractors" are individuals acting as individuals, and some are businesses. For small business set-asides and goals, only those who are businesses count. That's how I understand it. The following is from a SBA website--

http://www.sba.gov/content/am-i-small-business-concern

You may take it for granted that your company is a "small business." The distinction is important if you wish to register for government contracting as a small business. To be a small business, you must adhere to industry size standards established by the U.S. Small Business Administration. As you register as a government contractor in the System for Award Management (SAM), you will also self-certify your business as small.

The SBA, for most industries, defines a "small business" either in terms of the average number of employees over the past 12 months, or average annual receipts over the past three years. In addition, SBA defines a U.S. small business as a concern that:

  • Is organized for profit

  • Has a place of business in the US

  • Operates primarily within the U.S. or makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor

  • Is independently owned and operated

  • Is not dominant in its field on a national basis

The business may be a sole proprietorship, partnership, corporation, or any other legal form. In determining what constitutes a small business, the definition will vary to reflect industry differences, such as size standards.

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Some "independent contractors" are individuals acting as individuals, and some are businesses.

I don't understand that statement. The implication is that some individuals acting as "independent contractors" are not businesses.

What if an individual, like me, for instance, is selling services as an individual under contract? How is that individual different from a "business"?

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ji, I didn't understand that statement either. Also, I still don't understand why the SBA rep said that Nebraska "would not be able to use individuals (they) subcontract with in (their) small business plan goals..."

Are you saying that every business has to register as a government contractor to be able to count as a small business subcontractor on a government contract? I didn't know that, but there are a lot of things that I don't know. :)

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I was informed by an SBA rep that we would not be able to use individuals we subcontract with in our small business plan goals...does anyone know what hoops we could jump through to allow independent contractors to be included? The definition of "small business concern" includes sole proprietors so I guess I'm just not sure how an individual who was a woman couldn't be counted toward our WOSB goal. Any clarification would be great. Thanks.

nebraska said that he was "informed" of something by "an SBA rep." I give that post no credit whatsoever as a reliable statement of any Government rule, and I have no independent knowledge of the truth of any such statement, even assuming that nebraska properly understood whatever it was that the "SBA rep" actually said.

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The implication is that some individuals acting as "independent contractors" are not businesses.

That's right! A person can be an independent contractor without organizing him- or herself as a business concern. For example, a person might offer maid services to a rich household and be paid as an indepedent contractor with a 1099, without ever forming him- or herself as a business concern. Your teenage neighbor can cut your grass and you can pay him or her without him or her ever forming a business concern. I'm surprised you never heard of such an arrangement. Happens all the time, perfectly legal (if done right). Under this discussion, subcontracts to those individuals might not count as subcontracts to small business concerns, because...

To qualify as a small business concern, such a person must organize him- or herself as a for-profit business entity. Otherwise, no matter how small, it isn't a small business concern.

Here's an extract from the website www.nolo.com that helps illustrate the matter--

Do independent contractors need business licenses?

Question:

I'm a freelance software developer. Except for parking myself in coffee shops once in a while, I mostly work from my home. Do I need a business license to do this?

Answer:

The answer depends on where you work and what you do. A few states -- including Alaska and Washington -- require all businesses to get a state business license. Most states aren't this fussy, but they do require people in certain occupations -- such as doctors, lawyers, nurses, and architects -- to get a state license. We're not aware of any state that requires software developers to get a special state business license.

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The implication is that some individuals acting as "independent contractors" are not businesses.

That's right! A person can be an independent contractor without organizing him- or herself as a business concern. For example, a person might offer maid services to a rich household and be paid as an indepedent contractor with a 1099, without ever forming him- or herself as a business concern. Your teenage neighbor can cut your grass and you can pay him or her without him or her ever forming a business concern. I'm surprised you never heard of such an arrangement. Happens all the time, perfectly legal (if done right). Under this discussion, subcontracts to those individuals might not count as subcontracts to small business concerns, because...

To qualify as a small business concern, such a person must organize him- or herself as a for-profit business entity. Otherwise, no matter how small, it isn't a small business concern.

What definition of "business" are you using? Do you think that a person needs a license or to be organized in a particular way to be a business? According to 13 CFR 121.105, a "business concern or concern" is defined as follows:

§121.105 How does SBA define “business concern or concern”?

(a)(1) Except for small agricultural cooperatives, a business concern eligible for assistance from SBA as a small business is a business entity organized for profit, with a place of business located in the United States, and which operates primarily within the United States or which makes a significant contribution to the U.S. economy through payment of taxes or use of American products, materials or labor.

(2) A small agricultural cooperative is an association (corporate or otherwise) acting pursuant to the provisions of the Agricultural Marketing Act (12 U.S.C.A. 1141j) whose size does not exceed the size standard established by SBA for other similar agricultural small business concerns. A small agricultural cooperative's member shareholders are not considered to be affiliates of the cooperative by virtue of their membership in the cooperative. However, a business concern or cooperative that does not qualify as small under this part may not be a member of a small agricultural cooperative.

( b ) A business concern may be in the legal form of an individual proprietorship, partnership, limited liability company, corporation, joint venture, association, trust or cooperative, except that where the form is a joint venture there can be no more than 49 percent participation by foreign business entities in the joint venture.

( c) A firm will not be treated as a separate business concern if a substantial portion of its assets and/or liabilities are the same as those of a predecessor entity. In such a case, the annual receipts and employees of the predecessor will be taken into account in determining size.

Your quote from Nolo does not pertain to the issue.

According to the laws of my state, Oregon, Oregon Revised Statutes § 671.755, "'Conducting business' means engaging directly or through officers, agents and employees in an activity in pursuit of gain."I bet that other states have similar statutes.

According to Black's Law Dictionary a business is "a commercial enterprise carried on for profit; a particular occupation or employment habitually engaged in for livelihood or gain."

According to my review of 61 decisions of the SBA Office of Hearings and Appeals, you are organized for profit if you are not organized as a tax-exempt nonprofit, if you seek revenue in excess of your costs, and if your income is subject to Federal taxation (except, apparently, for certain Native American organizations).

According to Black's Law Dictionary a sole proprietorship is: "A business in which one person owns all the assets, owes all the liabilities, and operates in his or her personal capacity."

The SBA definition of "business concern" does not say that you have to have a license to be a small business concern. That is a matter of state and local laws and regulations. Any person who wants to do a job for someone else for pay, and is not an employee of the person, is a business. Whether you are a "legal" business depends on local laws and regulations. You may not need a license if you do less than a certain amount of business in a year.

The kid cutting grass in the neighborhood and the person providing maid services as independent contractors seem to fit the definition of "business concern".

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Somehow, it seems someone at the SBA is saying that subcontracting with individuals (independent contractors) will not qualify for meeting subcontracting plan goals. I don't know if this is true or not, but the original poster says it is.

SHOULD INDEPENDENT CONTRACTORS COUNT AS SUBCONTRACTORS?

  • If the individuals or independent contractors do meet the definition of small business concerns, then subcontractors to them should count towards the prime contractor's subcontracting goals.
  • If the individuals or independent contractors mentioned by the original poster don't meet the definition of small business concerns, then subcontracts to them don't count towards the prime contractor's subcontracting goals.
  • Only small business concerns, as officially defined, count towards the goals. For example, a purchase order to a very small non-profit organization (2 employees and $80K in revenue) doesn't count as an award to a small business -- the non-profit is small, very small, but it still doesn't count as a small business concern.

SHOULD INDEPENDENT CONTRACTORS COUNT AS EMPLOYEES?

  • The Mindpoint case that Joel cited goes the other way -- in that case, a prospective prime contractor wanted to count independent contractors as employees for the purpose of the self-performance requirement in FAR 52.219-29 (same philosophy as the limitation on subcontracting agreement in FAR 52.219-14) -- in Mindpoint, the prospective contractor did not want to treat the independent contractors as subcontractors. The GAO didn't solve the problem -- it dismissed the protest for lack of standing, writing that "The protester’s argument that the agency should have instead considered its Systems Administrator MS to be an employee rests entirely on information not contained in MindPoint’s proposal, purporting to show that the systems administrator 'would function more akin to an employee of MindPoint than a subcontractor.'"

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Sometimes companies try to claim individuals are independent contractors so that they do not provide them with fringe benefits. Some years ago, several employees of Microsoft sued the company alleging that they were employees and not independent contractors. The employees won that case. The IRS has developed tests to determine if someone is an employee or independent contractor. Courts have adopted those tests in certain situations and I believe other agencies, such as the EEOC, have employed them to determine if someone is an employee or independent contractor. This may be what SBA is doing here. If the SBA utilizes the IRS tests for employee status, SBA could be correct in regard to the subcontracting plan. However, if the SBA is simply saying independent contractors do not qualify as small businesses for purposes of a prime contractor's subcontracting plan, I don't see anything in the SBA regulations that would support that conclusion.

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Question related to SBA small business designation and "sole proprietor" small business of "1":

Not to confuse the SBA guidance with anything else, but when thinking of independent contractors vs. small business, companies that are larger than 50-employees also have to weigh in "Obamacare" into that equation, don't they?

As it sits right now, any person working 30-hours or more is considered a full time employee and has to be offered benefits, therefore they couldn't be counted as an "Independent Contractor" anymore even if they were brought on to do some short term consulting or could they?

I would think there are many businesses that hover around 50-people, that bring in seasonal or experts for a specific job that are normally "sole proprietors" of a small business and if they do not have any other staff, are they counted as a "full timer" against the hiring company or is there a legal way to keep them counted as a small business?

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The issue as to whether individuals working as independent contractors should be treated as employees or as subcontractors under a Government contract has been kicking around for a while. See e.g., Serco, Inc. v. Pension Benefit Guaranty Corp., CBCA 1695, 11-1 BCA ¶ 84662, which Ralph Nash and I wrote about for The Nash & Cibinic Report in "Time-and-Material Contract Payments: What Rate for Subcontractor Employees" 25 N&CR ¶ 23 (May 2011). In that case a prime contractor obtained some workers through a temp employee firm and billed the government for their work at its own hourly rate instead of seeking reimbursement for what it paid the temp service company. The prime paid the temp employee firm, which then paid the workers. The government denied the payment request, saying that the temp employee firm was a subcontractor and the temp workers were subcontractor employees. The contractor argued that the temps worked as employees under the prime's supervision in the prime's facility. The board agreed with the government and found the temp employee firm to be a subcontractor, erroneously relying on the definitions of subcontract and subcontractor in FAR 44.101. In reality, the temps were independent contractors hired through a third party to work as employees.

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The board agreed with the government and found the temp employee firm to be a subcontractor, erroneously relying on the definitions of subcontract and subcontractor in FAR 44.101. In reality, the temps were independent contractors hired through a third party to work as employees.

Does "erroneously" equal conveniently? Was it an error to rely upon these definitions because FAR 44.101 should apply to consent and competition in subcontracting and not to T&M payment? Your conclusion makes sense, and I am trying to understand where the board erred.

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The board erred because they applied a definition in FAR Part 44 to a term that came out of FAR Parts 16 and 32. According to the rules for definitions in FAR Part 2, a word defined in any part other than Part 2 applies only to the part in which it is defined. Words not defined in FAR have the common dictionary definition.

The T&M payment clause comes out of FAR Part 32 and, arguably, Part 16. There is no definition of subcontract or of subcontractor in FAR Part 2, and those terms are not defined in FAR Parts 16 and 32, which means that common dictionary definitions apply. Various dictionaries define subcontract and subcontractor variously.

Had the contractor's attorney known the rules in FAR for definitions, she might have been able to fashion an argument that would have yielded a better outcome for her client. There is no question that the board did not know the rules in FAR for definitions, and I doubt that the Government's lawyer knew them. Those rules are incorporated into contracts by the Definitions clause, FAR 52.202-1.

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I noticed that the the CBCA referenced a DCAA audit report. The position taken by the Board is similar to the position DCAA took regarding subcontract labor on T&M contracts prior to the Feb. 2007 version of that clause. I would not be surprised if the government's position was not based on the DCAA audit report.

Vern, from reading both of your posts on the Serco decision, I get the impression that you do not necessarily disagree with the result reached, but only the reasoning. Have I misread you?

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Retread:

Actually, I disagree with the result, because I think the temp personnel were not subcontractors in any meaningful sense. Correction of the board's error would not decide the case, since it would still leave the question of whether the temp firm was a subcontractor to be decided. I think a subcontractor is a firm hired to do part of the prime contract work in accordance with a contract specification, acting independently and not as an employee of the prime. An employer-employee relationship is not the same as a contractual relationship.

In the Serco case, the prime contractor did not contract with the personnel in question to act independently to complete specified contract tasks. They worked as employees, providing personal services, doing what they were told under the contractor's direct supervision, working at the contractor's facility. The temp firm simply acted as a personnel office. There was no indication that it even knew about the prime contract, much less was it hired to act independently to complete certain contract tasks. While the temp firm was a subcontractor as defined in FAR Part 44.101, that definition did not apply to the interpretation of the time-and-materials payment clause.

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Thanks for the clarification. This is similar to a situation I faced several years ago regarding a CAS non-compliance. The contractor used a value added cost input base which meant that the costs of subcontracts and materials were not included in the base. The contractor contracted with a temp firm for temporary employees but added G&A to the amounts it paid the temp firm. DCAA questioned the allocation of G&A asserting the temp firm was a subcontractor. I made an argument similar to what you stated to the contracting officer and the case was settled at about half what DCAA claimed was the cost impact, but less than what it would have cost to litigate the issue.

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I think we have veered far of course from the original question and have turned this into a posting of employee vs. independent contractor. An important issue I confess, but I'll assume that the original poster knows what he/she is doing regarding this and that they have bona fide independent contractors. It seems reasonable that a woman independent contractor should qualify as a WOSB.

If I got all that right, I stand by my original response (#2). Even a sole-proprietorship can pull a D&B number (may be based on SS# instead of EIN/TIN), register in SAM.gov, and upload the documents to the SBA repository. Then there would be little reason to disallow any of the independent contractor's performance as performance by a WOSB towards their small business goals.

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ohno:

What makes you think we've gone off course by discussing the employee vs. independent contractor issue?

Here is the original inquiry:

I was informed by an SBA rep that we would not be able to use individuals we subcontract with in our small business plan goals...does anyone know what hoops we could jump through to allow independent contractors to be included? The definition of "small business concern" includes sole proprietors so I guess I'm just not sure how an individual who was a woman couldn't be counted toward our WOSB goal. Any clarification would be great. Thanks.

Your original response was:

I would say, to protect yourself, have your independent contractor(s) 1) get a D&B no., 2) Register in SAM.gov, 3) follow the regs to register as a WOSB (including uploading the required documents to the WOSB repository (see sba.gov/wosb)), 4) complete their Reps & Certs in sam.gov identifying themselves as a WOSB, and 5) Provide you a copy of their final Reps & Certs. I know it's a lot of work, but it would CYA and the SBA wouldn't have credible reason to deny you at that point.

Your response assumes that the problem was that SBA did not consider the independent contractor to be a business. But what if the problem was that the SBA did not consider the "individual" to be an independent contractor? How do you know that was not the problem? What if you took the wrong trail with your original response?

See my post #6. Unless I missed it, we haven't heard from the OP since June 26. Today is July 11.

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I got lost but appreciated the discussion in this thread as my first efforts were to look everywhere I could - CFR, interent, SBA stuff, etc. - to determine why the SBA would have informed nebraska as indicated.

But as the thread grew my singular thought was -

nebraska - If I were in your shoes I would "inform" the CO of the prime contract in writing, with a copy to the SBA rep, that I was going to continue to count the independents as goal accomplishment until I am provided with an adequate reference as to why I could not.

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Carl:

I think nebraska has to do more than that. He cannot simply say that he is going to count the individuals as subcontractors. Such headstrong action could lay grounds for a false claims charge. First, his company had better establish and document that the individuals in question are, in fact, independent contractors and not employees and that its conclusion in that regard is reasonable.

Black's Law Dictionary defines "independent contractor" as follows:

One who is entrusted to undertake a specific project but who is left free to do the assigned work and to choose the method for accomplishing it. • It does not matter whether the work is done for pay or gratuitously. Unlike an employee, an independent contractor who commits a wrong while carrying out the work usu. does not create liability for the one who did the hiring.

The issue of independent contractor versus employee is big in employment and tax law. Some authorities have published guidance to help companies understand the distinction. See, for example, the following definition of independent contractor issued by the IRS, which reads in pertinent part as follows:

People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to Self-Employment Tax...

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

And see the extensive coverage published by the State of California, Department of Industrial Relations, found at

http://www.dir.ca.gov/dlse/faq_independentcontractor.htm

The coverage provides numerous criteria for determining whether an individual is an employee or an independent contractor. Keep in mind, too, that the use of independent contractors might affect your small business status through the ostensible subcontractor rule.

nebraska had better be careful about this, especially since someone at SBA told him that the individuals could not be counted as subcontractors. nebraska never told us what transpired between himself and the SBA rep and what if any reason the SBA rep gave for his opinion or determination, whichever it was.

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Sorry Vern...when in doubt, I always go back and read the original post. I agree that at this point we need to hear from Nebraska again for more data. Very useful info in this thread for anyone looking at the employee vs. independent contractor issue. Plenty of businesses (i.e., Microsoft) have gotten in a lot of trouble over this issue.

If they really are independent contractors in this case, I would definitely question the SBA's judgement. A SB (or any other socioeconomic SB category) CAN'T include the 1099 independent contractors toward their self-performance goals (Ref. GAO decision, Midpoint Group, LLC 5/8/14: http://www.gao.gov/assets/670/663099.pdf). Now they are saying they can't include 1099 employees towards subcontractor goals either???? They can't have it both ways. GRRRRRR!!!!

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Vern - I agree about being cautious but as you note without adequate reference the whole matter is a guessing game on the part of a contractor especially if SBA simply "informs" which I take to be an informal advisory statement. I note this understanding the all the implications (taxes, business ethics, etc.) but this is a contract matter. Contract compliance is between the prime and the agency (CO), and I believe this is supported by FAR 19.7 and specifically see FAR 19.707. This thread explores all the considerations nebraska should be aware of but when it comes right down to it only the CO can tell nebraska what is right and wrong and why (adequate reference) the independents cannot be included in the goals accomplishments. SBA is only an advisor.

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