Do contract employees count in company size determinations?

The following question was asked by a company official: Offerors on government contracts are required to certify whether they are small or large under the Small Business Administration's regulations. For many types of contracts, those size standards reference the number of employees employed by the company during the preceding 12 months. To what extent is a company required to count temporary and part-time employees in this calculation? Do "contract" employees count in these determinations?

In virtually all government procurements, offerors are required to certify their size status as part of their proposals. It is always important that offerors provide accurate information in response to these requirements. It is especially important in small-business set-aside acquisitions, in which the only companies allowed to compete are those certifying that they are small under the applicable Standard Industrial Classification (SIC) code. If the government or a disappointed offeror believes that a company has self-certified improperly, an investigation and/or protest may be initiated. If a company is caught self-certifying inaccurately, it can expect serious consequences including, at a minimum, loss of the contract at issue.

One of the more interesting questions in this area involves the counting of temporary, part-time and contract employees, who must be counted as part of the company's total employment during the applicable 12-month period preceding the certification. In many cases, employees provided under contract with an independent company must also be counted.

The SBA defines a small-business concern as "including its affiliates, independently owned and operated, not dominant in the field of operation in which it is bidding on government contracts and qualified as a small-business concern under the criteria and size standards in 13 C.F.R. Part 121," for the applicable SIC code. 13 C.F.R. Paragraph 121.601.

The size standard for a particular SIC code typically is expressed as either a maximum number of employees or as a maximum annual receipts. See 13 C.F.R. Paragraph 121.801. Size standards that are expressed as a maximum number of employees refer to the average employment of the concern, including the employees of its domestic and foreign affiliates, based upon employment during each of the pay periods for the preceding complete 12 calendar months. 13 C.F.R. Paragraph 121.407(a).

Moreover, the regulations explicitly require the company to count part-time and temporary employees as full-time employees for each applicable pay period. 13 C.F.R. Paragraph 121.407(b).

The regulations include a series of questions that should be reviewed in determining whether the employees of an independent contractor should be considered employees of the company. The questions include: (a) Did the company engage and select the employees? (b) Does the company have the power to dismiss the employees? (c) Does the company have the power to control and supervise the employees' performance of their duties? (d) Did the company dismiss employees from its payroll and replace them with the employees from any employment contractor involved? (e) Do the employees perform tasks normally performed by the regular employees of the business or that were previously performed by the company's own employees?

In several cases, the SBA has found that employees hired through third parties to perform essential elements of the contracted work will be included in the total employee count for the firm. This is particularly true where contracted labor performs work normally performed by in-house employees.

Based on the foregoing, a company is not allowed to use contract labor as a means to avoid the employee limitations of an applicable small-business size standard. On the other hand, contract labor may be used legitimately in some circumstances without jeopardizing a company's size status. Whether a particular arrangement is appropriate must be determined on a case-by-case basis.

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Peckinpaugh is a member of the government contracts section of the law firm of Winston & Strawn, Washington, D.C. His column can be read on FCW's Web page at http://www.fcw.com. For more information, contact him at carl@carl.com.