SBA Overhauls 8(a) Program’s Social Disadvantage Standard

The 8(a) Program creates contracting preferences for small businesses owned and controlled by “socially and economically disadvantaged” individuals. The Small Business Act defines socially disadvantaged individuals as “those who have been subjected to racial or ethnic prejudice or cultural bias because of their identity as a member of a group without regard to their individual qualities.” For decades, SBA regulations provided for two alternative tests under which an individual could establish social disadvantage. First, members of certain designated groups—including Black Americans, Hispanic Americans, Native Americans, Asian Pacific Americans and Subcontinent Asian Americans—were entitled to a rebuttable presumption of being socially disadvantaged. Second, individuals who were not members of one of the designated groups were permitted to submit personal statements supported by facts and evidence showing that he or she experienced social disadvantage.

In 2023, a federal district court in Ultima Services Corp. v. United States Department of Agriculture held that the SBA regulations’ rebuttable presumption violated the Fifth Amendment’s Equal Protection Clause and enjoined the SBA from continuing to use it. The SBA’s rule states that it is bringing the 8(a) Program’s eligibility rules into conformity with the Ultima decision, as well as the Program’s statutory requirements and goals.

The rule removes the rebuttable presumption and replaces it with another group-based test. Under the proposed test, to qualify as a socially disadvantaged individual, a citizen will be required to demonstrate that: (1) during the individual’s lifetime, a governmental or private entity (including federal, state or local governments, universities or corporations) discriminated or was biased against the citizen’s racial, ethnic or cultural group, or favored another group of which the individual is not a member; and (2) such discrimination, bias or favoritism conferred material harm on the citizen. The citizen must self-certify that he or she was a member of the relevant group at the time of the discrimination and suffered material harm because of it. The citizen must also provide evidence of the discriminatory action, policy, rule, regulation or practice. The rule states that sufficient evidence may include materials on government, university and corporate websites; official policies and procedures; statements by officials; reports, audits or findings; court decisions; or administrative rulings.

The rule also includes two examples of qualifying discrimination or bias, which are: (1) the prior iterations of the 8(a) Program’s eligibility rules that excluded the individual’s racial or ethnic group from the list of groups that are entitled to a rebuttable presumption; and (2) “situations where the citizen's group was disadvantaged in college or university admissions decisions or otherwise discriminated against by a private entity in an unlawful manner.”

The rule also removes the alternative non-presumptive test for social disadvantage altogether. As justification for its removal, SBA states that “the new, objective test will lead to a consistent, non-arbitrary determination, thus reducing the resource burden of the 8(a) program.”

The rule applies only to small businesses owned and controlled by individuals; it does not amend or affect the eligibility of entity-owned small businesses (i.e., those owned by tribes, Alaska Native Corporations, Native Hawaiian Organizations or Community Development Corporations).

The SBA states in its regulatory analysis that it does not intend to apply the new test to current 8(a) Program participants at their next annual review. SBA explains that the determination of social disadvantage is made at the time of admission to the 8(a) program and is not revisited during an 8(a) participant’s annual review.