SBA proposes to use a 24-month average number of employees to determine the size of small businesses under an employee-based size standard.
This proposed rule change may allow growing small businesses to remain small longer and may allow mid-sized businesses that recently lost their small-business status to requalify as small.
Comments on this proposed rule must be submitted by December 2, 2021.

On November 2, 2021, the U.S. Small Business Administration (SBA) proposed to amend the SBA regulations to implement a 24-month period for calculating the size of a business concern under an employee-based size standard. Currently, the SBA uses a 12-month period for employee-based size calculations. This proposed amendment to the SBA’s regulations implements Section 863 of FY 2021 National Defense Authorization Act (NDAA), which amended the Small Business Act to require that the employee-based size calculation be based on a concern’s pay periods for the preceding 24 months.

SBA proposes to revise 13 C.F.R. § 121.106 to implement the 24-month period. This change applies to all employee-based size standards, including manufacturing, wholesalers, mining, utilities, and environmental remediation. Currently, size is calculated under the employee-based standards by averaging the number of employees, including part-time and temporary employees, for each pay period in the preceding completed 12 calendar months. As a result of the proposed change, a concern would average its employees over all pay periods in the preceding completed 24 calendar months. If a concern has not yet been in business for 24 months, the concern would average its number of employees for each pay period during which it has been in business.

As we have discussed in previous alerts (here and here), in January 2020, SBA implemented the Small Business Runway Extension Act of 2018 (SBREA), adopting a five-year averaging period for calculating the annual receipts of businesses under a receipts-based size standard. In implementing the SBREA last year, SBA included a two-year transition period during which a business may choose to use a 5-year or 3-year average to calculate average annual receipts. This proposal to amend the employee-based size calculation from a 12-month average to a 24-month average does not include a similar transition period. It remains to be seen whether a transition period will be included in the final rule.  

The proposal to use a 24-month average number of employees for determining the size of businesses under an employee-based size standard would allow some growing small businesses to remain small for a longer period and may allow some large businesses to become small again. Additionally, some businesses who have recently decreased in size may lose their small business status, if their 24-month average number of employees is larger than their 12-month average.

The SBA has invited comments from interested parties on its proposed change to the 12-month averaging period for employee-based size standards. Comments should be submitted on or before December 2, 2021.

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