Ostensible Subcontractor Affiliation: Hiring Third-Party Employees OK

Under the SBA’s ostensible subcontractor affiliation rule, hiring incumbent employees can be evidence of affiliation, but the importance of that staffing plan in an affiliation analysis depends on what role the incumbent contractor will play in the awardee’s performance of the contract.

In a recent size appeal decision, the awardee proposed to hire 85 percent of its personnel from the incumbent contractor, but the incumbent wasn’t proposed as a subcontractor–in fact, the incumbent was the company protesting the awardee’s small business size.  Under these circumstances, the SBA Office of Hearings and Appeals held, the awardee’s hiring of incumbent employees did not establish ostensible subcontractor affiliation.

OHA’s decision in Size Appeal of Synergy Solutions, Inc., SBA No. SIZ-5843 (2017) involved a DOE solicitation to support the National Nuclear Security Administration’s Office of Personnel and Facility Clearances at Kirtland Air Force Base.  The solicitation was issued as a small business set-aside under NAICS code 541690, with a corresponding $15 million size standard.

TUVA, LLC submitted a proposal.  TUVA proposed to use two subcontractors: SAVA Workforce Solutions, LLC and Inquiries Inc.  Of the 55 Full Time Equivalents who would work on the contract, TUVA and its subcontractors intended to hire 85% from the incumbent contractor, Synergy Solutions, Inc.

After evaluating competitive proposals, the agency awarded the contract to TUVA.  Synergy filed a size protest, asserting that TUVA was affiliated with its subcontractors under the ostensible subcontractor affiliation rule.

The SBA Area Office issued a size determination finding TUVA to be a small business.  With respect to TUVA’s proposed staffing, the SBA Area Office held that TUVA’s plan to hire 85% of the incumbent personnel was not indicative of ostensible subcontractor affiliation because the incumbent contractor–Synergy–was not proposed as TUVA’s subcontractor.

Synergy filed a size appeal with OHA.  Among its arguments, Synergy asserted that TUVA’s staffing plan demonstrated that TUVA lacked relevant experience and expertise, and that “it is possible” that TUVA would rely on its subcontractors if it was unable to successfully recruit or retain the incumbent employees.

OHA noted that “TUVA proposes to hire a large portion of its workforce (85%) from the incumbent contractor.”  In this case, however, “that concern is not one of TUVA’s proposed subcontractors; rather, the incumbent is [Synergy] itself.”  OHA wrote that, in a previous case, it had held that “there was no ostensible subcontractor violation where the awardee had proposed to hire the incumbent workforce from a firm other than its proposed subcontractors.  That fact pattern is present here.”

OHA denied Synergy’s size appeal.

As OHA has often written, ostensible subcontractor affiliation cases are intensely fact-specific, so Synergy Solutions doesn’t necessarily mean that hiring employees from a third party could never factor into an affiliation analysis.  That said, OHA’s decision is logical: the question at the heart of the ostensible subcontractor rule is whether the awardee is unusually reliant on its subcontractors.  Where, as in Synergy Solutions, the incumbent contractor isn’t proposed as a subcontractor, it may be quite difficult for a protester to show that the awardee’s hiring of incumbent staff demonstrates such unusual reliance.
This content originally appeared on SmallGovCon.