Changes to Calculating Number of Employees Under SBA Size Standards

The U.S. Small Business Administration (SBA) announced a final rule adopting a 24-month average when calculating a business concern’s number of employees under SBA size standards. These standards determine eligibility for all SBA programs. In addition, the SBA is altering the period for calculating average annual receipts for business concerns in specific SBA programs. The final rule is effective July 6th, 2022. Previously, the SBA released a fact sheet covering one of its COVID-19 recovery programs.

Overview of SBA Size Standards

The SBA is a federal agency that provides counseling, capital, and contracting expertise to small businesses within the United States. Loan programs under the SBA are reserved for small businesses that qualify. In order to qualify, businesses must satisfy the agency’s definition of a “small business concern.” In other words, they must be independently owned and operated and not dominant in its field of operation. Overall, they must operate within SBA size standards. Other general criteria include that a small business is:

• Organized for profit
• Operating in the U.S.

Size standards are usually stated as the average number of employees or average annual receipts. The SBA counts all individuals employed full-time, part-time, or otherwise. These standards represent the largest size a business concern may be to still qualify as a small business under the SBA. Furthermore, SBA size standards for small businesses vary by industry. The Electronic Code of Federal Regulations provides a table to help determine size standards.

SBA Changes Averaging Period for Calculating Business Size

According to the final rule, the agency will use a 24-month average to calculate the number of employees in eligible business concerns under the SBA size standards. Before, the SBA allowed calculations based on a 12-month period. Meanwhile, the SBA will allow a five-year averaging period in addition to the current three-year averaging period for qualifying small businesses in other SBA programs. These SBA programs include:

• Business Loans,
• Disaster Loans,
• Surety Bonds, and
• Small Business Investment Company (SBIC) Programs.

Employer Takeaways

Under SBA size standards, changes to the averaging period apply to any industry or employer subject to employee-based size standards. In addition, mining, utilities, transportation, publishing, telecommunications, insurance, research and development, and environmental remediation firms are also subject to these standards. Many firms participate in multiple industries with different averaging periods for each industry with employee-based standards. The SBA acknowledged that it would be unrealistic to use a 24-month average for manufacturing industries yet retain a 12-month averaging period for industries with employee-based SBA size standards. In the end, these changes to the averaging period will allow larger small businesses to retain their small business status even longer. At the same time, mid-sized businesses will be able to regain their small business status. Finally, along with the financial aspect of operating a small business, employers of all sizes must remember their obligations under general employment law. One of these obligations is to display labor law posters conspicuously within the place of business.