Month: October 2018

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SBA Rules On SDVOSB Ownership And Control

The Department of Veterans Affairs (VA) and the United States Small Business Administration (SBA) each has its own service-disabled veteran-owned small business (SDVOSB) contracting program. Until recently, the VA and SBA programs were subject to different sets of eligibility rules. Effective October 1, 2018, SBA revised its eligibility requirements for the SBA service-disabled veteran-owned small business concern (SDVO SBC) program. Due to the VA’s recent elimination of its own eligibility requirements and corresponding adoption of SBA’s rules on eligibility, the recent changes to the SBA rules impact eligibility determinations under both programs.

In a few respects, the recent rule changes eased SDVOSB eligibility requirements. For example:

  • Non-service-disabled veteran minority owners now have more rights to decide certain extraordinary company actions (this was discussed in a prior article).
  • In states with community property laws (note: Virginia is not a community property state), ownership is now determined without regard to community property;
  • In limited circumstances, upon the death of a service-disabled veteran owner, his or her surviving spouse can own the SDVOSB for a period of up to ten (10) years;
  • Company stock owned by an employee stock ownership plan (ESOP) is exempt from the ownership calculation.

However, in many other ways, SBA now more tightly restricts SDVOSB eligibility than it did previously. For example, there is a bright line rule that service-disabled veteran owners must receive at least 51% of annual distribution of the company’s profits and retained earnings, and 100% of the value of each share upon sale of stock or dissolution of the company. Additionally, in the following circumstances, there is a presumption that non-service disabled veterans control the company (but the presumption is rebuttable):

  • A non-service disabled veteran who is involved in the management or ownership of the SDVOSB is a current or former employer (or principal of a current or former employer) of the service-disabled veteran;
  • A non-service disabled veteran receives compensation that exceeds compensation paid to the SDVOSB’s highest-ranking officer (usually CEO or President);
  • The SDVOSB shares an office, employees, equipment, resources, or services with another company in the same line of work and the other company or any of its owners, officers, directors, or their direct relatives owns an equity interest in the SDVOSB;
  • A non-service disabled veteran holds an equity interest in the SDVOSB and provides critical financial or bonding support;
  • A non-service disabled veteran holds a critical license required in the SDVOSB’s line of work;
  • The SDVOSB is dependent upon non-service disabled veteran individuals or entities such that the service-disabled veteran owner’s independent business judgment is compromised;
  • The service-disabled veteran owner is not able to work for the firm during “normal working hours”; and
  • The service-disabled veteran owner “is not located within a reasonable commute” to the SDVOSB’s “headquarters and/or job-sites locations, regardless of the firm’s industry.” Evidence that the service-disabled veteran owner is able to telecommute is insufficient to rebut the presumption.

Although they represent a departure from SBA’s old regime, the new rules are closely aligned with the eligibility criteria historically used by the VA. Importantly, the new regulations provide much-needed clarity on the eligibility requirements for SDVOSBs under both the SBA and VA programs, and hopefully will eliminate some of the inconsistencies previously experienced between the two programs.

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Recent Change To Rights Of SDVOSB Minority Owners

The Department of Veterans Affairs (VA) and the United States Small Business Administration (SBA) each administers its own service-disabled veteran-owned small business (SDVOSB) contracting program. Until very recently, each program was subject to its own set of rules. Disparities between the eligibility requirements of the VA’s “Vets First” program and the SBA’s Service-Disabled Veteran Owned Small Business Concern (SDVO SBC) program led to inconsistent results: a SDVOSB might qualify under the Vets First program, but not SBA’s program, or vice versa. Recent regulatory changes helped resolve some of the inconsistencies between the two programs and the corresponding confusion that has plagued service-disabled veteran-owned contractors.

Via a final rule effective October 1, 2018, the VA eliminated its own criteria for SDVOSB eligibility and instead adopted SBA’s eligibility guidelines found in 13 C.F.R. Part 125 for applicants to the Vets First program. Then, SBA adopted revised guidelines—also effective October 1, 2018—on service-disabled veteran-owned business eligibility.

One important conflict resolved by SBA’s new rules are the rights of non-service-disabled veteran owners of an otherwise qualified SDVOSB. Historically, the VA program acknowledged the business reality that a non-service-disabled veteran owner deserved to have input on certain fundamental changes to the business. Giving the non-service disabled veteran owner a say in “extraordinary” company actions was necessary for the non-service-disabled veteran owner to protect its investment in the business and benefitted the service-disabled veteran owner by making it easier to solicit potential investors. SBA, however, required the service-disabled veteran owner to exercise absolute control over the business, which SBA interpreted as prohibiting non-veteran owners from having rights over even extraordinary matters.

Effective October 1, 2018, SBA has changed its position on the rights of non-service-disabled veteran owners. 13 C.F.R. § 125.13(m) now specifies that in the following five “extraordinary circumstances,” a service-disabled veteran owner’s lack of unilateral and absolute authority does not make the business ineligible for SDVOSB status:

  1. Adding a new equity stakeholder;
  2. Dissolution of the company;
  3. Sale of the company;
  4.  The merger of the company; and
  5. Company declaring bankruptcy.

In other words, a non-service-disabled veteran owner now can have a say in any of these five decisions (but only these five decisions) without destroying the service-disabled veteran owner’s full “control” over the business required for SDVOSB eligibility. In addition to enhancing the opportunities for non-veteran investment in SDVOSBs, the regulatory change in 13 C.F.R. § 125.13(m), as well as the VA’s adoption of SBA’s eligibility requirements, provides some much-needed consistency between the VA and SBA SDVOSB programs. For more information, please contact the authoring attorney.


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As I reported earlier1, the U.S. Supreme Court held in Epic Systems Corp. v. Lewis on May 21, 2018, that employers and employees can agree in arbitration agreements that claims be brought on an individual, rather than class or collective basis. Now, the U.S. Court of Appeals for the Sixth Circuit has held that the Epic ruling extends to claims brought under the Fair Labor Standards Act (FLSA).

In Gaffers v. Kelly Services, Inc., the plaintiff worked in a “virtual call center” – essentially, a call center operation where the employees work from home – and claimed that the employer had underpaid him and his fellow “virtual” employees. The plaintiff brought suit against his employer under the FLSA on behalf of himself and his coworkers as an FLSA collective action. More than 1,600 employees joined him in the case. About half of those employees, however, had signed arbitration agreements with the employer in which they agreed that individual arbitration is the only forum for any employment claims, including wage claims. When the employer moved to compel individual arbitrations of those employees’ claims, the plaintiff argued that the National Labor Relations Act (NLRA) and the FLSA rendered those arbitration agreements unenforceable.

The Sixth Circuit shot down the plaintiffs’ argument. Relying on the Supreme Court’s decision in Epic, the court explained that neither the NLRA nor the FLSA displace the Federal Arbitration Act (FAA), which demonstrates a strong federal policy in favor of arbitration. Although the NLRA gives employees the right to concerted activity, and the FLSA gives employees the right to bring wage claims in collective actions, neither law shows a “clear and manifest” congressional intention to create exceptions to the FAA or to invalidate individual arbitration agreements. When employers and employees agree in an arbitration agreement to submit all claims to arbitration on an individual basis, therefore, the employee cannot bring an FLSA collective action.

The Sixth Circuit’s application in the Epic ruling to FLSA claims is another reminder to employers to review their arbitration agreements with their employees or, if they do not have arbitration agreements with their employees, to consider making such agreements. Arbitration of employment claims offers several advantages over litigation. If you have questions regarding your company’s arbitration agreements or would like to discuss whether arbitration agreements are the right fit for your company, the labor and employment attorneys at Vandeventer Black are available to assist you.  For more information, please contact the authoring attorney.

  1. “S. Supreme Court Rules In Favor Of Employment Agreements Requiring Arbitration On An Individual Rather Than Class Or Collective Basis.
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