Small Business Size Standards; Help Supply Services

SMALL BUSINESS ADMINISTRATION

13 CFR Part 121

Small Business Size Standards; Help Supply Services

AGENCY: Small Business Administration.

ACTION: Proposed rule.

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SUMMARY: The Small Business Administration (SBA) proposes a size

standard of $10 million in average annual receipts for Help Supply

Services--Standard Industrial Classification (SIC) 7363. The current

size standard for this industry is $5 million. SBA proposes this

revision to better define the size of business in this industry that

SBA believes should be eligible for Federal small business assistance

programs. SBA also proposes clarifying language in the small business

size regulations about affiliation when a Professional Employer

Organization (PEO) is co-employer of a firm's employees.

DATES: Submit comments on or before December 14, 1999.

ADDRESSES: Send comments to Gary M. Jackson, Assistant Administrator

for Size Standards, 409 3rd Street, S.W., Mail Code 6880, Washington

D.C. 20416. SBA will make all public comments available to any person

or entity upon request.

FOR FURTHER INFORMATION CONTACT: Patricia B. Holden, Office of Size

Standards, (202) 205-6618 or (202) 205-6385.

SUPPLEMENTARY INFORMATION: SBA received requests from the public to

review the size standard for the Help Supply Services industry (SIC

7363). These requests express concern that the size standard has not

kept pace with the rapid growth in the industry due in part to the

trends of outsourcing and downsizing. The industry has changed in two

ways; help supply firms are larger and they are providing a wider range

of personnel to businesses. One request also urged SBA to allow help

supply firms to exclude funds collected for and remitted to

unaffiliated third parties from gross receipts, as is currently done

for travel agents, real estate agents, and others, since 60 percent to

85 percent of revenues on many Federal contracts are ``passed through''

to a firm's employees or associates.

The current size standard for this industry, $5 million, is based

on gross billings including funds paid to employees (sometimes referred

to as ``associates''). Based on a review of industry data, SBA proposes

increasing the size standard for the Help Supply Services industry to

$10 million in average annual receipts. SBA does not propose a change

to the way average annual receipts are calculated for firms in the Help

Supply Services Industry (SIC code 7363). Under SBA's size regulations

(13 CFR 121.104), the size of a firm for a receipts-based size standard

is based on information reported on a firm's Federal tax returns.

Generally, receipts reported to the Internal Revenue Service (IRS)

include a firm's gross receipts or sales from provision of goods or

services. As explained below, SBA evaluated this issue and disagrees

that these types of receipts should be excluded from the calculation of

size for firms in this industry. Accordingly, the following discussion

explains the reasons for the proposed revision.

[[Page 55874]]

Calculation of Average Annual Receipts

Although SBA reviews requests to exclude receipts of certain

business activities on a case-by-case basis, the structure of the

reviews is consistent with past proposed rules on this issue (see,

e.g., advertising agencies, 57 FR 38452, and conference management

planners, 60 FR 57982). The reviews identify and evaluate five industry

characteristics under which it might be appropriate to exclude certain

funds received and later transmitted to an unaffiliated third party:

1. Does a broker or agent-like relationship exist between a firm

and a third party provider and is that relationship a dominant or

crucial activity of firms in the industry?

2. Are the pass-through funds associated with the broker or agent-

like relationship a significant portion of the firm's total receipts?

3. Consistent with the normal business practice of firms in the

industry, after the pass-through funds are remitted to a third party,

is the firm's remaining income typically derived from a standard

commission or fee?

4. Do firms in this industry usually consider billings that are

reimbursed to other firms as their own income, or do they prefer to

count only receipts that are retained for their own use?

5. Do Federal Government agencies, which engage in the collection

of statistics, and other industry analysts typically report receipts of

the industry firms on an adjusted receipts basis?

SBA's review of information obtained on the Help Supply Services

industry finds that these characteristics do not exist in the industry.

Therefore, an assessment of these characteristics does not support the

proposal to exclude funds received in trust for unaffiliated third

parties from the calculation of a Help Supply Services firm's receipts-

size. The following discussion summarizes these findings.

1. No Agent-Like Relationship

The Standard Industrial Classification Manual (1987) states that

this industry encompasses ``establishments primarily engaged in

supplying temporary or continuing help on a contract or fee basis. The

help supplied is always on the payroll of the supplying establishments,

but is under the direct or general supervision of the business to whom

the help is furnished.'' (See SIC 7363, page 364.) Types of

establishments include employee leasing service, fashion show model

supply services, help supply services, modeling services, and temporary

help services. These firms do not act as agents, but as employers. Some

firms even provide health and 401K plans. Their employees are not

unaffiliated third parties. Therefore, the dominant activity in this

industry is not carried out in a broker or agent-like relationship.

2. Pass-Through Funds Are Not a Significant Portion of Total Receipts

It is common practice in the industry for the Help Supply Services

firm to include sufficient funds in a contract to pay the salaries of

the workers provided. These funds are then, indeed, passed through to

the workers just as any firm providing any other product charges enough

to cover the cost of labor. But these funds are not held ``in trust;''

instead, they are the firm's own funds. How the supplying firm acquires

and pays for labor is a business decision. Size standards should not be

constructed to favor one labor arrangement over another. This issue

often arises when part of a contract is subcontracted. The contractor

has the option of employing enough workers to do the task and chooses

not to do so. Funds which are temporarily held in trust by a firm for

remittance to a airline, government agency, or home seller are

different in several respects, including the fact that the firm does

not have the option/business decision of whether or not the home

seller, airline, or government agency will be an employee or a

subcontractor. It is true (and not unusual) that the funds which are

reported to be ``passed through'' to the associates constitute the

majority of the contract revenue. Labor costs in most industries are

the largest cost. The size of the labor costs relative to the total

billing is not a reason to exclude them from calculation of gross

revenues.

3. Remaining Income Is Not Derived From Standard Commission or Fee

Real estate agents, travel agents, advertising agencies, and

conference planners derive their gross income from commissions and

fees, whereas most firms derive their gross income from pricing their

products. Both types of industries must then pay labor costs. SBA is

not aware of any commissions or fees that are standard in the Help

Supply Services industry. Contracts with and bills to the help supply

firms usually reflect charges for labor and overhead. Overhead, like

wages, varies for many reasons, including the types of benefits firms

provide their employees and efficiency of operation. Without such an

industry standard or practice, it would be impossible to implement a

size standard based on a firm's adjusted gross revenue from fees or

commissions. By contrast, in the travel industry, if the bookings are

$1 million, then it can be inferred that the adjusted gross income to

the firm is $100,000 because the industry commission and fee structure

is standard and well-known.

4. Firms in This Industry Usually Consider Billings as Gross Income

Firms in the Help Supply Services industry consider funds collected

as their own funds even though they face substantial labor costs. The

help supply firm is the one who hires and fires the employee,

negotiating their wages and benefits in the process. Their labor costs

are reflected in their bids to supply labor. The funds the help supply

firm receives to cover labor costs are fundamentally different from

funds received by a real estate agent which must be put into an escrow

account, and are never considered the real estate firm's funds. In

fact, the real estate firm would face substantial penalties if the

funds are co-mingled with its own funds. Not only is the payment

structure different, the relationship is different in the two

industries. In principal-agent relationships, the agent must, by law,

act in a fiduciary capacity for the principal. SBA is not aware of any

practice or requirement that help supply firms must act as fiduciary

for the firm to which it supplies labor.

5. Federal Agencies and Industry Analysts Typically Do Not Represent

Receipts of These Firms on an Adjusted Receipts Basis

Finally, data from the U.S. Bureau of the Census (Census Bureau) on

this industry, upon which that SBA evaluates size standards, shows firm

receipts based on gross revenue, not commission or fee. The survey form

used by the Census Bureau (SV 7306) when surveying Help Supply Services

firms does not specifically instruct them to report only agency or

brokerage commissions or fees as it does on Form UT 4700, page 2, items

1 & 2 (used to survey firms that arrange transportation of freight and

cargo and ``Freight Forwarding (net)'').

Thus, the Census Bureau recognizes that the normal arrangement in

this industry is to treat all revenue as gross income irrespective of

labor costs. Similarly, the credit reporting firm of Dun and Bradstreet

also reports receipts for firms in this industry by gross billings less

any discounts or refunds.

None of the five factors support treating the Help Supply Services

industry like the industries that operate as agents, such as a travel

or real estate agency. In fact, evaluation of the factors

[[Page 55875]]

strongly supports using gross revenue as the basis for the size

standard. Based on the findings discussed above, SBA believes it is

appropriate to continue to include all amounts collected on Help Supply

Services contracts when calculating receipts.

Size Standard for the Help Supply Services

Based on requests received from the public, SBA believes it is

appropriate to re-evaluate the size standard to see what, if any,

changes in the industry have occurred since the size standard of $5

million was established. Based on that evaluation, SBA proposes a $10

million size standard for this industry. The following discussion

describes SBA's size standards methodology and the evaluation of data

on the Help Supply Services industry supporting a revision to the

current size standard.

Size Standards Methodology

Congress granted SBA discretion to establish detailed size

standards. SBA generally considers four categories for establishing and

evaluating size standards:

1. The structure of the industry and its various economic

characteristics;

2. SBA program objectives and the impact of different size

standards on these programs;

3. Whether a size standard successfully excludes those businesses

which are dominant in the industry; and

4. Other factors if applicable.

Other factors may come to SBA's attention during the public comment

period or from SBA's own research on the industry. The reason SBA has

not adopted a general formula or uniform weighting system is to ensure

that the factors will be evaluated in context of a specific industry.

Below is a discussion of SBA's analysis of the economic characteristics

of an industry, the impact of a size standard on SBA programs, and the

evaluation of whether a firm at or below a size standard could be

considered dominant in the industry.

Industry Analysis

Paragraphs (a) and (b) of 13 CFR 121.102 list evaluation factors

which are the primary factors describing the structural characteristics

of an industry--average firm size, distribution of firms by size,

start-up costs and entry barriers, and degree of industry competition.

While these evaluation factors are generally considered the most

important indicators of industry structure, SBA will consider and

evaluate all relevant information that is helpful in assessing an

industry's size standard. Below is a brief description of the industry

structure evaluation characteristics.

1. Average firm size is simply total industry revenues (or number

of employees) divided by the total number of firms. If an industry has

an average firm size significantly higher than the average firm size of

a group of comparative industries (in this case, industries with the

anchor size standard of $5 million in receipts), this fact may support

establishing a higher size standard than the one in effect for the

group of related industries. Conversely, data showing an industry with

a significantly lower average firm size relative to the related group

of industries tends to support a lower size standard.

2. The distribution of firms by size examines the proportion of

industry sales, employment, or other economic activity accounted for by

firms of different sizes within an industry. If the majority of an

industry's output comes from large firms, this would tend to support a

higher size standard than the anchor. The opposite is true for an

industry in which the distribution of firms by size indicates that

output is concentrated among the smaller firms in an industry.

3. Start-up costs affect a firm's initial size because entrants

into an industry must have sufficient capital to start a viable

business. To the extent that firms in an industry have greater start-up

capital requirements than firms in other industries, SBA is justified

in considering a higher size standard. As a proxy measure for start-up

costs, SBA examines the average level of assets for firms in an

industry. An industry with a relatively high level of average assets

per firm as compared with the average assets per firm of the group of

comparative industries with a $5 million size standard is likely to be

a capital intensive industry in which start-up costs tend to be higher

for firms entering the industry. For those types of industries, that

circumstance may support the need for a relatively higher size standard

than the anchor size standard.

4. SBA assesses the degree of industry competition by measuring the

proportion or share of industry sales obtained by firms above a

relatively large firm size. In this proposed rule, SBA analyzes the

proportion of industry sales generated by the four largest firms in an

industry--generally referred to as the ``four-firm concentration

ratio.'' If a significant proportion of revenue from sales within an

industry is concentrated among a few relatively large producers, SBA

tends to set a higher size standard to assist a broader range of firms

to compete with firms that are clearly dominant in the industry. If

this factor shows the industry to be highly competitive, SBA tends to

apply the anchor.

5. Competition for Federal procurements and SBA financial

assistance. SBA also evaluates the impact of a size standard on its

programs and other applications of size standards to determine whether

small businesses defined under the existing size standard are receiving

a reasonable level of assistance. This assessment mainly focuses on the

proportion or share of Federal contract dollars awarded to small

businesses. In general, the lower the share of Federal contract dollars

awarded to small businesses in an industry which receives significant

Federal procurement revenues, the greater the justification for a size

standard higher than the existing one.

Another factor SBA considers when evaluating the impact of a

proposed size standard on SBA programs is the volume of guaranteed

loans within an industry and the size of firms in that industry

obtaining loans in SBA's financial assistance programs. SBA considers

this factor when determining whether or not the current size standard

may inappropriately restrict the level of financial assistance to firms

in that industry. If small businesses receive ample assistance through

these programs, a change to the size standard (especially if it is

already above the anchor size) may not be appropriate.

SBA established a size standard of 500 employees for the

manufacturing and mining industries at SBA's inception in 1953. Shortly

thereafter, SBA established a $1 million size standard for the

nonmanufacturing industries. These two size standards are generally

referred to as ``a base or anchor size standards.'' The revenue-based

size standards were adjusted for inflation so that, currently, the

anchor size for the nonmanufacturing industries is $5 million.

If the structural characteristics of an industry are significantly

different from the average characteristics of industries with the

anchor size standard, a size standard higher or, in rare cases, lower

than the anchor size standard may be supportable. Only when all or most

of the industry data are significantly smaller than the average

characteristics of the anchor group industries, or other industry

considerations suggest the anchor standard is an unreasonably high size

standard, will SBA adopt a size standard below the anchor size

standard.

Excluding agriculture and subsistence categories, which generally

have size

[[Page 55876]]

standards established by statute, only seven industries in the revenue-

based size standards are below the $5 million anchor. None in the

manufacturing or mining industries is below the 500 employee-based size

standards.

For the Help Supply Services industry under review in this proposed

rule, SBA begins by comparing the characteristics of the five

evaluation factors for this industry to the average characteristics of

the nonmanufacturing industries which have the anchor size standard of

$5 million (hereafter referred to as the nonmanufacturing anchor

group). If the characteristics of the industry are similar to the

average characteristics of the nonmanufacturing anchor group, then the

anchor size standard of $5 million is considered an appropriate size

standard for that industry. If, however, the industry characteristics

significantly differ from the average characteristics of the

nonmanufacturing anchor group, then a size standard above or below $5

million may be appropriate.

Evaluation of Industry Size Standard

SBA analyzed the size standard for the Help Supply Services

industry by comparing the industry's characteristics with the average

characteristics of the nonmanufacturing anchor group discussed above.

SBA examined economic data on the industry using:

A special tabulation of the 1992 Economic Census prepared

on contract by the U.S. Bureau of the Census;

Asset data from Dun and Bradstreet's 1998 Industry Norms

and Key Business Ratios;

Federal contract award data for fiscal years 1997 and 1998

from the U.S. General Services Administration's Federal Procurement

Data Center; and

7(a) Business Loans from SBA's database.

The table below shows the characteristics for the Help Supply

Services industry compared to the average characteristics for the

nonmanufacturing anchor group. A review of these factors leads to a

proposed size standard of $10 million for this industry.

Industry Characteristics of SIC 7363 Compared to the Nonmanufacturing Anchor Group

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Percent of industry sales by firms Percent of

of Average gov't

Average ------------------------------------ assets per Four-firm procurement

Category firm size firm ($ concentration dollars to

($ mil.) <$5Mil. <$10Mil. <$25Mil. mil.) ratio small

business

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Nonmanufacturing Anchor Group................................. $0.85 51.0 61.0 67.0 $0.5 15.0 21.0

Help Supply Services Industry................................. 2.98 26.3 37.2 52.0 0.56 11.1 10.7

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The average firm size in the Help Supply Services industry is more

than three times larger than the average firm size of the

nonmanufacturing anchor group. This shows that firms in the Help Supply

Services industry tend to be much larger in size than firms in other

non-manufacturing anchor group and supports a size standard at least

$10 million.

The distribution of sales by firm size also supports a size

standard for this industry at least $10 million. Under this factor, the

proportion of industry sales obtained by firms of $5 million and less

in sales, $10 million and less in sales, and $25 million and less in

sales is much smaller than that of firms of the same size class found

for the anchor nonmanufacturing group.

The average assets per firm show that the industry is capital

intensive, similar to the industries in the anchor group, and thus,

would support a size standard at the anchor of $5 million. However, the

average assets per firm is not substantially different from the anchor

group and so would not by itself support a standard higher than the

present $5 million standard.

The four-firm concentration ratio likewise is similar to, but

slightly less than, the anchor group characteristic size standard--no

higher than $5 million. The four-firm concentration ratio shows that

the four largest firms in the Help Supply Services industry account for

only 11 percent of the industry revenues, while the four largest-firms

in the nonmanufacturing anchor group account for 15 percent. This

factor shows the industry is already highly competitive.

If a few large firms were controlling a large portion of the

industry revenues, then raising the size standard above the anchor size

standard might help smaller firms compete. However, when the industry

is already competitive, as this one is, nothing would be gained in

competitiveness by lowering the size standard. Therefore, we conclude

that the four-firm concentration ratio does not support a standard

either higher or lower than the anchor.

Purpose of and Impact on SBA Programs

The percent of Federal contract dollars awarded to small firms in

the Help Supply Services industry during fiscal years 1997 and 1998 is

about half as large as the share of Federal contracting going to small

firms within the non-manufacturing anchor group. This supports an

increase to the current size standard. In fiscal years 1997 and 1998,

of the 1,049 actions reported by the Federal Procurement Data System,

645 (61 percent) went to small firms. While the 645 actions were 61

percent of the total actions, they were only 10.7 percent of the total

contract dollars awarded when the two years are combined. This industry

is lagging behind those in the anchor group.

Also, an increase to the size standard for this industry appears

reasonable based on the distribution of SBA guaranteed loans under the

7(a) program. In fiscal years 1994 through 1998, small businesses in

the Help Supply Services industry received a total of 229 loans which

averaged $116,800. The number of 7(a) loans to this industry has taken

a downward trend in recent years, from 81 in FY 1995 to 25 in FY 1998.

The total dollar value has also declined during that time, from

$6,951,029 to $2,651,687. As in Federal procurement, the potential

exists to increase 7(a) loans going to this industry. Both the level of

participation in this program and the trend would support a $10 million

size standard as one providing a reasonable level of assistance to

small businesses in this industry.

Considering these industry structure factors and the impact on SBA

programs in the aggregate, SBA believes that the $10 million size

standard is reasonable and would provide assistance to firms we believe

should be eligible as small business for this industry. Three of the

industry factors support a size standard higher than the non-

manufacturing anchor group and two industry factors

[[Page 55877]]

support a size standard at the anchor size standard.

Dominant in Field of Operation

Section 3(a) of the Small Business Act defines a small concern as

one that is independently owned and operated, not dominant in its field

of operation, and within detailed definitions or standards established

by the SBA Administrator. As part of its evaluation of a size standard,

SBA considers whether a business concern at or below a recommended size

standard would be considered dominant in its field of operation. This

assessment generally considers the market share of firms at a proposed

size standard as well as other factors that may reveal if a firm can

exercise a major controlling influence on a national basis in which

significant numbers of business concerns are engaged.

SBA has determined that at the recommended size standard of $10

million, no firm at or below those levels would be of a sufficient size

to be dominant in its field of operation. Firms at the proposed size

standard generate less than .02 percent of total industry sales. This

level of market share effectively precludes any firm from exerting a

controlling effect on the industry.

SBA also proposes to add clarifying language to Sec. 121.103(b)(4).

Paragraph (b) discusses exclusions from affiliation rules while

paragraph (b)(4) specifically excludes business concerns that lease

employees. We propose to insert Professional Employee Organizations

(PEOs) in this section along with leasing companies. Their relationship

with the firms to whom they provide employees and staffing services are

similar, yet questions arise from time-to-time because PEOs were not

specifically mentioned in the exclusion. SBA will not find a firm

affiliated with a leasing company or PEO merely because it uses the

services of a leasing company or PEO. However, SBA might find

affiliation based on other conditions.

Nothing in the clarification of the exclusions to the affiliation

rule is intended to change the way a firm must count its employees when

determining size. All employees must be counted; whether permanent,

part-time, temporary, leased or covered by a contract with a PEO. How a

firm obtains its staffing is a business decision, and size standards

are not intended to influence its decision in that regard.

Alternative Size Standards

SBA considered two alternative size standards for this industry.

One alternative considered was modifying the average annual receipts

method to allow for pass-through funds received for employees

(sometimes referred to as ``associates''). SBA rejected this

alternative because the industry characteristics are not similar to

those industries which obtain gross revenues from commissions and fees.

None of the five factors used in this evaluation supported making that

change.

Also, since not all the factors supported the same size standard,

but rather indicated a range of possible size standards, a second

alternative considered was to select one of the other sizes from the

range, either somewhat higher or lower than the one proposed. On

balance, and given the characteristics of the industry, SBA considers

$10 million the best interpretation of the data and the most

supportable standard for this industry.

SBA welcomes comments on the proposed size standard for Help Supply

Services. If the public can show compelling reasons why a different

size standard for this industry should be established or that it should

weigh one factor higher or lower, SBA will consider these reasons when

developing the final rule. SBA would also appreciate comments on its

position that it should measure the receipts size of a Help Supply

Services firm on gross receipts.

Compliance With Executive Orders 12612, 12988, and 12866, the

Regulatory Flexibility Act (5 U.S.C. 601-612), and the Paperwork

Reduction Act (44 U.S.C. 3501 et seq.)

SBA certifies that this rule, if adopted, would not be a

significant rule within the meaning of Executive Order 12866 since it

will not have an impact of $100 million or more. The total amount of

Federal procurement and SBA guaranteed loans combined is less than $160

million to this industry annually, and a change to the size standard is

unlikely to significantly affect these programs.

For purposes of the Regulatory Flexibility Act, this rule would not

have a substantial impact on a significant number of small entities.

Although potentially 576 additional firms could gain small business

status as a result of this rule, only a very small percentage of firms

in the industry compete for Federal procurements or obtain guaranteed

loans through SBA's financial assistance programs.

For the purpose of the Paperwork Reduction Act, 44 U.S.C. 3501 et

seq., SBA certifies that this rule would not impose new reporting or

recordkeeping requirements other than those already required of SBA.

For purposes of Executive Order 12612, SBA certifies that this rule

does not have any federalism implications warranting the preparation of

a Federalism Assessment.

For purposes of Executive Order 12988, SBA certifies that this rule

is drafted, to the extent practicable, in accordance with the standards

set forth in that order.

List of Subjects in 13 CFR Part 121

Government procurement, Government property, Grant programs--

business, Loan programs--business, Small businesses.

For reasons stated in the preamble, SBA proposes to amend 13 CFR

part 121 as follows:

PART 121--SMALL BUSINESS SIZE REGULATIONS

1. The authority citation for part 121 continues to read as

follows:

Authority: 15 U.S.C. 632(a), 634(b)(6), 637(a), 644(c) and

662(5).

2. In Sec. 121.103, revise paragraph (b)(4), to read as follows:

Sec. 121.103 What is affiliation?

* * * * *

(b) * * *

(4) Business concerns that lease employees from concerns primarily

engaged in leasing employees to other businesses or that enter into a

co-employer arrangement with a Professional Employer Organization (PEO)

are not affiliated with the leasing company or PEO solely on the basis

of a leasing agreement.

* * * * *

3. In Sec. 121.201, under the DIVISION I--SERVICES heading of the

``SIZE STANDARDS BY SIC INDUSTRY'' table, add a new entry for SIC Code

7363 in numerical order to read as follows:

Sec. 121.201 What size standards has SBA identified by Standard

Industrial Classification codes?

* * * * *

Size Standards by SIC Industry

------------------------------------------------------------------------

Size standards

in number of

SIC code and description employees or

millions of

dollars

------------------------------------------------------------------------

* * * * *

DIVISION I--SERVICES.................................... $5.0

EXCEPT:

* * * * *

7363 Help Supply Services............................... $10.0

[[Page 55878]]

* * * * *

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Dated: October 7, 1999.

Aida Alvarez,

Administrator.

[FR Doc. 99-26783 Filed 10-14-99; 8:45 am]

BILLING CODE 8025-01-P