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Startups and small businesses: Along with new opportunities, new year brings new laws, regulations

Business Law, TR Business Navigator

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new year new regulations
The New Year brings new opportunities to launch, grow, and strengthen your business, but also carries new challenges from new laws and regulations being implemented in 2019.

I recently discussed some of the new laws and regulations taking effect in 2019, and made some predictions for new legislation, initiatives, and regulations in the coming year that may affect startups and small businesses in New York and nationwide.

Here are some of the highlights from my presentation, “New Laws, New Regs & Other Considerations for 2019,” held on December 19 at Tully Rinckey, PLLC in Albany. Click the link to learn more about each of the below.

New York State’s Sexual Harassment Law

With the 2019 Budget Act, New York enacted new requirements for employers and enhancing employees’ protections in situations of sexual harassment in the workplace. In response to the “Me Too” movement, the Sexual Harassment Law prohibits employers from incorporating non-disclosure provisions in any employment or settlement agreement that relates to claims of sexual harassment, and prohibits employers from enforcing mandatory arbitration clauses against employees claiming sexual harassment.

In an effort to help prevent workplace sexual harassment in the future, the Sexual Harassment Law also requires that employers implement and distribute a sexual harassment prevention policy and provide annual sexual harassment prevention trainings for all employees. Initially, employers were required to implement a policy and provide trainings no later than October 9, 2018. However, New York has since extended the deadline for providing sexual harassment prevention training until October 9, 2019. New York State did not extend the deadline for implementing a sexual harassment prevention policy – meaning if your business doesn’t have a policy in place yet, do it immediately.

Small Business Runway Extension Act of 2018
Congress recently passed a simple one-line law, the Small Business Runway Extension Act, that alters how the U.S. Small Business Administration (SBA) and other federal agency determine a business’s size.

When reviewing business size for federal programs or government contracts, the SBA looks to the industry-specific size standard (See 13 C.F.R. 121.201) and considers the business’s average annual receipts or average number of employees the past three years. Under the Small Business Runway Extension Act, the SBA will now consider a business’s past five years of annual receipts and number of employees. With these two additional years, small businesses have more flexibility in accepting federal contracts while maintaining their size and socio-economic statuses (e.g., Service-Disabled Veteran-Owned, Women-Owned, Minority-Owned). Put differently, this change will likely provide small businesses more time to benefit from SBA and other agencies’ programs before directly competing with large businesses.

The President signed the Small Business Runway Extension Act into law on December 17, 2018, and SBA will likely begin to promulgate implementing regulations in early to mid 2019.

U.S. Department of Labor’s Overtime Rule
Under the Fair Labor Standards Act (FLSA), certain executive, administrative, and professional employees are exempt from receiving overtime if these employees make more than a certain amount – namely, the standard salary threshold.

In May 2016, the U.S. Department of Labor (DOL), which issues regulations implementing FLSA and other labor-related statutes, finalized a rule increasing the standard salary threshold from $23,660 (i.e., $455/week) to $47,476 (i.e., $913/week). The rule, however, was met with significant opposition from businesses and state governments and was invalidated (i.e., cancelled) by the U.S. District Court for the Eastern District of Texas in August 2017.

Throughout 2018, DOL has been collecting information from the public – particularly business owners – on how best to calculate the standards salary threshold and, thereby, what the standard salary threshold should be.

According to the Unified Agenda, which semi-annually summarizes the Federal government’s regulatory plans for the coming year, DOL plans to issue a new proposed overtime rule in January 2019.

Service-Disabled Veteran-Owned (SDVO) Eligibility and Procedures
Prior to October 1, 2018, the U.S. Department of Veterans Affairs (VA) and the U.S. Small Business Administration (SBA) had separate eligibility criteria for achieving and maintaining Service-Disabled Veteran-Owned (SDVO) status for federal programs. After that date, both VA and SBA are now applying SBA’s regulations and utilizing SBA’s due process procedures.

With the National Defense Authorization Act of 2017, Congress directed VA to utilize SBA’s regulations concerning size status, ownership, and control in determining whether a business qualifies as a SDVO or veteran-owned small business through the Center for Verification and Evaluation (CVE). In addition, Congress directed SBA’s Office of Hearings and Appeals (OHA), which already hears SDVO appeals related to federal procurements, to adjudicate all protests of eligibility and appeals of denials or terminations related to VA’s CVE.

During 2018, VA and SBA issued several regulations implementing these changes, including deletion of VA’s control and ownership rules and new procedures for protests and appeals at SBA OHA.

These new criteria and procedures for determining SDVO are all effective as of October 1, 2018, and will present new challenges for small businesses looking to attain SDVO certification for the first time or to maintain their certification through recertification.

Proposed Rule Concerning Subcontracting and Set-Asides
On December 4, 2018, the U.S. Small Business Administration (SBA) proposed several important changes to rules governing how federal agencies contract with small businesses – and prime contractors.

Subcontracting Plan Compliance
SBA’s proposed rule seeks to bolster protections for small business subcontractors incorporated into a prime contractor’s subcontracting plan. Federal agencies often direct large contractors to provide a small business subcontracting plan with their contract proposal. These subcontracting plans, in many cases, help the agency achieve its socio-economic contracting goals (e.g., 5 percent for SDVO, etc.), but agencies must monitor a prime contractor’s performance to ensure a small business subcontractor actually receives work.

Specifically, SBA intends to declare that it is a material breach of the government contract for a contractor to fail to comply in good faith with the procuring agency’s requests for assurances (e.g., periodic reports, surveys, studies) that the prime contractor is complying with its small business subcontracting plan. In fact, SBA states “[g]ood faith effort considers a totality of the contractor’s actions to provide the maximum practicable opportunity to small businesses to participate as subcontractors” (83 Fed. Reg. 62516, 62517). While it is unclear whether such allegations can be presented to SBA’s Office of Hearings and Appeals, SBA intends for such material breaches to follow the prime contractor as part of its past performance criteria for future contracts.

Small Business Set-Asides
PCRs are often the first to review a federal acquisition for compliance with the Rule of Two, which helps ensure small business government contractors have an opportunity to receive federal contracts. SBA’s changes aim at solidifying the role of Procurement Center Representatives (PCRs) to, in-part, ensure certain contracts and task orders are set aside for small businesses (e.g., SDVO, WOSB, etc.).

The Rule of Two, simply, requires a procurement officer to consider whether there are two or more small business that can perform the pertinent contract. If so and the contract is valued at between $3,000 and $150,000, then the acquisition must be set aside for small business government contractors. If the contract is valued at more than $150,000 and the two small businesses can provide the best performance and price, then the acquisition must be set aside as well. If there aren’t two acceptable small businesses, the federal agency does not have to set the contract and can offer the contract in full open competition, where small and large contractors are competing for the same contract.

SBA’s proposed rule clarifies that PCRs may review any federal acquisition, including those already set aside, partially set aside, or reserved for small businesses. This will better enable PCRs to advocate for small businesses, and particular socio-economic groups, in federal contracting and help ensure compliance with the Rule of Two.

Also, under the current regulation, if a procuring agency set asides a contract for less than $150,000, and only receives one acceptable small business offer, the agency may still make an award to that small business. However, these is no such statement regarding set-asides valued at more than $150,000, and many procuring agencies cancel those solicitations and re-compete. SBA seeks to change that, and clarify agencies may accept the one small business offer in both instances.

Set-Asides for Contractors in Disaster Areas
SBA also proposed to establish contracting preferences for small business government contractors located in disaster areas (e.g., New York City post-Hurricane Sandy, Puerto Rico post-Hurricane Maria), implementing the Recovery Improvements for Small Entities After Disaster Act. As incentive, federal agencies contracting with such disaster-affected small businesses will receive double credit toward their socio-economic contracting goals.

International Trade Agreements With (Some) Focus on Small Business
On November 30, 2018, the Presidents of Mexico, Canada, and the United States signed the United States – Mexico – Canada Agreement (USMCA) that, if ratified by the U.S. Senate, would replace the North American Free Trade Agreement (NAFTA).

Notably, if ratified, USMCA would be the first free trade agreement for the United States with a section specifically focused on small businesses. Previously, both the Trans-Atlantic Trade and Investment Partnership (TTIP) between the United States and the European Union (including the United Kingdom) and the Trans-Pacific Partnership (TTP) between the United States, Japan, Australia and several other Asian countries (excluding China) sought to benefit small businesses (internationally, “small- and medium-sized enterprises”) with specific provisions. However, neither agreement was ever ratified by the U.S. Senate.

Under USMCA, the member countries agree to promote cooperation between each country’s small business support infrastructure (e.g., Small Business Development Centers, incubators, export assistance centers); to encourage exchanges of information and best practices; and to help link small business suppliers, buyers, and potential partners in each country. The member countries also specifically agreed to collaborate on activities promoting certain socio-economic groups of small businesses (e.g., Minority-Owned, Women-Owned, Service-Disabled Veteran-Owned, Alaskan Native-Owned). USMCA’s provision on small businesses also highlights the other provisions that would benefit small businesses in each country, such as agriculture, digital trade, and intellectual property.

Similar provisions focused on small businesses can be expected in the United States’ other trade negotiations. Recently, the President formally notified Congress of his intent to enter into trade negotiations with Japan, the United Kingdom, and the European Union. As mentioned above, these countries were parties to TPP and TTIP, respectively, both of which had included provisions focused on promoting small businesses in each country.

Predictions for the New Congress
In 2019, the 116th Congress will bring some new faces to the forefront of several committees, including the U.S. Senate’s Committee on Small Business and Entrepreneurship and the U.S. House of Representative’s Committee on Small Business.

As the Democrats take control of the lower chamber, Congresswoman Nydia Velazquez (D-NY) is set to become the new chair of the House’s Committee on Small Business after previously serving several terms as Ranking Member (i.e., the highest ranking member of the minority party) and Chairwoman from 2007 to 2011.

In recent interviews, Congresswoman Velazquez has suggested that she will focus on small business programs serving woman- and minority-owned businesses, as well as the recovery of her native Puerto Rico following Hurricane Maria.

In the upper chamber, the Republicans retained control, but will see some change in chairmanships due to recent retirements causing a domino effect. In particular, Senator Bob Corker’s (R-TN) retirement has opened the top post on the U.S. Senate’s Committee on Foreign Relations, which is set to be filled by Senator Jim Risch (R-ID). Because Senator Risch will be chairman on another committee, he will resign his current position as chairman of the U.S. Senate’s Committee on Small Business and Entrepreneurship.

Senator Marco Rubio (R-FL) is the second-highest ranking Republican on the committee, and is set to become the new chairman for the 116th Congress. In fact, coincidentally, Senator Rubio has advocated for two bills in recent weeks focused on small business relief. First, Senator Rubio and Senator Sherrod Brown (D-OH) have been pushing a bill, the Small Business Lending Fairness Act, which would codify the U.S. Federal Trade Commissions’ ban on confessions of judgment in lending and would extend the ban to protect small businesses.

Confessions of judgment are akin to agreements in which one party confesses to a bad act and promises to remedy their actions through scheduled payments or other mechanisms, and the other party promises to accept the remedy and only file the confession with a court if the first party doesn’t follow through. Some banks have abused this legal mechanism when lending to small businesses, sometimes filing the confession of judgment and seizing the small business’ assets without notice or due process. The Small Business Lending Fairness Act would aim to prohibit this practice against small businesses.

The second, the Spurring Businesses in Communities Act, aims to increase the presence of Small Business Investment Companies (SBICs) in under-served and rural areas. Under the Act, which passed the U.S. Senate on December 6, 2018 and became law on December 13, 2018, the U.S. Small Business Administration (SBA) would place priority on processing applications from SBICs in under-served areas, and would exempt applicants in these areas from SBA’s usual capital contribution requirements.

Both chambers will likely continue their perennial focus on disaster relief, capital access, government contracting programs, and deregulation. But, these leadership changes for both committees will likely present new opportunities to address small business issues with creative solutions.

Startups and small businesses seeking clarification of or assistance with compliance of the new legislation taking effect in 2019 should contact an attorney who is knowledgeable in state and federal laws affecting businesses.

Daniel T. Kane, Esq. of Tully Rinckey PLLC, is Director and Lead Counsel of the TR Business Navigator, an affordable, dynamic legal service and guidance program for new startups and existing small businesses.

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