As part of sweeping changes to the HUBZone rules in the 2019 Final Rule, SBA implemented the so-called HUBZone “legacy employee” rule.  This new rule was welcomed by HUBZone firms because it permits them to continue counting an employee as a HUBZone employee even after the employee moves out of a HUBZone, as long as certain requirements are satisfied.  Specifically, to qualify as a HUBZone legacy employee, the rule requires that an employee (i) reside in a HUBZone for at least 180 days prior to the firm’s certification or recertification; (ii) continue to live in a HUBZone for at least 180 days immediately after the certification or recertification; and (iii) maintain continuous employment with the firm. 

In 2021, SBA changed how it interpreted and applied the “legacy employee” rule.  In FAQs, SBA placed limitations on how firms could take advantage of the legacy employee rule, depending on where the firm’s principal office was located and the status of the HUBZones in which the legacy employees resided.  This sparked an outcry from HUBZone firms that relied in good faith on SBA’s prior guidance for the “legacy employee” rule.  SBA listened to these concerns and implemented a grace period during the second half of 2021 during which HUBZone firms were permitted to use the legacy employee rule based on SBA’s prior guidance. 

The grace period ended as of January 1, 2022.  As a result, HUBZone firms must now follow SBA’s current guidance to take advantage of the legacy employee rule.  Here are three key changes that HUBZone firms need to be mindful of when seeking to use the legacy employee rule in 2022:

1. Employees residing in RAs/QDAs can no longer be counted as legacy HUBZone employees. The grace period allowed firms recertifying their HUBZone status to count an employee as a HUBZone legacy employee if the employee lived in Redesignated Areas and/or Qualified Disaster Areas (RAs/QDAs) 180 days prior to and 180 days after a firm’s certification or recertification (360-day period).  Now, firms cannot count employees as legacy employees if the employee resided in a RA/QDA during the relevant 360-day period.
2. Firms with principal offices in RAs/QDAs can no longer use the legacy employee rule. SBA’s grace period allowed firms with principal offices in RAs/QDAs to use the legacy employee rule.  Now that the grace period ended, firms that have their principal office in an RA/QDA are not permitted to use the legacy employee rule.
3. An employee’s HUBZone residency must occur after December 26, 2019 to be considered a legacy employee. The grace period also allowed firms recertifying to count employees as legacy employees if their 360-day period of HUBZone residency took place before December 26, 2019. Now, firms can only count employees as legacy employees if their qualifying HUBZone residency occurred after December 26, 2019.