Experience Equates to Control: A Dangerous Precedent and a Word of Caution

5 min

A recent decision from the Office of Hearing and Appeals (OHA), In the Matter of C & E Industrial Services, Inc., SBA No. WOSB-112 (April 8, 2019), highlights an often-overlooked characteristic necessary to qualify as a woman-owned small business (WOSB) or economically disadvantaged woman-owned small business (EDWOSB): experience. The OHA upheld a determination by the SBA that C & E Industrial Services, Inc. (C & E) did not satisfy the eligibility requirements for a WOSB, in large part because the owners did not possess the "managerial experience of the extent and complexity needed to run the concern" and therefore could not truly control the concern as required by the woman-owned programs. 13 C.F.R. § 127.202(b).

Arising out of a 100% WOSB set aside to rebuild four parking lots at the White Sands Missile Range in New Mexico, C & E won the bid and then found itself faced with a size protest by an unsuccessful offeror. C & E was controlled by four individuals: Joe Hernandez, Estella Hernandez, Isidro Valles, and Corina Valles. Each respective pair was a married couple. The two women combined to control 51% of the stock of the company and served as President and Vice President. Their husbands were Secretary and Treasurer. The SBA took no issue with the ownership aspect of C & E as it clearly satisfied 13 C.F.R. § 127.201.

C & E provided job descriptions which, at least on paper, showed that the women exercised a substantial amount of control over the operations of the company. However, the resumes of the four revealed disparities in experience. Both women spent many years as school bus drivers, and their resumes only pointed towards administrative, office, and financial duties in their roles at C & E. In contrast, the men each had more than 25 years of experience in construction and construction management and were heavily involved in the actual daily performance of the company's contracts.

The SBA found that the women did not possess the experience to run the company, and thus lacked control under § 127.202(b), and the OHA agreed. On review, the OHA laid out four factors for consideration to determine if an individual has the requisite experience: "(1) the characteristics of the applicant concern; (2) the disadvantaged individual's education and employment history, including supervisory experience, as opposed to that of the non disadvantaged individuals involved in the firm's management; (3) the disadvantaged individual's role at the applicant concern; and (4) the extent of non-disadvantaged individuals' involvement in the operations of the applicant concern."

The OHA compared the experience of the women in the construction industry to that of their husbands and found it lacking. While acknowledging that the women may play a big role in the day-to-day administration of the firm, the OHA noted that "they must also participate in the long-term decision making and day-to-day management to be found in control." The judge noted that the men managed a "significant part" of the daily operations, the business license for the company was in Mr. Valles' name (and listed as such on SAM, triggering the protest), and there was no indication that the women had any supervisory authority over either man. While the women were the majority owners, could control the board, and exercised some degree of control and experience, it was not enough experience (and therefore control) in relation to the non disadvantaged officers of the company.

The OHA decision is unfortunate as it seems to equate the daily operations of the business to control over the business. In an increasingly complex and competitive environment, the notion that the top executives have the same experience as the operational and middle management is short-sighted. Further, to extrapolate that persons not handling the daily operations cannot make educated long-term planning and strategy decisions is unfounded. Rather, we would argue that in today's business environment, executives are often disconnected from operations because they have a different skillset focused on running the business successfully and with long-term goals in mind. In fact, following an antiquated approach that a company's top executive be involved in all aspects of a company just inhibits the company's growth. The delegation of tasks and expertise to lower management persons does not mean the loss of control, but rather constitutes smart management. It is too bad that OHA has not recognized this.

Thus, in light of this decision, it is critical to document that female owners of a business are in positions of actual authority, not only of the company, as the regulations require, but also over the performance of the contract. Next, the second factor of the OHA's analysis is relative, comparing the experience of the female owners with any non-disadvantaged managers. This analysis focuses on relevant job experiences—in this case literal, on-the-job construction work—versus more generic or ambiguous administrative or management experience. Unfortunately, this may create a perverse incentive for WOSBs or EDWOSBs to hire only individuals with less experience than the owner so as not to overshadow the owner's experience. Finally, it is probable this protest never would have happened if C & E had their business license in the name of one of the woman owners. Therefore, again, OHA stressed form over substance (i.e., who filed paperwork somehow being dispositive of control).

The WOSB and EDWOSB programs can provide great benefits to small businesses looking for opportunities in the government contracts sphere. However, OHA has again handcuffed contractors in potentially making the decision between hiring the very best personnel to help grow a successful business, or limiting the concern so as not to risk its WOSB or EDWOSB status.