Recent Changes for Contractors to Consider – SBA Small Business Credit Rules, CMMC Updates, CTA Reporting, FLSA Overtime Requirements, COTS Rules

Aerospace, defense, and security businesses are subject to a myriad of regulations and operational requirements that are constantly changing. In this episode, we'll dig into some of these changes and discuss what they mean as we look ahead to 2024 and beyond.

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About the authors:
Richard J.R. Raleigh, Jr.
Christopher L. Lockwood

Transcript

Welcome to Womble Perspectives, where we explore a wide range of topics, from the latest legal updates to industry trends to the business of law. Our team of lawyers, professionals and occasional outside guests will take you through the most pressing issues facing businesses today and provide practical and actionable advice to help you navigate the ever changing legal landscape.

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Aerospace, defense, and security businesses are subject to a myriad of regulations and operational requirements that are constantly changing. These include things like Small Business Administration rules for credit for small businesses and cybersecurity requirements that are particular to defense contractors and subcontractors, but they also include rules applicable to other companies and employers, like Department of Labor overtime rules. 2023 seemed to be a year of many proposed and implemented changes to rules and regulations and in this episode, we’ll cover several changes relevant to businesses in the government contracts industry for 2024.

White House Initiative to Promote Small Business Participation in Multiple Award Contracts accounted for nearly 163 billion dollars, which amounts to 20% of total contract spending in fiscal year 2022. Multiple Award Contracts are a popular buying tool for federal agencies because they provide a quick and cost-effective way to obtain goods and services using streamlined competitions. Multiple Award Contracts are highly coveted by federal contractors and winning an “on ramp” for one of these contracts can put small businesses in the catbird seat to capture significant future work.

On January 25th of this year, the White House Office of Management and Budget  announced guidance to federal agencies to promote greater participation by small businesses under multiple award contracts. The Office’s guidance includes recommendations to engage agency small business specialists earlier in the contract planning process; consider greater “on-ramp” opportunities for small businesses; discourage agencies from using “off ramps” to remove small businesses from Multiple Award Contracts due to growth; apply the “Rule of Two” to reserve opportunities for small businesses where possible; and  maximize the issuance of small orders to small businesses.

This announcement is great news for small federal contractors. Small business participation is essential to protection of the nation’s supply chain and defense industrial base. Implementation of this guidance should result in a greater number of opportunities for small businesses to compete for, win, and keep lucrative multiple award contracts.

Meanwhile, the SBA revised its Small Business Subcontracting Plan regulations in response to changes made in section 870 of the National Defense Authorization Act of 2020. Specifically, changes were made to the requirements that apply to contractors seeking to obtain subcontracting credit on certain types of Federal contracts.

Most federal contracts require awardees to submit a subcontracting plan that includes small business goals. The update contains three changes to subcontracting plan requirements. First, a prime contractor may elect, in some instances, to receive credit toward its subcontracting plan for lower-tier subcontracts to small businesses. Second, agencies are prohibited from setting tier-specific goals for prime contractors that use lower-tier credit. Third, subcontracting plans are required to recite the records that contractors will maintain to substantiate lower-tier credit.

The Small Business Administration has removed a mandate that contractors with individual subcontracting plans take credit for lower-tier subcontracts, and instead provides that prime contractors “may elect to receive credit” either for first-tier subcontracts on their own or for subcontracts at any tier.

Also, agencies are now prohibited from setting tier-specific goals for prime contractors that use lower-tier credit. The Small Business Administration is revising the regulations so that all prime contractors will have only one set of subcontracting goals, and contractors are required to include in their subcontracting plans a statement of the types of records they will maintain to substantiate subcontracting credit.

To summarize one important change, previously small regulations allowed prime contractors to receive credit for some small business subcontracts below the first tier for purposes of meeting their small business subcontracting plan goals. However, the new rule allows prime contractors to take credit for lower-tier subcontracts only if their subcontracting plan applies to a single contract with a single agency. So prime contractors cannot receive lower tier subcontracting credits when the subcontracting plan applies to multiple contracts.

Cybersecurity Maturity Model Certification is nothing new. Certification version 1.0 was the Department of Defense’s initial vision for the program, which was implemented in September 2020, and version 2.0 was announced in November 2021. But on December 26th of 2023, the Office of the Department of Defense Chief Information Officer issued a proposed rule with proposed requirements for “a comprehensive and scalable assessment mechanism to ensure defense contractors and subcontractors have, as part of the Cybersecurity Maturity Model Certification Program, implemented required security measures to expand application of existing security requirements for Federal Contract Information and add new Controlled Unclassified Information security requirements for certain priority programs.” While the the Department of Defense currently requires covered defense contractors and subcontractors to implement certain security protections, the updated Cybersecurity Maturity Model Certification Program is to provide the Department with a mechanism to verify implementation by contractors and subcontractors at the outset and throughout contract periods of performance.

The Department of Defense expects contractors of all sizes – large companies and small businesses – to comply, and these updates to the Cybersecurity Maturity Model Certification rules are aimed at strengthening the cybersecurity of the defense industrial base – in recognition of increased targeting of the supply chain by adversaries like China and Russia. Since the proposed rule requires contractors and subcontractors to annually affirm their compliance with specified security requirements for each level of Cybersecurity Maturity Model Certification 2.0, they can be held accountable and false affirmations could lead to False Claims Act issues.

Comments on the proposed rule are due February 26th 2024 and the final rule will not appear before 2025.

In other cyber-news related to the DoD – in November 2023, the Deputy Secretary of Defense published the 2023 Department of Defense Data, Analytics, and Artificial Intelligence Adoption Strategy, providing more strategic guidance related to AI. The Strategy document lays out the Department’s approach to improving the organizational environment within which DoD leaders and warfighters will make decisions leveraging data, advanced analytics, and AI for strategic advantage – from the boardroom to the battlefield.

Next up: the Corporate Transparency Act. This Act, part of the Anti-Money Laundering Act of 2020, contains requirements for reporting the ownership of many business entities and became effective on January 1st of this year.

In short, the CTA requires that certain businesses disclose to the U.S. Treasury’s Financial Crimes Enforcement Network certain information about the company, its beneficial owners, and in some cases, the company applicant.

“Reporting Companies” are companies with twenty or fewer employees formed by filing paperwork with the Secretary of State or an equivalent official, usually corporations or LLCs. “Beneficial Owners” are individuals that exercise “substantial control” over the Reporting Company or have an ownership interest in the Reporting Company of at least 25 percent. Senior officers, directors, and others who make significant decisions on behalf of the company could meet the definition of “substantial control.” The Beneficial Owner Information includes full name, date of birth, passport or other state-issued identification number, and copy of the identification document.

Reporting Companies created or registered before January 1st, 2024, have until January 1st, 2025, to file an initial report with Beneficial Owner Information with FinCEN. Reporting companies created or registered after January 1st, 2024, and before January 1st, 2025, have ninety days after creation or registration to file a report. Entities created on or after January 1st, 2025, will have 30 days to submit the reports to FinCEN. There are penalties – civil and criminal – for non-compliance.

Moving on to the Department of Labor, in 2023, the DOL proposed new rules concerning the salary threshold for exempt employees under the Fair Labor Standards Act. The Department’s proposal raises the salary threshold level for exempt workers under this Act to $1,059 per week (approximately $55,000 annually) from its current rate of $684 per week ($35,568 a year).

By way of background, unless specifically exempted, an employee covered by the Fair Labor Standards Act must receive pay for hours worked more than forty in a workweek at a rate not less than one and one-half their regular rate of pay, referred to as “overtime” pay. To be “exempt” under the “white-collar” or Executive, Administrative, or Professional exemption, presently an employee generally must be paid a salary of at least $684 per week or the equivalent of $35,568 annually for a full-year employee in the current regulations and must primarily perform executive, administrative, or professional duties, as provided in the Department’s regulations. Certain employees are not subject to either the salary basis or salary level tests, e.g., doctors, teachers, and lawyers. 

The Department of Labor proposes to increase the standard salary level to the 35th percentile of earnings of full-time salaried workers in the lowest-wage Census Region, currently the South, which would be $1,059 per week, or $55,068 annually, based on current data; apply the standard salary level to Puerto Rico, Guam, the U.S. Virgin Islands, and the Commonwealth of the Northern Mariana Islands, and increase the special salary levels for American Samoa and the motion picture industry; increase the highly compensated employee total annual compensation requirement to the annualized weekly earnings of the 85th percentile of full-time salaried workers nationally, which would be $143,988 per year based on current data; and automatically update these earnings thresholds every 3 years with current wage data to maintain their effectiveness.

We expect the Department of Labor to issue its Final Rule after the public comment period - a 60-day period that began September 8, 2023 - so the new salary requirements are likely to begin early this year.

And finally, rules that apply to Commercially available off-the-shelf items.

In November 2023, by issuing a Final Rule, the Department of Defense amended the Defense Federal Acquisition Regulation Supplement to implement a part of FY 2017’s NDAA concerning the inapplicability of certain laws and regulations to acquisition of commercial products, including commercially available off-the-shelf items and commercial services. Currently, Federal Acquisition Regulation 12.503 through 12.505 sets out certain contract clauses that are inapplicable to contracts for commercial products and services. However, the new Defense Federal Acquisition Regulation Supplement rule creates two new lists of inapplicable clauses that will apply in addition to the existing Federal Acquisition Regulation provisions for DOD contracts. Defense Federal Acquisition Regulation Supplement 212.370 lists inapplicable clauses for contracts and subcontracts for the acquisition of commercial products, commercial services, and commercially available off-the-shelf items, and Defense Federal Acquisition Regulation Supplement 212.371 lists additional clauses inapplicable to contracts for the acquisition of commercially available off-the-shelf items.

In a separate proposed rule, DoD proposes to make 252.203–7003, Defense Federal Acquisition Regulation Supplement 252.203–7005, and Defense Federal Acquisition Regulation Supplement 252.215–7007 no longer applicable to solicitations and contracts for commercial products, commercial services, and Commercially available off-the-shelf items 

Public comments for that proposed rule are due January 16, 2024.

If you have any questions about the issues discussed in this episode, or any issues pertaining to government contracting, please contact the authors of this alert or the WBD attorneys with whom you normally work. 

As usual, a link to the full article covered here, along with information about the authoring attorneys, is available in the show notes.

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