Independent Contractors May Not Be "Employees" for Satisfying Limitation on Subcontracting Thresholds

In the case of set asides for small businesses, FAR 19.5 restricts the ability of contractors to subcontract some of the effort. This requirement is designed to reduce the frequency where small businesses act as mere "front companies" for non-small businesses. For supplies and services contracts, the contractor must perform at least 50 percent of the work. For construction contracts, the contractor must perform at least 15 to 25 percent of the work (depending upon whether its general construction or construction by special trades).

Where this restriction applies, most solicitations will require the bidders to demonstrate that their proposals meet the limitation on subcontracting criteria. Those that do not meet the criteria, are usually deemed "unacceptable" and eliminated from further consideration.

In a recent GAO bid protest, a company called MindPoint attempted to argue that an independent contractor was really an employee for purposes of satisfying the limitation on subcontracting requirement. MindPoint asserted that it properly considered one of its two proposed systems administrators - an independent contractor - to be an employee for purposes of calculating whether MindPoint would meet the minimum percent cost of performance requirement.

In its proposal, MindPoint represented that it would perform 53 percent of the contract effort using seven individuals including a systems administrator who was not a true employee but an independent contractor. Adjusting out the system administrator, the Government calculated that MindPoint would only perform 45 percent of the personnel costs of performance with its own employees.

MindPoint argued that the Government should have instead considered the systems administrator to be an employee because the independent contractor would "function more akin to an employee of MindPoint than a subcontractor". This argument, the GAO noted, rested entirely on information not contained in MindPoint's proposal. GAO has repeatedly ruled that it is a contractor's responsibility to provide an adequately written proposal that establishes its capability and the merits of its proposed approach in accordance with the terms of the solicitation. An offeror that does not affirmatively demonstrate the merits of its proposal risks rejection of its proposal. In this case, MindPoint consistently referred to the system administrator as an independent contractor and made no mention that the system administrator would be more "akin" to an employee than a subcontractor.

In the end, GAO didn't address whether an independent contractor could be considered an employee for purposes of satisfying the limitation on subcontracting criteria. It simply ruled that the Government acted reasonably in eliminating MindPoint's proposal from competition and as a result, denied MindPoint's appeal.