Garvin Enterprises, Inc. d/b/a Lloyd Staffing, No. 4544 (April 4, 2003), Docket No. SIZ-2002-07-01-26 UNITED STATES OF AMERICA SMALL BUSINESS ADMINISTRATION OFFICE OF HEARINGS AND APPEALS WASHINGTON, D.C. ) SIZE APPEAL OF: ) ) Garvin Enterprises, Inc. d/b/a ) Docket No. SIZ-2002-07-01-26 Lloyd Staffing ) ) Appellant ) Decided: April 4, 2003 ) Solicitation No. RFP 673-63-02 ) Department of Veterans Affairs ) James A. Haley Veterans' ) Hospital ) Tampa, Florida APPEARANCES David P. Metzger, Esq., Christina C. Pak, Esq., Holland & Knight LLP, for Appellant James S. Ganther, Esq., Ganther Law Office, P.A., for Seaborn Healthcare, Inc. Kenneth Dodds, Esq., Office of General Counsel, for Intervenor Small Business Administration DIGEST In the case of a temporary employment agency operating under a franchise agreement which provides that the temporary employees will be the employees of the franchisor, and the franchisor will finance the payroll, process the payroll, pay the payroll taxes, pay the employees, invoice the customers, own and collect the accounts receivable and their proceeds, and deduct all money due it before remitting money to the franchisee, the franchisor controls the franchisee, and the two firms are affiliated. DECISION HOLLEMAN, Administrative Judge: Jurisdiction This appeal is decided under the Small Business Act of 1958, 15 U.S.C. Section 631 et seq., and 13 C.F.R. Parts 121 and 134. [1] Issue Whether a temporary employment agency operating under a franchise agreement which provides that the temporary employees will be the employees of the franchisor, and the franchisor will finance the payroll, process the payroll, pay the payroll taxes, pay the employees, invoice the customers, own the accounts receivable and their proceeds, and deduct all money due it before remitting money to the franchisee, is affiliated with its franchisor. I. BACKGROUND A. Procedural Background On March 18, 2002, the Department of Veterans Affairs, James A. Haley Veterans' Hospital, in Tampa, Florida (VA), issued the subject solicitation for on-site medical billing services. The Contracting Officer (CO) set the procurement totally aside for small businesses and assigned to it North American Industry Classification System (NAICS) code 524298 (All Other Insurance Related Activities), with an annual receipts size standard of $6 million. [2] Initial offers were due April 8, 2002. On May 13, 2002, the CO awarded the contract to Garvin Enterprises, Inc. d/b/a Lloyd Staffing (Appellant), and notified the other offerors of the awardee. On May 16, 2002, Seaborn Healthcare, Inc. (Seaborn), filed a timely size protest with the CO. Seaborn alleged Appellant is affiliated with Lloyd Personnel Systems, Inc. (Lloyd), an undisputed large concern. On May 17, 2002, the CO issued a stop work order to Appellant. On May 20, 2002, the CO forwarded the protest to the Small Business Administration's (SBA) Office of Government Contracting, Area III, in Atlanta, Georgia, for a size determination. Later that same day, the SBA reassigned this matter to its Office of Government Contracting, Area IV, in Chicago, Illinois (Area Office), for processing. The Area Office file contains Appellant's corporate documents, Federal income tax returns, financial statements, loan papers, and office lease; Lloyd's Offering Circular; the Franchise Agreement and Modification No. 1; and Appellant's response to the protest allegations. These documents show Appellant was incorporated in the State of Florida on February 17, 2000, and Jacquelyn D. Garvin and Samuel M. Garvin, Jr. are its only shareholders, officers, and directors. Appellant, by itself, is below the applicable size standard, but if combined with Lloyd, it would be other than small. On June 11, 2002, the Area Office issued its size determination. The Area Office found Appellant affiliated with Lloyd and, therefore, other than small. The Appellant received the size determination on June 14, 2002. B. The Franchise Agreement The Franchise Agreement provides that Lloyd will be the legal employer of all temporary employees whose services Appellant provides to its customers. Lloyd will employ these temporary employees, finance the payroll, process the payroll, pay the payroll taxes, pay the temporary employees, and invoice the customers for their services. The accounts receivable and proceeds of all collected accounts belong to Lloyd. Lloyd deducts money from its payments to Appellant for any sums due it under the Franchise Agreement. Appellant may not do business with any customer Lloyd does not deem creditworthy. The Franchise Agreement contains the schedule of fees charged Appellant by Lloyd. Appellant pays royalties on its gross profits, surcharges if the prime interest rate rises above 10%, a fee to cover national advertising, a fee if it transfers the business, a termination fee, a fee for arbitrating disputes with Lloyd, a fee of 98% of an account if it becomes delinquent, and an audit fee. Appellant's office location, layout, office equipment, signs, stationery and advertising material are all subject to approval by Lloyd. Lloyd specifies the accounting procedures and formats and computer software Appellant will use. Appellant will maintain its own permanent employees who will devote their full time to Appellant's business. These employees may not be independent contractors. Lloyd will train these permanent employees. In event of termination, Appellant must assign its lease and telephone number to Lloyd. C. The Size Determination The Area Office reviewed the provisions of the Franchise Agreement, and characterized the financial relationship between the firms by stating that Appellant does not pay Lloyd, rather Lloyd pays Appellant, and compared Appellant to a salesperson working on commission. The temporary employees Appellant locates and the customers it develops do not become its employees or customers; rather, they are Lloyd's employees and customers. Applying this Office's precedent in Size Appeals of Dani Enterprises, Inc. and C. Patrick Kennedy, SBA No. SIZ-3345 (1990), reaffirmed on reopening, SBA No. SIZ-3379 (1990) (hereinafter referred to collectively as Dani), and 13 C.F.R. Section 121.103(a)(3), the Area Office determined the Franchise Agreement gave Lloyd control over Appellant, and thus the firms were affiliated. D. The Appeal Appellant filed its appeal with this Office on July 1, 2002. The appeal contains 12 attachments, including the contract award documentation, stop-work order, and several items that also are in the Area Office file. On July 2, 2002, the Administrative Judge notified the parties of this appeal, and ordered the SBA to file its comments by July 23rd, with Appellant's reply to the SBA's comments due on August 6, 2002, the date the record would close. On July 19, 2002, Appellant moved to admit the attachments to its appeal into the record. On July 22nd, the CO filed the award documentation and the stop work order. On July 23rd, the SBA filed its comments, and Seaborn, the protestor below, filed its response to the appeal. On August 1, 2002, the International Franchise Association (IFA) submitted a letter in support of the appeal. This letter was not served on all parties. On August 6, 2002, Appellant filed its reply to the SBA's comments. On that same day, Appellant moved to further supplement the record with six exhibits. On August 7, 2002, Spherion Corporation (Spherion) submitted a letter in support of the appeal. This letter was not served on all parties. On August 15, 2002, the Administrative Judge convened a telephone conference with the parties to discuss the closure of record, the availability of a protective order for Appellant's proprietary and confidential information, and the unserved letters this Office had received from the IFA and Spherion regarding this matter. On August 21, 2002, Appellant filed a request for a protective order. Also that day, IFA and Spherion filed certificates of service for their letters, and Express Personnel Services (EPS) filed a letter in support of the appeal, with a certificate of service. On August 23, 2002, the SBA filed an opposition to Appellant's August 6th motion to further supplement the record. Also on August 23rd, Time Services, Inc. filed a statement, not properly served on all parties. On August 26, 2002, Accountants, Inc. did the same. Also on August 26, 2002, the Administrative Judge issued a protective order. [3] On August 28, 2002, EPS filed a statement, properly served on all parties. E. New Evidence on Appeal This Office's regulations limit the role of new evidence, submitted on appeal, which the Area Office has not had the opportunity to consider. Such evidence may be admitted only if a motion is filed and served establishing good cause for its submission. See 13 C.F.R. Section 134.308(a). This Office allows such evidence only when it finds the evidence is relevant to the issues on appeal, does not unduly enlarge those issues, and has the potential to clarify the facts on those issues. See Size Appeal of Pointe Precision, LLC, SBA No. SIZ-4434, at 4 (2001). Appellant provided twelve attachments with its appeal. Attachments A through G and I either are already in the Area Office file or are part of the contract documentation. Accordingly, these do not require a ruling. Attachment H is a declaration by Jacquelyn D. Garvin, Appellant's principal. Exhibit J is the declaration of Vincent Albanese, Chief Financial Officer of Lloyd, Appellant's franchisor. Attachment K is the declaration of Joel A. Klarreich, an attorney and self- described expert on the legal problems of the franchise industry. Attachment L is a copy of a blank Instrument of Assignment. Appellant argues Attachment L is relevant as an example of a common contract financing arrangement, which it asserts is similar to that used by Appellant, and supports one of its arguments on appeal. The Administrative Judge concurs, and ADMITS the document. Attachments H, J, and K constitute Appellant's main argument in this case. They are relevant and do not unduly enlarge the issues, and therefore the Administrative Judge ADMITS them into evidence. Appellant also provided six exhibits on August 6, 2002, in reply to the Agency's Response. [4] Exhibits A, B, and C are declarations of its employees, describing their duties. Exhibit D is another declaration of Ms. Garvin, disputing the Area Office's interpretation of the Franchise Agreement. Exhibit E is an unsigned, undated copy of a modification to the Franchise Agreement. Exhibit F is a copy of information posted on the website of the National Association of Professional Employer Organizations (NAPEO). The Administrative Judge finds Exhibits A through C are repetitive of other information already in the record and do not enlarge the understanding of the issues here, and accordingly, EXCLUDES them. Exhibit D is argument about a document which speaks for itself, and is thus EXCLUDED. Exhibit E is in the Area Office file. Exhibit F merely provides more information from a trade association website and is not relevant to this case, and is EXCLUDED. F. Arguments on Appeal 1. The Appeal Appellant asserts this Office erred in its decision in Dani. There, this Office held that, where the employees of a franchised temporary employment agency were employees of the franchisor (rather than of the franchisee), and the franchisor handled all bookkeeping, payroll, and billing, the franchisor had control over the ultimate product of the franchisee, and thus the franchisor and two franchisees were affiliated. Appellant argues the practices this Office found as indicia of affiliation are, in fact, normal industry practices. Appellant asserts Dani failed to adequately analyze and explain why these practices constitute control. Appellant makes nine arguments. First, Appellant asserts the handling of payroll is a ministerial service which Lloyd performs as a service for its franchisee. It makes little difference from the standpoint of the employees and the customers who pays them. This is service for the franchisee, which it could have performed elsewhere, but has performed by the franchisor. Similarly, the billing and collection functions are ministerial services. Further, Appellant asserts: "Lloyd depends on the collections, made possible only by timely billings, to recoup the loan made to Garvin by advancing the payroll costs paid each pay period to the temporary employees." Appeal at 18. These collections are Lloyd's source of payment of royalties and surcharges provided for in the franchise agreement. Appellant asserts obligations are created once an employee works, and there is no discretion in the payment which Lloyd must make once this has happened. Appellant further argues that since it is in direct touch with the clients, Appellant, not Lloyd, controls the process. Appellant has the capacity to harm, and thus to control, Lloyd by mishandling client relations. Second, Appellant asserts Lloyd performs the payroll and billing functions for legitimate business reasons. Lloyd provides a form of financing for the franchisee, and protects its mark and good name. Also, this practice maximizes Appellant's profits, by offering economies of scale, the franchisor's expertise, and by performing these functions in place of a commercial payroll service. Third, Appellant asserts franchisor processing of payroll and billing is a customary and common practice in the temporary employee services industry. Appellant points to a phrase in Dani, which referred to this practice as a "noncustomary intrusion" into the operations and management of franchisees, and asserts this statement is in error and thus Dani's holding is erroneous. Fourth, Appellant asserts its practice is analogous to bank financing through assignment of claims under Government contracts. This practice is common among Government contractors, and has not resulted in any findings of affiliation between banks and their customers. Fifth, Appellant asserts SBA's own regulations provide that businesses which lease employees from concerns primarily engaged in leasing employees, or which enter into a co-employer agreement with a Professional Employer Organization (PEO), are not affiliated with the leasing company or the PEO. See 13 C.F.R. Section 121.103(b)(4). Appellant faults Dani for not considering this rule, and argues this rule is inconsistent with, contradicts, and undermines the holding in Dani. Sixth, Appellant asserts this Office's case law is not consistent. Appellant points to Size Appeal of Coastal Base Services, SBA No. SIZ-3662 (1992) (hereinafter Coastal Base). Appellant claims there is no difference between the relationships held to constitute affiliation in Dani and those found not to constitute affiliation in Coastal Base. Appellant asserts Coastal Base is correct. Appellant argues the fact the billing arrangements in Coastal Base were optional is irrelevant, as they still could result in a finding of control, if analyzed under the Dani precedent. Seventh, Appellant also points to Size Appeal of B&L, LLC d/b/a Orange Grove Medical Specialties, P.A., SBA No. SIZ-4279 (1997) (hereinafter Orange Grove) as another inconsistent case. Appellant asserts this case properly holds that extensive control over the administration of a firm's business does not result in a finding of affiliation. Eighth, Appellant argues Dani is based upon a fundamental error. The product of the temporary services firm is not, as Dani held, the temporary employees. Rather, it is the services the firm provides to locate, recruit, hire, train, promote, discipline the temporary employees, and to match them with the customers' needs. Ninth, Appellant asserts the size determination is factually erroneous. The size determination characterizes Appellant as working for Lloyd, because customers remit their payments to Lloyd, which takes its share and sends Appellant the remainder. Appellant asserts this is form over substance, and contains little analysis or reasoning why this constitutes control. Appellant asserts there are factors which indicate its independence from Lloyd, such as lack of common ownership and common management. Further, Appellant has sole responsibility for recruiting, hiring, training and firing the temporary employees; selection of clients; and control over certain other business decisions. No Lloyd employees are Appellant's employees. Other provisions the Area Office cited as indicia of control are dismissed as customary to the industry. In addition, Appellant asserts this case is distinguishable from Dani because Appellant bears the full burden of uncollectible accounts. This emphasizes the fact that Appellant has the right to make a profit and bears a risk of loss, commensurate with its work. As relief, Appellant requests this Office to reverse the size determination for the instant and future contracts, and to conclude that Appellant is eligible for the 8(a) program. 2. The Agency Response SBA asserts billing and collecting is a fundamental element of any business. An independent business has control over its income and expenditures. The central issue here is who ultimately controls the accounts receivable. The legitimate business reasons Appellant relies on to justify the relationship are irrelevant. SBA also asserts Appellant's contention that Lloyd must employ the temporary employees to ensure compliance with employment laws and protect its mark is meritless. Appellant already employs its own office staff, and non-franchised temporary employment concerns have to comply with the employment laws. Further, all franchisors are concerned with protecting their mark and good name, yet many manage to do so without creating affiliation with their franchisees. SBA points to provisions of the franchise agreement assigning its lease and telephone numbers to Lloyd upon termination of the franchise and requiring it to immediately transfer its entire business to Lloyd as further evidence of affiliation. SBA also distinguishes Appellant's franchise arrangement from an assignment of claims, which, first is optional; second, is generally contract-specific; and third, is an arm's-length transaction. SBA further asserts its regulation dealing with PEOs was written so as not to disturb this Office's existing precedent on franchise affiliation. SBA further asserts cases Appellant claims are inconsistent with its precedent are not. In Coastal Base, the billing arrangement was voluntary. In Orange Grove, the ultimate product the challenged firm was offering was medical services, and thus not controlled by the management firm. SBA asserts the ultimate product of a temporary employment concern is the temporary employees provided by the concern to its customers. This product is provided by Lloyd, as these workers are its employees. Appellant provides the services it describes not so much to the government as to Lloyd, whose employees it locates, recruits, hires, trains, promotes, and disciplines. SBA further asserts many of the provisions of the franchise agreement regarding billing establish that Lloyd controls Appellant. Lloyd has complete discretion to deduct from the receivables any costs, fees, or penalties it determines are due it under the franchise agreement, prior to remitting to Appellant. These can include amounts due Lloyd for failure to acquire Lloyd's written consent for certain transactions, or to maintain adequate insurance, a surcharge if the prime rate exceeds 10%, advertising, late payments, delinquent charges, and audit fees. Finally, SBA points to provisions that Appellant may not do business with any client Lloyd does not find creditworthy, and a prohibition against employing any of its own office staff as independent contractors as further evidence of control. 3. Appellant's Reply Appellant reasserts that temporary employees are not the product of temporary staffing firms. Appellant points to the extensive services it provides. The essence of the services is the "skill, creativity, imagination, persistence, knowledge, innovation, interpersonal skills and other human qualities" Appellant provides to its customers. Reply at 11. The services can be summarized as finding prospective customers; determining their needs; and finding, training, assigning and supervising the temporary employees the customers require. Appellant denies that billing and collecting is a fundamental part of an independent business. Appellant also disputes SBA's characterization of the assignment of claims process. They are not always contract-specific, but may include all the firm's receivables. Further, while they are arm's- length transactions, so are franchise agreements. While they are optional, so is entering into franchise agreements. Appellant asserts Lloyd seeks to ensure labor law compliance not because Appellant is unable to do so but, because if it failed to do so, Lloyd's reputation would suffer, and this should not be an indicia of affiliation. Appellant reasserts SBA's regulation excluding PEOs is inconsistent with the Dani precedents, as PEOs routinely co- employ employees and perform the same functions Lloyd and other franchisors perform for their franchisees. Appellant asserts SBA has not properly distinguished Coastal Base, and the voluntary nature of the affiliation there should not be determinative. Appellant asserts the concept of affiliation by election is unknown to this Office's case law, and should not be decisionally significant. Appellant also asserts it cannot compete for federal contracts unless it is as an eligible small business. Appellant further asserts SBA's characterization of the franchise agreement is in error. Appellant will provide the services, not Lloyd. Appellant disputes the characterization Lloyd will really provide the services to the VA under the contract, because Appellant will be the party to the contract and will provide the services required. Further, the transfer of the contract is prohibited by law (41 U.S.C. Section 15), so Lloyd could not have a role in the contract and a novation would be required for Lloyd to step in if Appellant could not perform. Appellant also asserts it has negotiated a special provision for the termination of its business. Lloyd has first right of refusal to purchase the business at Appellant's price. If Lloyd does not meet this price, Appellant can sell to another buyer. Appellant asserts franchising industry practices are very relevant to the issue of whether Appellant and Lloyd are affiliated. The fact that this arrangement is customary to the industry is further evidence Lloyd is not interested in managing and controlling Appellant. Finally, Appellant asserts SBA failed to address some of its arguments. Appellant bears the risk of loss commensurate with its ownership because it bears 98% of the costs of uncollected revenues. SBA failed to comment on the list of factors that establish Appellant controls its business through management, such as the fact none of Lloyd's officers, directors, or key employees had any ownership interest or any management role in Appellant. SBA also ignored the many aspects of Appellant's business it clearly does control. SBA also made no attempt to demonstrate how control can arise from the simple ministerial fact Lloyd technically employs the temporary employees and handles the billing. 4. Other Pleadings Seaborn, the protestor below, opposes the instant appeal. It asserts the Area Office's size determination followed this Office's long-established, applicable precedent. Seaborn further asserts Appellant's argument its financing arrangement is similar to an Assignment of Claims is inapposite because an assignment of claims from Appellant to Lloyd would violate 41 U.S.C. Section 15. Seaborn points to other provisions of the Franchise Agreement which demonstrate Appellant's economic dependence upon Lloyd, such as a non-competition provision. IFA's, Sperion's, and EPS's filings generally repeat Appellant's arguments that Dani was wrongly decided, that this Office's precedents are inconsistent, and that Dani is inconsistent with industry practices. [5] II. DISCUSSION A. The Standard of Review Appellant filed the instant appeal within 15 days of receiving the size determination and, thus, the appeal is timely. 13 C.F.R. Section 134.304(a)(1). Appellant has the burden of proving, by a preponderance of the evidence, all elements of its appeal. Specifically, it must prove the Area Office size determination is based on a clear error of fact or law. See Size Appeal of Rebmar, Inc., SBA No. SIZ-4173, at 4 (1996); 13 C.F.R. Section 134.314. After examining the record, and considering Appellant's asserted points of error, the Administrative Judge concludes Appellant has failed to meet its burden. It is undisputed that Appellant, by itself, is below the applicable size standard, and that Lloyd is large. Thus, the only substantive issue raised in this appeal is whether the Area Office erroneously found Appellant affiliated with Lloyd. Firms are affiliated when one firm controls or has the power to control the other. See 13 C.F.R. Section 121.103(a)(1). Among the factors SBA considers in determining whether affiliation exists are a firm's contractual relationships. See 13 C.F.R. Section 121.103(a)(2). In the case of franchises, SBA's regulations provide that restraints imposed on a franchisee relating to standardized quality, advertising, accounting format, and other similar provisions generally will not be considered in determining affiliation, but that affiliation may arise through other means. See 13 C.F.R. Section 121.103(g). It is clear, and indeed, it is undisputed, that the Area Office applied this Office's Dani line of precedent in determining Appellant's size, and that the precedent is applicable here. Appellant launches a frontal assault on this line of precedent, asserting it must be overturned. Accordingly, the Administrative Judge must consider this line of cases. B. The Dani Precedents Dani involved two firms which were franchisees of Norrell Services, Inc. (Norrell), a large employment firm. Norrell's contract with its franchisees provided all the temporary employees furnished to customers were hired by the franchisees, but were Norrell's employees. Norrell provided their pay and benefits, handled all bookkeeping and payroll accounts, and billed the customers. Franchisees paid Norrell a continuing fee equal to 60% of gross profits or 15% of net billings, whichever was greater. The losses from uncollectible accounts were borne 60% by Norrell, 40% by the franchisees. This Office found this franchise agreement resulted in Norrell controlling its franchisees, and thus the franchisees were affiliates of Norrell. Dani, SBA No. SIZ-3345, at 5. This Office reopened the matter on its own motion to consider filings made after the first decision issued. The Dani appellants argued the provisions of Norrell's contract were normal to a franchise agreement, and were necessary for Norrell to perform payroll and billing functions provided for in the agreement. The Dani appellants also argued they had considerable discretion in the operation of their businesses, including recruiting, training, assigning, and disciplining the temporary employees; selecting clients; all decisions regarding their own permanent office staff, as well handing their pay and benefits; and handling advertising and insurance on their own. Further, the Dani appellants asserted the arrangement was standard in the temporary help industry. This Office rejected the Dani appellants' arguments. This Office concluded first, Norrell, not the franchisees, controlled the franchisees' ultimate product, the temporary employees' personnel services the franchisees provided to customers. Second, the billing and collection process was a fundamental element of any business, and Norrell clearly controlled that aspect of the franchisees' business. Third, Norrell bore 60% of the losses from uncollectible accounts, and thus the franchisees did not bear the risk of loss in a manner characteristic of an independently owned and operated business. This Office went on to hold that, under these conditions, the franchisor had the power to control the franchisee, and the firms were thus affiliated. Dani, SBA No. SIZ-3379, at 6. The Dani appellants, together with Norrell, filed a complaint for declaratory and injunctive relief against SBA in the U. S. District Court for the District of Columbia to restrain the Agency from enforcing this Office's decisions. The Dani appellants argued because the franchisees had the right to profit and bore the risk of loss, and there was no evidence of shared management, centralized stock ownership, or centralized business or contractual decision-making, this Office should not have concluded the franchisor and franchisees were affiliated. The court rejected these arguments, and held this Office's decision was not arbitrary and capricious, but based upon a reasonable interpretation of SBA's regulations clearly consistent with the plain meaning of the regulations and the Congressional mandate embodied in the Small Business Act. Dani Enterprises, Inc., et al. v. U. S. Small Business Administration, 757 F. Supp. 99, 102-106 (D.D.C. 1991). This Office has consistently applied Dani over the past 12 years, relying upon the precedent numerous times in its decisions. [6] C. The Merits of the Appeal 1. The Coastal Base Precedent Appellant first asserts this Office has been inconsistent in applying the Dani precedent. It relies largely on two cases, Coastal Base and Orange Grove. In Coastal Base, however, the temporary employees whose services the franchisee provided to its customers were not reported as being the franchisor's, rather than the franchisee's, employees. See Coastal Base, at 2- 4. Regardless of industry practice, in assessing a precedent we must evaluate it in light of the facts as reported in the case. Accordingly, the Administrative Judge must conclude there is a vitally important distinction between the facts in Coastal Base, on the one hand; and in Dani, its progeny, and the instant case, on the other. Further, the contract in Coastal Base provided the franchisor would handle the franchisee's payroll and billing only at the franchisee's option. Id. Appellant argues this second distinction is irrelevant, because if the franchisee exercises it, the franchisor will still be controlling its payroll and billing. Appellant argues SBA does not recognize the concept of affiliation by election. However, this is not true. The concept is properly identified as affiliation through contractual arrangements, which result in one firm controlling another. 13 C.F.R. Section 121.103(a)(2). The franchisee in Coastal Base had options as to how it would handle its payroll and billing. The franchisees in Dani, like Appellant, had no option, and thus were more subject to the franchisor's control than the franchisee in Coastal Base. Accordingly, the Administrative Judge concludes Coastal Base is not inconsistent with Dani, but rather is distinguishable, because the temporary employees whose services the franchisee was providing to its customers were not the employees of the franchisor and the franchisee had the option of either turning its payroll and billing functions over to the franchisor, or making other arrangements. 2. The Orange Grove Precedent In Orange Grove, this Office held a medical practice was not affiliated with a large management firm which handled all of its non-medical administrative functions. The basis for the holding was that, by retaining control over all the medical aspects of its practice, the challenged firm had retained control of the core of its business, and its ultimate product. Orange Grove, at 7-9. The management firm was clearly the medical firm's servant. It is important to note that Orange Grove did not involve a franchise, and thus is distinguishable from Dani on those grounds. Appellant argues, however, the arrangement is sufficiently similar that the precedent is applicable. Appellant's reliance on Orange Grove goes to the core of its argument and its assertion of a fundamental flaw at Dani's heart. What is the ultimate product of Appellant and similar temporary help firms? Appellant argues the declarations it submits establish its product is the services the firm provides to identify prospective customers; determine their needs; and find, train, assign, and supervise the temporary employees the customers require. Performing these services requires "skill, creativity, imagination, persistence, knowledge, innovation, interpersonal skills and other human qualities." Appellant's declarations provide an impressive discussion of the range of tasks Appellant performs and the diligence with which it performs them. However, the final judge of a firm's ultimate product must be its customers; the question being, what do they seek to procure? Here, the VA seeks to procure temporary personnel to perform billing services. The Solicitation is concerned with the qualifications, training, and ability of the temporary personnel the eventual awardee will supply, not with the efforts of the awardee in finding, training, and assigning those temporary personnel. Solicitation, at 5-13, 42-43. This is true of any customer of temporary personnel services. The product they seek to procure is the temporary personnel and the services these employees perform. Appellant's argument confuses the efforts and tasks needed to produce and supply its product to its customers with the product itself. One does not seek to purchase from General Motors marketing skill, design expertise, and manufacturing efficiency; one seeks to purchase an automobile. Here, Appellant's product is the temporary employees and the services they perform. These employees are Lloyd's employees, and Lloyd controls their payroll, invoices for their services, and collects the accounts receivable their services generate, turning over to Appellant only those funds due it under the Franchise Agreement. This leads to the inescapable conclusion that Lloyd controls the core of Appellant's business, and its ultimate product. Accordingly, the Dani precedent and instant case are clearly distinguishable from Orange Grove. 3. Other Arguments Appellant's argument that payroll, billing, and collection are mere ministerial services is without merit. These functions are the handling of the firm's cash flow, the very heart of any business. Further, it is instructive that Appellant's own brief stresses how important it is to Lloyd that Lloyd handles this cash flow, as Lloyd depends upon these collections to obtain payments. The Franchise Agreement appears to arrange Appellant's fiscal affairs with an emphasis on what is to Lloyd's advantage, not Appellant's. Lloyd's control of these functions is an important indicator of its control over Appellant. It may be important to Lloyd that Appellant only does business with customers it deems creditworthy, but this is a judgment independent businesses usually make for themselves. Similarly, the fact Appellant lacks the discretion to decide whether its own staff will be employees or independent contractors is also an indication of control by Lloyd. The fact there may be good business reasons for this does not change the fact that Appellant's cash all flows into Lloyd, any money it receives comes from Lloyd, and this leaves Lloyd with a significant amount of control over Appellant. That the obligation to make payments arises when a temporary employee works does not alter the fact it is Lloyd who controls the money and makes the payments. Appellant's argument that Lloyd has no discretion in the making of payments is belied by the fact that it is Lloyd which holds the money, and decides what deductions must be made and what payments are due. If Appellant disagrees with Lloyd's calculations, it must resort to arbitration. Simply put, Lloyd controls Appellant's money. [7] That Appellant's mishandling of client relations could harm Lloyd does not alter the reality that it is Lloyd who bills, collects, and disburses all the funds. Further, Appellant gives the discretion to decide under what terms it will retain its own personnel. They must be employees, not independent contractors. Appellant does appear to have established that this type of arrangement is customary for many firms in the temporary employment industry. In that sense, Dani's finding that such an arrangement is a "noncustomary intrusion" is incorrect. However, Dani's finding, viewed in the context of business in general, is correct. Even in franchise arrangement, it is highly unusual for one firm to give another such complete control over its cash flow. And it is the element of control to which SBA must look in determining affiliation. The fact it is customary in the temporary employment industry for the franchisor to take such a degree of control does not diminish the fact that the control exists, and it results in affiliation between franchisor and franchisee. Appellant seeks an exception for its industry from normal rules of affiliation based on its industry practices. This is a policy question, and thus beyond this Office's jurisdiction. Appellant's argument that SBA's regulation on PEOs supports its position is meritless. The regulation provides that concerns which lease employees from concerns engaged in leasing employees (i.e., firms like Appellant's customers) or which enter into a co-employment arrangement with a PEO (i.e., firms like the challenged firm in Orange Grove) are not affiliated with the leasing firm or the PEO. 13 C.F.R. Section 121.103(b)(4). SBA first issued this rule in its 1996 revision of its regulations. [8] See 60 Fed. Reg. 57982, 57985, 57996 (Nov. 24, 1995) (proposed rule); 61 Fed. Reg. 3280, 3287 (Jan. 31, 1996) (final rule). The regulation was revised in 2000 to include a specific reference to PEOs. See 65 Fed. Reg. 35810 (June 6, 2000) (final rule). In the 2000 revision, the accompanying preamble clearly stated the rule was narrowly written "so as not to impact findings of affiliation based on control or other grounds." Id. at 35812. The commentary also clearly stated that where a franchise agreement gave the franchisor control of the temporary employees the franchisee leases out, the firms are affiliated. See Id. at 35812. The regulation is part of the section where SBA sets out certain narrowly defined exceptions to findings of affiliation, in situations where, but for the exception, there might otherwise be a finding of affiliation. See 13 C.F.R. Section 121.103(b). It is clear this regulation was precisely tailored to cover only firms which utilized PEOs and customers of temporary employment agencies, and not cover temporary employment firms which are franchisees of large firms. Appellant's assertion of inconsistency in inapposite. A narrowly tailored exception is of course not entirely consistent with a general principle. In this case, SBA made a policy decision an exception was appropriate and enacted the exception under its rulemaking authority using proper rulemaking procedures. SBA also clearly left undisturbed the Dani line of precedent. Appellant's argument that its financial relationship with Lloyd is analogous to assignment of claims financing is also inapposite. Such assignments may be made only to banks or similar financial institutions. See 41 U.S.C. Section 15; 48 C.F.R. Section 32.802(b). Conventional arm's-length financing of this sort is not a basis for a finding of affiliation. See Size Appeal of Calcasieu Refining Company, SBA No. SIZ-3583, at 16 (1992). On the other hand, financing, when combined with other factors which give the firm extending the financing control or the power to control the challenged firm, is a basis for a finding of affiliation. See Size Appeal of American Guard Services, SBA No. SIZ-4397, at 6-8 (2000). [9] Appellant's receipt of financing from Lloyd, in the context of the other provisions of the Franchise Agreement, is clearly another indicium of control. Appellant's remaining arguments amount to the assertion that the Area Office erred in failing to find that the various aspects of its business it clearly does control establish that Appellant does have control over its business, despite the other provisions of the Franchise Agreement. Appellant's bearing the burden of uncollectible accounts is one example. After reviewing Appellant's pleading and declarations, the Administrative Judge concludes the Area Office did not err in rejecting Appellant's argument. The Area Office was relying on this Office's clear, long established precedent that a franchise agreement containing provisions similar to those in the Franchise Agreement between Appellant and Lloyd amounted to a degree of control which necessitated a finding of affiliation. While there are factors, among them Appellant's bearing the burden of uncollectible accounts, lack of common ownership and management between the firms, and its special provision for termination of the business, which weigh against a finding of affiliation, they are outweighed by the many provisions discussed above which establish Lloyd's control over Appellant and mandate a finding of affiliation. The other factors Appellant raised demonstrate the firm is not a shell, and its officers and employees perform real work. They do not, however, outweigh the provisions of the Franchise Agreement which establish Lloyd's control over Appellant. 4. Summary Appellant seeks to overturn one of this Office's long- established precedents. Dani was carefully considered by this Office, which reached the conclusion that, in the case of a temporary services firm, where there is a franchise agreement which provides that the temporary employees leased out by the firm are to be the franchisor's employees; the franchisor controls the payroll, billing and collection of the franchisee; and the agreement provides the franchisor will control 60% of the firm's uncollectible accounts, that franchise agreement gives the franchisor control or the power to control the franchisee, and the firms are thus affiliated. Dani was affirmed by the U.S. District Court, and has remained undisturbed for twelve years. SBA has rewritten its regulations several times since Dani was decided, and yet has left this precedent undisturbed. Further, SBA carved out an exception to its affiliation rules dealing with PEOs, yet made clear this exception did not disturb Dani. Appellant now seeks to overturn this precedent. Appellant argues Dani lacks analysis; yet one wonders if any degree of analysis would suffice for Appellant. Appellant's stock in trade, the product it supplies to its customers, is a corps of temporary employees who are, in fact, Lloyd's employees. Lloyd controls all the money for the business. It bills for the temporary employees' services, collects the accounts receivable, and pays the employees. Lloyd then remits those sums due Appellant, after deducting those sums due to Lloyd. There is an extensive schedule of fees Appellant must pay Lloyd. Money is the heart of any business, its reason for being, and it is frivolous to take any other position. Lloyd controls Appellant's cash flow. Lloyd also has a great deal of control over many aspects of the day-to-day operation of Appellant's business. Simply put, this Franchise Agreement is far more restrictive than the one considered in Dani. The degree of control the Franchise Agreement gives Lloyd mandates a finding of affiliation between the firms. Appellant's argument there are good business reasons for the arrangements is inapposite. First, it is clear from Appellant's own brief that many of these arrangements are for Lloyd's benefit, which reinforces the conclusion they lead to Lloyd's controlling Appellant. Second, merely because an arrangement is a good business practice does not preclude a finding that one firm controls another. Even accepting Appellant's argument that the Franchise Agreement embodies good business practices, the control it grants Lloyd mandates a finding of affiliation. Appellant had a choice to make, between independence and sheltering under Lloyd's wing. Having made the one choice, it cannot expect the benefits meant for those who choose the other. In essence, Appellant is making a policy argument here that Dani is bad law, bad policy, and franchisees in the temporary employment industry should have an exclusion from affiliation coverage. As noted above, this Office is not the forum for this argument. This Office must enforce the regulations as written, relying on our established precedents. Under both the regulations and the case precedent, it is clear Appellant is affiliated with Lloyd, and thus other than small, and that therefore Appellant has failed to establish that the Area Office erred in its size determination. III. CONCLUSION For the above reasons, the Administrative Judge AFFIRMS the Area Office's size determination and DENIES the instant appeal. [10] This is the final decision of the Small Business Administration. 13 C.F.R. Section 134.316(b). __________________________________ CHRISTOPHER HOLLEMAN Administrative Judge _________________________ The Small Business Administration has revised its regulations governing the small business size determination program and its regulations governing size appeals. 67 Fed. Reg. 47244 (July 18, 2002). However, because the size determination which is the subject of this appeal was issued prior to the September 16, 2002, effective date of this rule, the prior regulations apply to this appeal. 2 Effective February 22, 2002, the SBA changed the size standard for NAICS code 524298 to $6 million. 67 Fed. Reg. 3041, 3051 (Jan. 23, 2002). 3 The Administrative Judge has reviewed the record, and concludes that he has not included in this decision any proprietary material requiring a Protective Order covering the decision itself. This decision does not discuss in detail the material in the declarations Appellant submitted. The provisions of the Franchise Agreement are discussed, as they are in all of this Office's franchise decisions. To redact them would render the decision unintelligible. Appellant's financial information is not discussed. Accordingly, this decision is not being issued under the Protective Order. 4 The six exhibits are: Exhibit A, Declaration of Deborah J. Egan (Egan Declaration); Exhibit B, Declaration of Lance E. Goldstein (Goldstein Declaration); Exhibit C, Declaration of Kurt A. Halls (Halls Declaration); Exhibit D, Supplemental Declaration of Jacquelyn D. Garvin, with two attachments (Second Garvin Declaration); Exhibit E, Modification No. 1 to the Franchise Agreement and related correspondence; and Exhibit F, Material from the National Association of Professional Employer Organizations (NAPEO material). Exhibit E is also in the Area Office file. 5 The pleadings of Time Services, Inc. and Accountants, Inc. are not considered here, because they were not properly filed and served. 13 C.F.R. Sections 134.204, 134.307. However, they also largely repeat Appellant's arguments. 6 See, e.g. Size Appeal of Hawaii Personnel Services, Inc. d/b/a ADECCO, SBA No. SIZ-4341 (1999); Size Appeal of Evins Personnel Consultants, Inc., SBA No. SIZ-4245 (1997); Size Appeal of Western Temporary Services, Inc., SBA No. SIZ-3677 (1992). 7 Lloyd's Offering Circular states Lloyd may deduct money from its payment to Appellant without express authorization in the Agreement. Lloyd's Offering Circular, at 8. 8 It thus goes without saying that this Office could not have taken the rule into account in Dani, decided six years prior to the promulgation of the rule. 9 Appellant is correct that an assignment of its contracts to Lloyd might run afoul of 41 U.S.C. Section 15. In this context, the SBA's statement that Lloyd, not Appellant, is providing the services under the contract might be viewed not as error, but as an overstatement, based on the fact that Lloyd's employees will perform the actual services procured. 10 Appellant's plea that it be admitted to the 8(a) program is beyond this Office's jurisdiction, even if it had prevailed in its appeal. SBA's regulations governing eligibility for and admission to the 8(a) program are found at 13 C.F.R. Sections 124.101 - 124.207. Posted: April, 2003