Emerging Small Business Enterprise Policy Statement

NJDOT ESBE Policy Statement Revised as of March 17, 2011

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NEW JERSEY DEPARTMENT OF TRANSPORTATION

EMERGING SMALL BUSINESS ENTERPRISE

POLICY STATEMENT

I. PURPOSE

The New Jersey Department of Transportation (NJDOT) has established

an Emerging Small Business Enterprise (ESBE) certification in order to

meet the maximum feasible portion of its Disadvantaged Business

Enterprise (DBE) goal through race-neutral means in accordance with

regulations of the U.S. Department of Transportation (USDOT), 49 CFR

Parts 26.51 and 26.39.

II. IMPLEMENTATION

To ensure that the maximum feasible portion of the overall DBE goal is

met by using race-neutral means, NJDOT will establish ESBE participation

goals on its federally funded contracts. Prime contractors may use DBE

and/or ESBE firms in order to satisfy these ESBE goals.

ESBE contracting goals for USDOT federally funded construction projects

will be determined by the NJDOT Contractor Compliance Unit with the

help of the NJDOT Bureau of Construction Services. The Contractor

Compliance Unit and Bureau of Construction Services will review the

construction firm’s Engineer’s Estimate, for a specific project, to identify

the items typically subcontracted by a prime contractor on similar projects.

This review will determine the subcontracting opportunities on that project

and approximate percentage that will be subcontracted to ESBE and DBE

firms.

In the case of professional services agreements, NJDOT will set ESBE

goals at the same level as the overall goal. For example, if the overall

goal is 15.61%, then NJDOT will set the ESBE goals on its professional

services agreements at 15.61%, provided that there are subconsulting

opportunities on those agreements.

NJDOT only counts DBE participation when reporting progress toward

meeting DBE goals. ESBE participation is not counted. ESBE certification

exists solely for the benefit of the DBE program. NJDOT will monitor the

effect of ESBE certification on DBE utilization. If it is determined that

ESBE certification has a negative impact on DBE utilization, then NJDOT

reserves the right to limit, discontinue, or eliminate ESBE certification.

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III. APPLICABILITY

This policy applies only to NJDOT construction and consultant contracts

funded in whole or in part with federal financial assistance. This policy is

not applicable to the award of NJDOT contracts for the purchase of

commodities or on any 100 percent state-funded contracts.

Applications and questions regarding eligibility as an ESBE should be

addressed to:

Disadvantaged and Small Business Programs Unit

Division of Civil Rights and Affirmative Action

New Jersey Department of Transportation

1035 Parkway Avenue

PO Box 600

Trenton, NJ 08625-0600

IV. DEFINITIONS

The NJDOT will adopt the definitions contained in 49 CFR Part 26.5 for

this policy.

V. ELIGIBILITY FOR ESBE CERTIFICATION

In general, to be eligible for ESBE certification, the firm must be a small

business, according to SBA size standards, and be 51% owned, and

controlled by one or more economically disadvantaged individuals whose

personal net worth does not exceed $1.32 million.

Eligibility Guidelines for ESBE certification:

a. Ownership - The business must be 51% owned by an economically

disadvantaged person.

b. Business Size Determination - The business (including its affiliates)

must be a small business as defined by SBA standards. It must not

have annual gross receipts over $22.41 million in the previous three

fiscal years. Under SAFETEA-LU, this threshold will be adjusted

annually for inflation by the Secretary.

c. Personal Net Worth - Only persons having a personal net worth

(PNW) of less than $1.32 million can be considered as a potential

qualified ESBE. Items excluded from a person's net worth

calculation include an individual's ownership interest in the

applicant firm, and his or her equity in their primary residence.

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d. Independence - The business must not be tied to another firm in

such a way as to compromise its independence and control.

e. Control – An owner seeking certification must possess the power to

direct or cause the direction of the management and policies of the

firm. The owner must also have an overall understanding of, and

managerial and technical competence and experience directly

related to, the type of business in which the firm is engaged. 49

CFR 26.71

f. Burden of Proof Allocation - Applicants carry the initial burden of

proof regarding their eligibility and must demonstrate that they meet

all requirements concerning group membership or individual

disadvantage, business size, ownership, and control. 49 CFR 26.61

VI. RULES GOVERNING DETERMINATIONS OF OWNERSHIP

a. In determining whether the economically disadvantaged

participants in the firm own and control the business, all the facts in

the record must be viewed as a whole.

b. The firm’s ownership by economically disadvantaged individuals

must be real, substantial and continuing, going beyond the pro

forma ownership as reflected in its ownership documents. The

economically disadvantaged owners must enjoy the customary

incidents of ownership and share in the risks and profits

commensurate with their ownership interests, as demonstrated by

the substance, not merely the form, of arrangements.

c. All securities that constitute ownership of a firm shall be held

directly by economically disadvantaged individuals. Except as

provided in this paragraph, no securities or assets held in trust, or

by any guardian for a minor, are considered as held by

economically disadvantaged persons in determining the ownership

of the applicant business. However, securities or assets held in

trust, or by any guardian for a minor, are considered as held by an

economically disadvantaged individual for purposes of determining

ownership under the following circumstances:

i. The beneficial owner of securities or assets held in trust is

an economically disadvantaged individual, and the trustee is

the same or another such individual; or

ii. The beneficial owner of a trust is an economically

disadvantaged individual who, rather than the trustee,

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exercises effective control over the management,

policymaking, and daily operational activities of the applicant

business. Assets held in a revocable living trust may be

counted only in the situation where the same economically

disadvantaged individual is the sole grantor, beneficiary, and

trustee.

d. The contributions of capital or expertise by the economically

disadvantaged owners to acquire their ownership interests must be

real and substantial. Examples of insufficient contributions include a

promise to contribute capital, an unsecured note or mere

participation in the firm’s activities as an employee.

e. The following requirements apply to situations in which expertise is

relied upon as part of an economically disadvantaged owner’s

contribution to acquire ownership:

i. The owner’s expertise must be:

1. In a specialized field;

2. Of outstanding quality;

3. In areas critical to the business’ operations;

4. Indispensable to the business’ potential success;

5. Specific to the type of work the business performs;

and

6. Documented in the records of the business. The

records must clearly show the contribution of

expertise and its value to the business.

ii. The individual whose expertise is relied upon must have a

significant financial investment in the business.

f. For purposes of determining ownership, the Department shall deem

as being held by an economically disadvantaged individual, all

interests in a business or other assets obtained by the individual:

i. As the result of a final property settlement or court order in a

divorce or legal separation, provided that no term or

condition of the agreement or divorce decree is inconsistent

with this section; or

ii. Through inheritance, or otherwise because of the death of

the former owner.

g. All interests in a business, or other assets obtained by the

economically disadvantaged owner as a result of a gift or transfer

without adequate consideration, from any non-economically

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disadvantaged individual or non-ESBE firm will be presumed not to

be held by the economically disadvantaged owner if the non-

economically disadvantaged individual or non-ESBE firm is:

i. Involved in the same business for which the individual is

seeking certification, or an affiliate of the business;

ii. Involved in the same or similar line of business; or

iii. Engaged in an ongoing business relationship with the

applicant business, as an affiliate of the applicant business.

h. To overcome the presumption and permit the interests or assets to

be counted, the economically disadvantaged individual must

demonstrate by clear and convincing evidence, that:

i. The gift or transfer was made for reasons other than

obtaining ESBE certification, and

ii. The economically disadvantaged individual actually controls

the management, policy and operations of the business,

notwithstanding the continuing participation of the non-

economically disadvantaged individual who provided the gift

or transfer.

i. The Department will apply the following rules in situations in which

marital assets form a basis for ownership of the business:

When marital assets (other than the assets of the business in

question) are held jointly or as community property by both

spouses, are used to acquire the ownership interest asserted by

one spouse, the Department shall deem the ownership interest in

the firm to have been acquired by that spouse with his or her own

individual resources, provided that the other spouse irrevocably

renounces and transfers all rights in the ownership interest in the

manner sanctioned by the laws of the state in which either

spouse or the firm is domiciled. The Department does not count a

greater portion of joint or community property assets toward

ownership than state law would recognize as belonging to the

economically disadvantaged owner of the applicant firm.

VII. RULES GOVERNING DETERMINATIONS OF CONTROL

a. In determining whether economically disadvantaged owners control

a firm, the Department will consider all the facts of the record,

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viewed as a whole.

b. Only an independent business may be certified as an ESBE. An

independent business is one the viability of which does not depend

on its relationship with another firm or firms.

i. In determining whether a potential ESBE is an independent

business, the Department will scrutinize its relationships with

non-ESBE businesses in such areas as personnel, facilities,

equipment, financial and/or bonding support, and other

resources.

ii. The Department will consider whether present or recent

employer/employee relationships between the ESBE owner

of the applicant business and non-ESBE business or

persons associated with non-ESBE businesses compromise

the independence of the applicant business.

iii. The Department will examine the applicant firm’s

relationships with prime contractors to determine whether a

pattern of exclusive or primary dealings with a prime

contractor compromises the independence of the potential

ESBE.

iv. In considering factors related to the independence of a

potential ESBE, the Department will consider the

consistency of relationships between the potential ESBE

firms and non-ESBE firms with normal industry practice.

c. The firm must not be subject to any formal or informal restrictions

which limit the customary discretion of the economically

disadvantaged owners. There can be no restrictions through

corporate charter provisions, by-law provisions, contracts or any

other formal or informal devices (e.g. cumulative voting rights,

voting powers attached to different classes of stock, employment

contracts, requirements for concurrence by non-economically

disadvantaged partners, conditions precedent or subsequent,

executive agreements, voting trusts, restrictions on or assignments

of voting rights) that prevent the economically disadvantaged

owners, without the cooperation or vote of any non-economically

disadvantaged individual, from making any business decision of the

business. This paragraph does not preclude a spousal co-

signature on financial, real estate or banking documents as may be

required.

d. The economically disadvantaged owners must possess the power

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to direct or cause the direction of the management and policies of

the business and to make day-to-day as well as long-term

decisions on matters of management, policy and operations.

i. The economically disadvantaged owner must hold the

highest officer position in the business (e.g., chief executive

officer or president).

ii. In a corporation, the economically disadvantaged owners

must control the board of directors.

iii. In a partnership, one or more economically disadvantaged

owners must serve as general partners, with control over all

partnership decisions.

e. Individuals who are not economically disadvantaged may be

involved in the applicant business as owners, managers,

stockholders, officers, and/or directors. Such individuals must not,

however, possess or exercise the power to control the business, or

be disproportionately responsible for the operations of the

business.

f. The economically disadvantaged owners of the business may

delegate various areas of the management, policymaking, or daily

operations of the business to other participants in the business,

regardless of whether these participants are economically

disadvantaged individuals. Such delegations of authority must be

revocable, and the economically disadvantaged owners must retain

the power to hire and fire any person to whom such authority is

delegated. The managerial role of the economically disadvantaged

owners in the business’s overall affairs must be such that the

Department can reasonably conclude that the economically

disadvantaged owners actually exercise control over the business’

operations, management, and policies.

g. The economically disadvantaged owners must demonstrate to the

Department’s satisfaction that they have an overall understanding

of, and managerial and technical competence and experience

directly related to the type of work or service in which they are

engaged. The economically disadvantaged owners are not

required to have experience or expertise in every critical area of

their business’ operations, or to have greater experience or

expertise in a given field than managers or key employees,

however, the economically disadvantaged owners must have the

ability to intelligently and critically evaluate information presented

by other participants in the firm’s activities and to use this

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information to make independent decisions concerning the firm’s

daily operations, management and policymaking. Generally,

expertise limited to office management, administration, or

bookkeeping functions unrelated to the business’s activities will be

insufficient to demonstrate control.

h. If state or local law requires an owner to have a particular license or

other credential in order to own and/or control a certain type of

business, then the economically disadvantaged person(s) who

owns and controls the applicant firm must possess the required

license or credential. If state or local law does not require such a

person to have such a license or credential to own and/or control a

business, the Department will not deny certification solely on the

ground that the person lacks the license or credential. However,

the Department may take into account the absence of the license or

credential as one factor in determining whether the economically

disadvantaged owner(s) actually control the business.

i. The Department shall consider differences in remuneration

between the economically disadvantaged owners and other

participants in the firm in determining whether to certify a firm as an

ESBE. Such consideration shall be in the context of the duties of

the persons involved, normal industry practices, the firm’s policy

and practice concerning reinvestment of income, and any other

explanations for the differences proffered by the business. The

Department may determine that an applicant firm is controlled by its

economically disadvantaged owner although that owner’s

remuneration is lower than that of some other participants in the

business.

In a case where a non-economically disadvantaged individual

formerly controlled the applicant business, and an economically

disadvantaged individual now controls it, the Department may

consider differences in salary of the former and current owner of

the applicant firm as a factor in determining who controls the firm,

particularly when the non-economically disadvantaged individual

remains involved with the business and continues to receive

greater compensation than the economically disadvantaged

individual.

j. In order to be viewed as controlling the business, an economically

disadvantaged owner cannot engage in outside employment or

have other business interests that conflict with the management of

the business or prevent them from devoting sufficient time and

attention to the affairs of the business to control its activities. For

example, absentee ownership of a business and part-time work in a

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full-time business are not viewed as constituting control. However,

an individual could be viewed as controlling a part-time business

that operates only on evenings and weekends, if the individual

controls it all the time it is operating.

k. An economically disadvantaged individual may control a business

even though one or more of the individual’s immediate family

members (who themselves are not economically disadvantaged

individuals) participate in the firm as a manager, employee, owner,

or in another capacity. Except as otherwise provided in this

paragraph, the Department shall make a judgment about the

control the economically disadvantaged owner exercises vis-à-vis

other persons involved in the business, as in other situations

without regard to whether or not the other persons are immediate

family members.

l. If the Department cannot determine that the economically

disadvantaged owners, as distinct from the family as a whole,

control the firm, then the economically disadvantaged owners have

failed to carry the burden of proof concerning control, even though

they may participate significantly in the business’s activities.

m. Where a business was formerly owned and/or controlled by a non-

economically disadvantaged individual (whether or not an

immediate family member), and ownership and/or control were

transferred to an economically disadvantaged individual, and the

non-economically disadvantaged individual remains involved with

the business in any capacity, the economically disadvantaged

individual now owning the business must demonstrate to the

Department, by clear and convincing evidence, that:

i. The transfer of ownership and/or control was made for

reasons other than obtaining certification as a ESBE; and

ii. The economically disadvantaged individual actually controls

the management, policy and operations of the business,

notwithstanding the continuing participation of a non-

economically disadvantaged individual who formerly owned

and/or controlled the business.

n. In determining whether a firm is controlled by its economically

disadvantaged owners, the Department will consider whether the

business owns the equipment necessary to perform its work.

However, the Department shall not determine that a firm is not

controlled by economically disadvantaged individuals solely

because the business leases, rather than owns, such equipment,

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where leasing equipment is a normal industry practice and the

lease does not involve a relationship with a prime contractor or

other party that compromises the independence of the business.

o. The Department shall grant certification to a firm only for the

specific types of work in which the economically disadvantaged

owners have the ability to control the firm. To become certified in

an additional type of work, the firm need demonstrate to the

Department that its economically disadvantaged owners are able to

control the firm with respect to that type of work.

p. A business operating under a franchise or license agreement may

be certified if it meets the standards in this subpart and the

franchiser or licenser is not affiliated with the franchisee or licensee.

In determining whether affiliation exists, the Department may

consider the restraints relating to standardized quality, advertising,

accounting format, and other provisions imposed on the franchisee

or licensee by the franchise agreement or license, provided that the

franchisee or licensee has the right to profit from its efforts and

bears the risk of loss commensurate with ownership. Alternatively,

even though a franchisee or licensee may not be controlled by

virtue of such provisions in the franchise agreement or license,

affiliation could arise through other means, such as common

management or excessive restrictions on the sale or transfer of the

franchise interest or license.

q. In order for a partnership to be controlled by an economically

disadvantaged individual, any non-disadvantaged partners must not

have the power, without the specific written concurrence of the

economically disadvantaged partner(s), to contractually bind the

partnership or subject the partnership to contract or tort liability.

r. The economically disadvantaged individuals controlling a firm may

use an employee leasing company. The use of such a company

does not preclude the economically disadvantaged individuals from

controlling their firm if they continue to maintain an employer-

employee relationship with the leased employees. This includes

being responsible for hiring, firing, training, assigning, and

otherwise controlling the on-the-job activities of the employees, as

well as ultimate responsibility for wage and tax obligations related

to the employees.

VIII. ADDITIONAL ELIGIBILITY REQUIREMENTS

a. Consideration of whether a firm performs a commercially useful

function or is a regular dealer pertains solely to counting toward

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ESBE goals the participation of firms that have already been

certified as ESBEs. Except as provided in this paragraph, the

Department will not consider commercially useful function issues in

any way in making decisions about whether to certify a firm as a

ESBE.

b. The Department may consider, in making certification decisions,

whether a firm has exhibited a pattern of conduct indicating its

involvement in attempts to evade or subvert the intent or

requirements of the DBE Program.

c. The Department shall evaluate the eligibility of a firm on the basis

of present circumstances. A firm will not be refused certification

based on historical information indicating a lack of ownership or

control of the firm by economically disadvantaged individuals at

some time in the past, if the firm currently meets the ownership and

control standards of this part. Nor will the Department refuse to

certify a firm solely on the basis that it is a newly formed firm.

d. ESBE firms and firms seeking ESBE certification shall cooperate

fully with requests for information relevant to the certification

process. Failure or refusal to provide such information is a ground

for denial or removal of certification.

e. Only firms organized for profit may be eligible for ESBE

certification. Not-for-profit organizations, even though controlled by

economically disadvantaged individuals, are not eligible for ESBE

certification.

f. An eligible ESBE firm must be owned by individuals who are

economically disadvantaged. Except as provided in this paragraph

a firm that is not owned by economically disadvantaged individuals,

but instead is owned by another firm cannot be an eligible ESBE.

g. If economically disadvantaged individuals own and control a firm

through a parent or holding company, established for tax,

capitalization or other purposes consistent with industry practice,

and the parent or holding company in turn owns and controls an

operating subsidiary, the Department may certify the subsidiary if it

otherwise meets all requirements of this policy statement. In this

situation, the individual owners and controllers of the parent or

holding company are deemed to control the subsidiary through the

parent or holding company and must be economically

disadvantaged as defined under this policy.

h. The Department may certify such a subsidiary only if there is

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cumulatively 51 percent ownership of the subsidiary by

economically disadvantaged individuals.

i. Recognition of a business as a separate entity for tax or corporate

purposes is not necessarily sufficient to demonstrate that a firm is

an independent business, owned and controlled by economically

disadvantaged individuals.

j. The ESBE applicant will not be required to be prequalified as a

condition for certification.

IX. CERTIFICATION PROCEDURES FOR EMERGING SMALL BUSINESS

ENTERPRISES

a. A business may apply to the Department at any time to be certified

as an Emerging Small Business Enterprise. Such application must

be made on the application form supplied by the Department. All

firms wishing to participate on projects with ESBE goals must be

certified in accordance with this policy.

b. If a business is to be counted as an Emerging Small Business

Enterprise for the purpose of meeting the ESBE goals for a specific

contract, the business must be certified by the Department. In the

event a business is not certified by the Department, the complete

certification application must be received by the Division of Civil

Rights and Affirmative Action in accordance with the following

schedule:

i. A business that wants to be counted as an Emerging Small

Business Enterprise for the purpose of meeting the

established ESBE contract goals for a specific contract at

the time of the award of that contract, shall submit its

completed application at least 15 calendar days prior to the

date for the receipt of bids for that contract.

ii. A business that wants to be considered as an Emerging

Small Business Enterprise for the purpose of meeting

established ESBE contract goals for a specific contract,

either as an additional or replacement subcontractor after

work on the contract has commenced, shall submit its

completed application at least 15 calendar days prior to

submitting a request for Approval to Sublet (Form DC-18) to

the Department.

iii. Failure by an uncertified business to submit a completed

application for certification for a specific contract in

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accordance with this subsection shall result in the applicant

firm not being considered for certification for that contract.

c. All applications must be completed in their entirety before they will

be considered by the Department. If an applicant knowingly

supplies false or inaccurate information, the applicant shall be

disqualified, and may be subject to further penalties as provided by

law.

d. The business, or any principal owner of the business, must not

have been debarred or convicted of bid-related crimes or violations

within the past six years in any state or federal jurisdiction, or be

under notice of intent to debar in any jurisdiction.

X. APPROVAL OR DENIAL OF CERTIFICATION AS AN EMERGING

SMALL BUSINESS ENTERPRISE

a. When an applicant is approved by the Department as an Emerging

Small Business Enterprise, the business will be notified in writing of

such certification. The certification shall be effective as of the date

of approval and shall be valid for a three year period unless

revoked by the Department. ESBE firms shall be required to

provide update information and complete a “No Change Affidavit”

each year, if applicable, for renewal of their Emerging Small

Business Enterprise certification.

b. When an applicant is denied certification as an Emerging Small

Business Enterprise, it shall be notified in writing of the reasons for

that decision. The applicant may request an informal hearing by

writing to the Department within 20 State business days of receipt

of said denial notice. The burden of proof of eligibility shall be upon

the applicant in any such proceeding. The applicant is not

prohibited from contracting with the Department during the

pendency of its appeal; however, it will be unable to participate on

any contract as an ESBE.

c. If an applicant requests an informal hearing on the denial of its

application the Department shall schedule an informal meeting at

which time the applicant may present additional information to

contest the cited deficiencies and further support its application.

The Commissioner, or his or her designee, shall review this

additional information and the applicant shall be advised of the

Department’s final decision within 30 business days of the informal

meeting.

d. When the Department intends to decertify an Emerging Small

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Business Enterprise for failure to meet the requirements of this

policy, or as the result of a third-party challenge, the business shall

be notified in writing of the department’s intent to decertify and the

reasons why. An investigation may be conducted by the Division of

Civil Rights and Affirmative Action to determine the validity of any

third-party allegations. If a preliminary determination is made to

decertify the firm, the firm will be given an opportunity to appeal the

findings either in person at an informal hearing, and/or in writing.

The business may request an informal hearing by writing to the

Department within 20 business days of receipt of said notice of

Intent to Decertify. The ESBE firm will be notified of the

Department's decision within 30 business days following the

informal hearing. The business shall be eligible to participate as an

Emerging Small Business Enterprise in the ESBE goal program

during the pendency of its appeal to the Department.

e. If a firm’s ESBE certification is denied or revoked by the

Department, the applicant may not reapply for ESBE certification

for a period of one (1) year from the final date of the denial or

decertification decision letter by the NJDOT.

XI. SEVERABILITY

If any section, subsection, provision, clause or portion of this Policy is

adjudged unconstitutional or invalid by a court of competent jurisdiction,

the remainder of this Policy shall not be affected thereby.

XII. REVIEW

The operation of the program contained in this Policy and the need for its

continuation shall be reviewed by the Commissioner annually.

XIII. AUTHORITY

49 CFR 26.51, 49 CFR 26.39, 49 CFR 26.23