Labor & Employment Law Daily Wrap Up, FEDERAL REGULATIONS—SBA proposes overhaul of small business size standards, (Aug 19, 2026)

By Brandi O. Brown, J.D.

Thousands of mid-sized employers could soon gain access to small-business programs under a proposal that would replace many revenue-based tests with employee-count thresholds and broaden eligibility across hundreds of industries.

Today, the U.S. Small Business Administration shared a proposal that would reshape what qualifies as a “small business” for federal contracting, lending, and regulatory purposes. The proposal consists of two related Federal Register publications scheduled for August 20: a proposed rule establishing new size standards across hundreds of industries and a companion notice releasing a revised methodology that would fundamentally change how those standards are calculated.

At the center of the initiative is SBA’s effort to simplify a system that currently contains nearly 1,000 separate size standards tied largely to six-digit North American Industry Classification System (NAICS) codes. Under the proposal, SBA would reduce that framework to 338 size standards by moving largely to four-digit industry groups and some five-digit industries, while eliminating existing contracting-related exceptions. SBA says the change is intended to reduce confusion and make it easier for businesses, lenders, and contracting officials to determine eligibility.

One of the most significant aspects of the proposal is SBA’s broad move away from revenue-based standards and toward employee-based standards. According to the SBA, it “has repeatedly received petitions to raise size standards or use employee-based standards so that small firms can continue to stay relevant in their industry and withstand rapid, ever-changing economic realities, additional requirements in contracts expanding what the government is procuring, changing costs of doing business, shrinking margins, and various other shifts that the prior SBA size standards were unable to swiftly react to.”

Employee count as default. Now, the agency proposes to use employee counts as the default measurement whenever the law allows. SBA argues that employment figures are more stable than revenue because they are less affected by inflation, productivity gains, or year-to-year business fluctuations. Under the proposal, many industries currently measured by annual receipts would instead be measured by workforce size.

The proposed rule substantially increases many size standards. SBA estimates the changes would increase the number of businesses classified as small from approximately 6.34 million to 6.46 million, adding about 114,541 firms to the small-business category. The agency projects that roughly 37,000 firms that already hold federal contracts would become newly eligible as small businesses, representing more than $71 billion in fiscal year 2025 contract obligations.

The proposal may also affect employer compliance obligations beyond procurement. SBA notes that qualifying as a small business can influence how federal agencies apply the Regulatory Flexibility Act and other regulatory programs. The agency points to recent regulatory activity involving small-business lending requirements as an example of how small-business classifications can affect compliance burdens and regulatory obligations. More firms qualifying as small could therefore gain access to regulatory flexibilities or delayed compliance timelines in future rulemakings.

“Benefit cliff” before. The companion methodology document provides insight into the agency’s policy rationale. SBA argues that prior standards created a “benefit cliff” that discouraged growth because businesses risked losing access to small-business programs once they crossed an eligibility threshold. The revised methodology is intended to give firms more room to expand while remaining eligible for federal contracting preferences and SBA-backed financing.

Rather than relying on factors such as concentration ratios, average firm size, or federal contracting disparities, SBA proposes a new market-based framework focused on three measures: national industry size, the number of geographic markets in which competition occurs, and adjustments for imports and exports. According to SBA, these factors better reflect the statutory requirement that a small business be “not dominant in its field of operation.”

No lowering. Another notable element is SBA’s decision not to lower size standards even where its calculations might support reductions. The agency cites inflation, economic pressures, and concerns about restricting access to capital and contracting opportunities. SBA emphasizes that lowering standards could reduce small-business participation in federal contracting programs, limit growth opportunities, and adversely affect employment and economic development.

The proposed rule is subject to public comment, and SBA is soliciting feedback on both the revised size standards and the underlying methodology.

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