September 29, 2020

The Department of Housing and Urban Development (HUD) has published, via separate notices: (1) a final rule updating its Section 3 regulations in a stated effort to, among other things, create additional incentives for employers to retain and invest in their low- and very low-income workers; and (2) final benchmarks for measuring compliance with the final rule’s Section 3 reporting requirements.

Background

HUD’s Section 3 program is intended to ensure that employment, training, contracting, and other economic opportunities generated by certain HUD financial assistance programs are directed to low- and very low-income persons, especially recipients of government assistance for housing, and to businesses that provide economic opportunities to low- and very low-income persons.  This final rule replaces the interim guidance issued by the Obama Administration, which was rescinded by President Trump in 2017.  Through this rule, HUD is finalizing numerous changes that are generally geared towards ending the incentives that employers on HUD-funded projects currently have to fulfill their Section 3 new hire obligations by creating a series of short-term jobs and hiring and firing employees.  The final rule seeks to alter this practice by changing the metric used to evaluate Section 3 compliance from the number of new hires to a percentage of hours worked.  HUD asserts that this change will provide an incentive to employers to create longer-term employment opportunities and career ladders for low- and very-low income people.

This final rule will apply to: (1) Public Housing Financial Assistance, which covers Section 5 development assistance, Section 9(e) operations and management assistance, and Section 9(d) development, modernization, and management assistance; and (2) Section 3 projects, which covers HUD program assistance used for housing rehabilitation, housing construction and other public construction projects that generally exceed a $200,000 project threshold, or any Section 3 project funding from HUD’s Lead Hazard Control and Healthy Homes programs that generally exceeds a $100,000 project threshold.  In a modification from the proposed rule, the final rule provides that the HUD Secretary may adjust the general $200,000 threshold for Section 3 projects, through a Federal Register Notice subject to public comment, in order to ensure Section 3 compliance.  In addition, under the proposed rule, Lead Hazard Control and Health Homes programs were subject to the general $200,000 project threshold.  However, after receiving comments suggesting a lower threshold for such projects as they are usually smaller in nature, HUD is adopting a $100,000 project threshold for all projects that receive funding from HUD’s Lead Hazard Control and Healthy Homes programs.

Tracking and Reporting of Labors Hours

Of particular note, HUD is finalizing a requirement to track and report labor hours, instead of new hires, in an attempt to measure the actual employment of low- and very-low income workers and the proportion of the total employment performed by low- and very low-income workers on Section 3 projects.  According to HUD, this method of tracking and reporting is more consistent with business practices for most construction contractors working on HUD assisted or insured projects.  The final rule will not require the establishment of a detailed time-and-attendance system and will instead permit employers who do not track hours through such a system to report a “good faith assessment” of the labor hours of a full-time or part-time employee. 

“Section 3 Workers,” “Targeted Section 3 Workers,” and “Section 3 Business Concerns”

To reflect the statutory priorities for public housing programs and other HUD assistance programs, HUD is finalizing definitions for “Section 3 Workers” and “Targeted Section 3 Workers.”  Under this rule, HUD will define a Section 3 Worker for both Public Housing Financial Assistance and Section 3 projects as a worker that meets one of the following criteria: (1) the worker’s income is below the income limit established by HUD; or (2) the worker is employed by a Section 3 business concern.  However, the final rule will define a “Targeted Section 3 Worker” differently for Public Housing Financial Assistance and Section 3 projects.  For Public Housing Financial Assistance, HUD will define Targeted Section 3 Workers as: (1) employees of a Section 3 business concern; (2) residents of public housing projects or Section 8-assisted housing; (3) residents of other projects managed by the PHA that is expending assistance; or (4) current YouthBuild participants.  For Section 3 projects, Targeted Section 3 Workers will be: (1) employees of a Section 3 business concern; (2) low- or very low-income workers residing within the service area or the neighborhood of the project; or (3) current YouthBuild participants.  A Section 3 business concern will be defined as a business concern meeting one of the following requirements: (1) at least 51 percent owned by low- or very low-income persons; (2) over 75 percent of the labor hours performed for the business are performed by low- or very low-income persons; or (3) at least 51 percent owned by current public housing residents or residents who currently live in Section 8-assisted housing (which is an increase from the 25 percent threshold in the proposed rule).

HUD notes that under the proposed rule, labor hours for Section 3 workers and Targeted Section 3 workers could be counted as long as the worker met the definition of a Section 3 worker or Targeted Section 3 worker at the time of hire.  Based on public comments and further consideration, however, HUD now states that a worker whose income has risen should only be counted for Section 3 purposes for a limited time period.  As a result, HUD has updated the final rule to provide that for purposes of reporting the labor hours for Section 3 workers and Targeted Section 3 workers, an employer may choose whether the workers are defined as Section 3 workers for a five-year period at the time of the workers’ hire or when the workers are first certified as meeting the Section 3 worker definition.

Other Final Rule Provisions

In addition, the final rule provides for how to track funding and to report benchmarks when there is a project that is funded by Public Housing Financial Assistance and also meets the criteria as a Section 3 project.  The final rule also addresses reporting for a Section 3 project that receives housing and community development assistance from two different HUD programs.  Finally, the rule establishes a framework under which HUD program offices will incorporate Section 3 compliance and oversight into their regular program oversight and will make Section 3 a more integral part of the program’s work. 

Section 3 Reporting Benchmarks

The final rule requires recipients of public housing financial assistance and recipients that fund a Section 3 project to report on whether they have met certain benchmarks.  These benchmarks are based on ratios of Section 3 Workers and Targeted Section 3 Workers in comparison to all workers and are intended to monitor grantees’ abilities to direct HUD financial assistance to these workers.  These benchmarks will serve as safe harbors, with HUD presuming that recipients that certify compliance and meet the benchmarks are in compliance with Section 3 requirements.  These benchmarks will be set by notice and updated at least every three years as HUD gathers new data.  As noted above, HUD has published a separate notice providing its initial benchmarks.

The benchmark for Section 3 projects is: (1) 25 percent or more of the total number of labor hours worked by all workers on a Section 3 project are worked by Section 3 Workers; and (2) five percent or more of the total number of labor hours worked by all workers on a Section 3 project are worked by Targeted Section 3 Workers.  HUD notes that it is also finalizing one alternative for the Public Housing Financial Assistance benchmark that is: (1) 25 percent or more of the total number of labor hours worked by all workers employed with public housing financial assistance in the public housing authority’s (PHA) or other recipient’s fiscal year are worked by Section 3 Workers; and (2) five percent or more of the total number of labor hours worked by all workers employed with public housing financial assistance in the PHA’s or other recipient’s fiscal year are Targeted Section 3 Workers. Under the proposed rule, HUD had included a “new hires” formula as an additional alternative for PHAs, which the agency is not retaining in the final rule due to a belief that the consideration of new hires provides an incomplete measure of the employment and local contracting opportunities available to low- and very low-income persons envisioned by the Section 3 statute.

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