REGULATORY FLEXIBILITY ACT



The Regulatory Flexibility Act (RFA) of 1980 is a law designed to make government agencies review all regulations that they impose to ensure that they do not place a disproportionate economic burden on small business owners and other small entities. The Regulatory Flexibility Act was intended to extend protection to three different types of small entities in the United States: small businesses (as defined by the Small Business Administration); small organizations (nonprofit establishments that are independently owned and operated and not dominant in their field); and small governmental jurisdictions (defined as governments of cities, counties, towns, townships, villages, school districts, and other districts with populations of less than 50,000).

In the years following the enactment of the RFA, however, many small business owners contended that agencies too often ignored the law. Periodic attempts to revise the RFA failed until March 1996, when the Small Business Regulatory Enforcement Fairness Act (SBREFA) became law. This new legislation cast the Regulatory Flexibility Act in an entirely new light, for it amended the 1980 law to allow for judicial review of government agencies' compliance with it.

Before the 1996 law was passed, small business owners had had no legal recourse when faced with regulations that they felt were unfair to smaller companies. "There was no statutory requirement that forces an agency to do an analysis," explained one spokesman for the Senate Committee on Small Business in Nation's Restaurant News. With the passage of the Small Business Regulatory Enforcement Fairness Act, however, "a small entity, including businesses—if an agency rule seems unfair—can challenge it in court. And if they prevail, they can modify it or strike it to reduce the impact on that entity."

LEGISLATIVE HISTORY OF THE RFA

Prior to 1980, American small businesses were forced to adhere to the same regulations as far larger companies, even though they did not have nearly the same resources to bring to bear. Entrepreneurs and directors of nonprofits repeatedly charged that when regulations put forth by the Environmental Protection Agency (EPA), the Occupational Safety and Health Administration (OSHA), and other agencies were applied evenly, without regard to the size of the enterprises affected, they sometimes did serious damage to smaller organizations. Such regulations had to do with taxes, workplace safety, and the environment, among other issues.

As the Small Business Administration noted in its Guide to the Regulatory Flexibility Act, "the costs of complying with a particular regulation … may be manageable for a business with 500 or more employees, or revenue in the millions of dollars. On the other hand, a smaller company may not have the ability to absorb the expenses as easily, to set competitive prices, to devise innovations or even to continue as a viable entity." The Guide added that as more businesspeople and politicians investigated the situation, "evidence indicated that uniform application of federal regulatory requirements imposed increases in the economies of scale and affected small entities' ability to compete effectively. Reports … cited these disproportionate economic burdens on small business as contributing to declines in productivity, competition, innovation, and the relative market shares of small business."

The passage of the RFA in 1980, then, was meant to blunt much of the burden that regulatory changes were laying on the shoulders of small businesses. According to the RFA, each agency was supposed to analyze how its regulations affected the ability of small businesses to compete. In addition, RFA directed agencies to balance the needs of small business with the benefits of the regulation being considered. The law called for agencies to propose regulatory alternatives for smaller companies that would be unduly hurt if forced to adhere to the original regulations. The Regulatory Flexibility Act still allowed agencies to put together needed regulatory measures in such realms as workplace safety and environmental protection, but it meant to give a greater voice to small businesses by encouraging agencies to listen to small business concerns and study ways in which regulations could be adjusted for them.

During the 1980s, however, many entrepreneurs and other members of the business community came to feel that the RFA was an unacceptably weak law. The law—which actually went into effect on January 1, 1981—included no legal penalties that could be imposed on agencies that did not follow the Act's guidelines, so some agencies paid little attention to the RFA. Observers felt that some agencies were simply recalcitrant, while others, burdened by inadequate budgets, did not have the resources to satisfactorily address the issues laid out in the RFA. Most observers granted that the Regulatory Flexibility Act was valuable in certain cases, but by the early 1990s there was a growing clamor in the small business community and Congress for an amended RFA.

In September 1993 President Clinton signed Executive Order 12866, which highlighted the responsibilities of government agencies to adhere to the principles of RFA. That same year, the Clinton administration's National Performance Review task force formally recommended that agency compliance with the RFA be subject to judicial review. Less than three years later, in March 1996, a number of major amendments to the RFA—including provisions adding judicial review—became law with the passage of the Small Business Regulatory Enforcement Fairness Act.

SMALL BUSINESS REGULATORY ENFORCEMENT FAIRNESS ACT

The 1996 act included several components that drew praise from small business owners. While the addition of judicial review of agency compliance with the RFA received the bulk of attention, the amendments also gave agencies additional responsibilities in the areas of policy review and outreach, and gave non-agency entities (small businesses, Congress) more influence in the regulatory process.

JUDICIAL REVIEW The Small Business Regulatory Enforcement Fairness Act amended the RFA so that small businesses finally had legal recourse when confronted with regulations that they felt did not adhere to the RFA. It created a complaint process whereby small businesses can seek review of the rule in court. Under the 1996 amendments, noted the SBA, "the court may review the final regulatory flexibility analysis, the agency's certification that the rule has no impact on small entities, and the agency's compliance with periodic reviews of current rules. Under the amendment, judicial review also applies to interpretative rulemakings promulgated by the IRS [Internal Revenue Service]." (Prior to the 1996 legislation, interpretative rulemakings of the IRS had been exempt from the RFA because of provisions of the Administrative Procedure Act.) In addition, the RFA now includes a provision that reimburses small business operators for legal fees incurred if they successfully challenge a regulation as overly harsh.

PERIODIC REVIEWS SBREFA reinforced RFA review guidelines for government agencies. Under the amended RFA, agencies are required to review all existing regulations to see if they have a significant economic impact on meaningful numbers of small entities (businesses, nonprofits, small government bodies). In situations where a "significant" impact is found, the agency in question is directed to review the regulations and determine whether they should remain in place, be revised, or be rescinded. Factors to be evaluated include: continued need for the regulation; impact of industry and economic trends on the regulation; public comments on the regulation's strengths and weaknesses; complexity of the regulation; and extent to which the regulation overlaps, duplicates, or conflicts with already existing federal, state, or local laws.

OUTREACH RFA now requires both OSHA and EPA to put together small business advocacy review panels every time they propose a regulation that is likely to have a big economic impact on a large number of small businesses. This information-gathering step is designed to solicit small business input on both the likely compliance costs of the regulations and possible mutually acceptable regulatory alternatives. A report reflecting the results of the review panel meetings is then prepared.

In addition, federal agencies are directed under RFA to publish a listing of all proposed or final regulations expected to be implemented during the following year. This requirement, say proponents, provides small business owners with more time to study the regulations and their likely impact on their establishments. Finally, the RFA now requires agencies to prepare easily understandable guide books to help businesses comply with regulations.

EXPANDED AUTHORITY FOR CHIEF COUNSEL FOR ADVOCACY The 1996 amendments to the RFA expanded the authority of the SBA's chief counsel for advocacy. The RFA now allows the chief counsel—who has been formally designated to monitor agency compliance with the law—to file amicus briefs in situations where regulations are being reviewed in court.

LEGISLATIVE REVIEW A provision of the 1996 legislation established a 60-day review period during which Congress will be able to reject any new regulations that are held to be unnecessary.

Despite these changes, however, some critics contend that SBREFA has not lived up to expectations in its first two years of existence. "The law was supposed to open up a new era of federal friendliness toward entrepreneurs," wrote Stephen Barlas in Entrepreneur. "And while it's premature to call the law a bust, SBREFA's shortcomings are becoming readily apparent." Detractors argued that Congress showed little inclination to exercise its increased powers of legislative review, and they claimed that other review panels called for in SBREFA have been slow to take shape.

For further information on the Regulatory Enforcement Act, contact the Office of Advocacy of the Small Business Administration, Washington, DC.

FURTHER READING:

Allen, Robin Lee. "Regulatory Bill Lets Small Operators Flex Muscles." Nation's Restaurant News. April 22, 1996.

Barlas, Stephen. "In Limbo." Entrepreneur. December 1997.

Barlas, Stephen. "Regulatory Relief: A New Bill to Ease Small-Business Burdens Just May Make It through Congress." Entrepreneur. April 1996.

Neese, Terry. "Boosting Small Business Opportunities with RFA." LI Business News. June 11, 1999.

SBA Advocacy—Guide to the Regulatory Flexibility Act. Washington: U.S. Small Business Administration, 1997.

Warner, David. "Putting the Brakes on Federal Rules." Nation's Business. March 1995.



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