In recent years there has been a flurry of activity over the misuse by contractors of woman- and minority-owned business enterprises (“WMBE’s”). The battle lines have often been fought over the contention that such an entity was not performing a “commercially useful function.” In other words, it was basically a sham, merely acting as a paper middle-man for other entities doing their work or supplying their materials.
 
But there is another front in the war against WMBE’s, and that is whether they are really controlled by the women or minorities whose names are on the door.
 
In a recent case from the appellate division in Albany, the court was asked to overturn the determination of the New York State Department of Economic Development, Division of Minority and Women’s Business Development (the “Division”) which had refused to re-certify Panko Electrical and Maintenance Corporation (“Panko”) as a WBE. There was no dispute that Panko performed a commercially useful function as an electrical contractor. But the Division ruled that Barbara Panko, the President and majority shareholder of this family business, did not exercise sufficient “control” of the company.
 
Panko was run in the field by her husband and son, both licensed electricians. But it was contended that Barbara Panko, who was not an electrician herself, bore primary responsibility for Panko’s financial and administrative affairs. She decided which jobs to pursue, oversaw final estimates and bids, obtained bonds for bids, and personally reviewed and executed major contracts. The Division held that this was insufficient to establish “control” and the appellate court agreed.
 
The court stated that while she did not have to be an electrician, she needed to “retain operational control of the enterprise.” It found that she did not enjoy independent control over the “day-to-day business decisions” of Panko. In her earlier testimony at Division hearings, she had struggled to explain how she could evaluate the appropriate cost of a project without electrical expertise. She could not read blueprints or address technical details in developing estimates. She did not supervise any field operations and rarely visited work sites, leaving that to her husband and son and other project managers. The men admitted to handling other essential business functions such as personnel decisions and tax matters.
 
The court concluded that Panko was, in actuality, a family-owned business in which the wife and mother shared responsibilities. But she could not be considered to “exert independent control” over the company.
 
This holding presents two problems—one for an MBE or WBE trying to determine what level of control is really necessary to satisfy the Division; the other for a contractor trying to determine if a prospective MBE or WBE will remain certified and satisfy set-aside goals.
 
One suspects that family-owned businesses present their own set of red flags for regulators and contractors. But making a contractor perform this analysis, at the peril of losing credit for one of its MBE or WBE subcontractors, seems unfair.

For More Articles on Women-Owned Business Enterprises See:
Women-Owned Business Enterprise Loses “WBE” Certification Where Brothers Perform Important Functions Of The Business