What is Section 3?
Section 3 is a provision of the Housing and Urban Development (HUD) Act of 1968 that is intended to foster local economic development, neighborhood economic improvement, and individual self-sufficiency. The Section 3 program requires that recipients of certain HUD financial assistance provide job training, employment, and contracting opportunities for low- or very-low income residents in connection with projects and activities in their neighborhoods.
The goal of Section 3 is to ensure that employment and other economic opportunities generated by federal financial assistance for housing and community development programs are directed toward low- and very low-income persons, particularly recipients of government assistance.
Bob Damewood, Staff Attorney at RHLS has worked with fellow housing advocates for many years to make key changes to the Section 3 provision. The Final Rule incorporates some of these suggestions. Read on for more information on changes and the advocacy efforts that RHLS has been involved in.
What are some of the changes contained in the Final Rule?
On September 29, 2020, HUD published a Final Section 3 Rule, updating the 1994 Interim Rule. The Final Rule makes some changes that advocates have been pushing for for years – most notably abandoning the “new hire” compliance standard in favor of “hours worked” – but it also weakens monitoring and enforcement considerably.
Here are the major changes:
- The Final Rule eliminates the “new hire” compliance standard in favor of an “hours worked” standard. Under the Interim Rule, a Section 3 covered employer was presumed to be in compliance with hiring requirements if at least 30% of all new hires were Section 3 residents (residents of public housing, low-income residents of the area in which a HUD-assisted project is located, or YouthBuild participants), One problem with the “new hire” standard was that contractors could avoid compliance by placing their new hires on non-Section 3 jobs, or by hiring Section 3 residents for only a short period of time. Another was that identifying which workers on a job were new hires and which were existing employees is no easy task. Under the Final Rule, HUD will now gauge compliance based on a percentage of total hours worked. HUD has not yet revealed what percentage of hours worked it will use as a safe harbor benchmark.
- The Final Rule changes the definition of Section 3 resident (now called “Section 3 worker”). A Section 3 worker is a worker who currently fits or when hired within the past five years fit at least one of the following categories: (1) met HUD’s income limits in the previous calendar year, (2) is employed by a Section 3 business concern, or (3) is a YouthBuild participant. HUD states that the 5-year lookback period is intended to reward retention of Section 3 workers.
- The Final Rule adds a new preference and definitions for “Targeted Section 3 worker.” In addition to establishing an “hours worked” benchmark for Section 3 workers, HUD will also establish a benchmark for “Targeted Section 3 worker.” There are two definitions of Targeted Section 3 worker – one for projects funded by public housing assistance and a different one for projects funded by housing and community development assistance. Workers employed by a Section 3 business concern qualify under both definitions. For public housing, targeted workers also include workers who currently or when hired (within the last 5 years) were residents of public or Section 8-assisted housing or YouthBuild participants. For housing and community development assistance, targeted workers also include workers who currently or when hired (within the last 5 years) were living within the service area or neighborhood of the project or YouthBuild participants.
- The Final Rule eliminates the “dollar value” compliance standard for Section 3 contracting. Instead, HUD will count all employees of a Section 3 busines concern as Section 3 workers and Targeted Section 3 workers for purposes of meeting the “hours worked” employment safe harbors. Only time will tell whether this approach will result in additional contracting opportunities for Section 3 businesses.
- The Final Rule changes the definition of Section 3 business concern. A Section 3 business concern is a business concern meeting at least one of the following criteria, documented within the last six-month period: (1) at least 51% owned and controlled by low-income persons, (2) over 75% of the labor hours over the previous 3-month period are performed by Section 3 residents, or (3) at least 51% owned and controlled by current residents of public housing or Section 8 assisted housing.
- The Final Rule removes Section 3 monitoring and compliance responsibilities from FHEO. Until now, HUD’s office of Fair Housing and Equal Opportunity has been responsible for monitoring and enforcing Section 3 compliance. The Final Rule places that responsibility within the applicable HUD program office (Public Housing or Community Planning and Development). Yet another office (Field Policy and Management) will receive and evaluate Section 3 reporting.
- The Final Rule eliminates the Section 3 complaint process. One of the worst changes from an advocate’s perspective is the elimination of the Section 3 complaint and informal settlement process. People who are denied employment or contracting opportunities may still complain to the applicable HUD program office or to the Office of Field Policy and Management, but there are no longer any regulatory standards governing the processing and resolution of complaints.
- The Final Rule lowers the coverage threshold for lead remediation and control projects and removes the per-contract threshold for all housing and community development projects. The Interim Rule applied to all contracts worth at least $100,000 on projects receiving at least $200,000 in housing and community development assistance. The Final Rule reduces the per-project threshold to $100,000 for lead remediation and control projects and eliminates the per contract threshold altogether. Instead, the recipient agency is responsible for meeting the Section 3 labor hour goals on a covered project, regardless of the size of individual contracts and subcontracts.
- The Final Rule changes (and relaxes) recordkeeping and reporting requirements. The Final Rule requires PHAs and other recipient agencies to report the following benchmark data to HUD: (1) the total number of labor hours worked, (2) the total number of labor hours worked by Section 3 workers, and (3) the total number of labor hours worked by Targeted Section 3 workers. If a contractor or subcontractor does not track labor hours on a project, the PHA or recipient agency may accept their “good faith assessment” of hours worked in each of those categories. Needless to say, that makes it nearly impossible to determine whether a contractor or subcontractor is meeting Section 3 benchmarks on a project that doesn’t have Davis-Bacon or similar reporting requirements.
RHLS has advocated to adopt an “hours worked” Section 3 compliance standard for decades. We are pleased that HUD finally made that change. We are also pleased that HUD responded favorably to our advocacy against some of the most harmful changes in their Proposed Rule, like the one that would have required only a 25% ownership stake in a Section 3 business concern for residents of public or Section 8 housing.
However, we are disappointed in HUD’s approval of a “good faith assessment” reporting standard, HUD’s removal of the complaint process, and HUD’s failure to require or incentivize collaboration with DOL listed apprenticeship training and technical assistance providers to recruit Section 3 workers and help them acquire the skills they need to be successful. We will continue our advocacy efforts to improve Section 3 until it fulfills its potential of giving low-income residents a pathway out of poverty.
For more information:
Read the full text of HUD’s Final Section 3 Rule.