Effect of Affirmative Action Decision on Small Minority-Owned Businesses

In a sharply divided 5-4 decision, the United States Supreme Court, in Adarand Constructors, Inc. v. Federico Pena, Secretary of Transportation, overruled past precedent and sharply restricted federal contracting preferences (or "set-asides") for small minority-owned businesses. The Adarand decision directly threatens the Department of Transportation's $2.2 billion in annual contract set-asides for small minority-owned businesses, as well as the overall $6.4 billion in annual contracts the federal government sets aside for these businesses. The Adarand decision will, in turn, have a significant impact on Minnesota businesses with federal contracts, especially Minnesota's small minority-owned construction businesses.

The Department of Transportation contract at issue, like most federal agency contracts, contains a subcontractor compensation clause, which gives a prime contractor a financial incentive to hire subcontractors certified as small businesses that are controlled by "socially and economically disad- vantaged individuals." The contract further requires the prime contractor to presume that such individuals include minorities "or any other individual found to be disadvantaged" by the Small Business Administration (SBA). The contractor's financial incentive for hiring a small minority-owned business is substantial, including "[t]en percent of the final amount of the approved subcontract, not to exceed 1.5 percent of the original contract amount."


"The decision will have a significant impact on Minnesota small minority-owned construction businesses...."

In Adarand, the Supreme Court expressly did not eliminate per se either the Department of Transportation's or any other federal agency's set-aside program based on race, despite calls to do so by two of the justices. Rather, the Court ruled that the Department of Transportation's program and other federal contract set-asides based on race must withstand "strict scrutiny." This standard is consistent with that used in the review of similar affirmative action programs adopted by the states and cities. See, e.g., Richmond v. J.A. Croson, 488 U.S. 469 (1989).

"Strict scrutiny" review requires the government to prove that each racial set-aside program adopted is a "narrowly-tailored measure that furthers compelling governmental interests," i.e., to assist only those individuals or entities who were victims of past racial discrimination. Racial preferences aimed at trying to assist all minorities would fail strict scrutiny.

The Court's rationale for applying the higher standard of review to affirmative action programs for racial minorities is that "there is simply no way of determining what classifications are in fact motivated by illegitimate notions of racial inferiority or simple racial politics." The Court, citing its earlier decision in Croson, further explained that:

Indeed, the purpose of strict scrutiny is to "smoke out" illegitimate uses of race by assuring that the legislative body is pursuing a goal important enough to warrant use of a highly suspect tool. The test also ensures that the means chosen "fit" this compelling goal so closely that there is little or no possibility that the motive for the classification was illegitimate racial prejudice or stereotype.
Many critics contend the imposition of this "strict scrutiny" review effectively eliminates all such set-aside or affirmative action programs. But, as noted above, the Court's majority views the difficulty in satisfying this "strict scrutiny" test as but a necessary safeguard against the "illegitimate" use of this "highly suspect tool." The majority highlighted a particularly egregious case of discrimination within the Alabama State Police Department as an example of an acceptable affirmative action plan that would satisfy the "narrow test" set forth by the Supreme Court.

Effect on Minnesota's Minority-Owned Businesses

The effect of the Adarand decision on Minnesota's minority-owned businesses, notably construction businesses, will no doubt be dramatic. According to an article in the Minneapolis Star Tribune:
Some minority-owned businesses in Minnesota generate as much as 90 percent of their revenues as a result of minority business development goals or government set-aside programs. The state's top minority construction firms earn more than $100 million in revenues; other minority-owned businesses, including those in food, computers, freight, and real estate, bring in revenues exceeding $400 million, according to the National Association of Minority Contractors and the Metropolitan Economic Development Association (MEDA).

Effect on Private Hiring

"Under the current law, more than 100,000 companies and universities that have federal contracts of over $50,000 must establish `goals and timetables' to hire and promote minorities and women." Consistent with this law, the Supreme Court has previously ruled that private employers may prefer minorities and women in hiring or promotions in order to correct a "manifest imbalance" in the work force. But, under Adarand, that rationale is unlikely to save these federal programs which financially assist private employers in achieving this goal.

Effect on Preferences for Women

The Supreme Court made no reference to the impact of Adarand on governmental set-asides for women. As a result, such preferences for women currently face a lower standard of scrutiny than those designed for racial minorities. "One federal court in California has already done exactly that, upholding a contract set-aside for women while striking down a similar plan for minorities."

Like the state of race relations in this country today, the Supreme Court's decision in Adarand is both clouded and controversial. Nevertheless, all companies, whether minority-owned or not, with government contracts -- notably construction firms -- stand to gain from a clear understanding of the latest precedent in this area.

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