HUD Publishes Final Section 3 Rule

October 15, 2020

Each year HUD invests billions of federal dollars into distressed communities across the country for projects that build and rehabilitate housing, improve a variety of infrastructures, build community centers, and help families achieve stability and advancement. One way that HUD achieves these objectives is through the promotion and administration of Section 3, a provision of the HUD Act of 1968, found at 12 U.S.C. 1701u.

Each year HUD invests billions of federal dollars into distressed communities across the country for projects that build and rehabilitate housing, improve a variety of infrastructures, build community centers, and help families achieve stability and advancement. One way that HUD achieves these objectives is through the promotion and administration of Section 3, a provision of the HUD Act of 1968, found at 12 U.S.C. 1701u.

The Section 3 program requires that PHAs and other recipients of HUD housing and community development funding, to the greatest extent feasible, provide job training, employment, and contracting opportunities for low- or very-low income residents in connection with projects and activities in their neighborhoods. A Section 3 obligation is to support businesses owned or controlled by low-income people or businesses that hire them. PHAs and jurisdictions using Community Development Block Grant (CDBG), HOME Investment Partnerships program funds, and other HUD funds must comply with Section 3 and ensure that contractors and subcontractors comply.

On Sept. 29, HUD published the Section 3 final rule. Effective Nov. 3, the updated rule is the first policy change to the program since 1994. Public housing financial assistance recipients must implement their Section 3 activities according to this rule and comply with the reporting requirements starting with the recipient's first full fiscal year after July 1, 2021. These regulations apply to Section 3 projects for which assistance or funds are committed on or after July 1, 2021.

Here are the key changes in the final rule.

Sustained Employment of Section 3 Residents

The final rule emphasizes tracking and reporting labor hours instead of new hires. The 1994 interim rule required PHAs and jurisdictions to have the goal that 30 percent of new hires be Section 3 residents. In some instances, contractors would hire Section 3 residents for a short time so that they would count toward the 30 percent goal but lay them off soon afterwards. In other cases, a Section 3 resident would be given only 20 hours or less of work per week. Some contractors would shift some of their existing workforce to a Section 3 project so that the contractor could claim that they didn’t need to hire anyone new for the Section 3 project.

The new rule focuses on tracking and reporting labor hours instead of new hires to measure total actual employment by Section 3 workers and the proportion of that total employment performed by Section 3 workers. HUD noted that with the previous new-hires standard, hiring five new workers for one or two months would be counted as more valuable than hiring one person for a full year. A full-time job sustained over a long period provides a Section 3 worker with the potential to gain skills that can lead to greater self-sufficiency.

However, small PHAs or those with fewer than 250 public housing units won’t be required to report the number of labor hours. Instead, they have the option to report qualitative efforts, such as holding job fairs, referring residents to services supporting work readiness, and outreach efforts to generate job applicants.

Targeted Section 3 Worker

HUD created a category called “Targeted Section 3 Worker” to reflect the law’s requirements for prioritizing categories of Section 3 workers. This is intended to give PHAs and jurisdictions an incentive to focus on hiring workers who are given priority in the statute and to provide contracts to Section 3 businesses primarily owned, controlled by, or that hire a substantial number of workers given priority in the statute.

According to the rule, a targeted Section 3 worker is:

  • A worker employed by a Section 3 business;
  • A worker who’s currently, or who was when hired by the worker’s current employer, a resident in a public housing project or Section 8 assisted housing;
  • A resident of other projects managed by the PHA that’s expending assistance; or
  • A current YouthBuild participant.

Section 3 Benchmarks

PHAs and jurisdictions will be considered in compliance with the Section 3 statute if they follow employment priorities and meet the Section 3 benchmark. The final rule establishes a benchmark of:

  • Section 3 workers make up 25 percent of the total number of labor hours worked by all workers; and
  • Targeted Section 3 workers make up 5 percent of the total number of hours worked by all workers.

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