Immigration Corner: Two Strategies to Avoid or Limit Potential E-Verify Liability for Contractors
The E-Verify rule for federal contractors can be a deal breaker for many contractors. The requirements imposed on contractors can expose them to liability with the Department of Homeland Security (DHS) through its enforcement arm, Immigration and Customs Enforcement. In an industry where there is extremely high turnover and where fraud continues to exist in the workforce, in terms of documents that establish eligibility to legally work in the U.S., it has become increasingly risky for contractors to enter a government program that checks the legal working status of their employees.
A Quick Review of E-Verify and the E-Verify Rule for Federal Contractors
E-Verify is a website created by DHS that allows businesses to determine the eligibility of their employees to work in the U.S. E-Verify was created in 1997 as the Basic Pilot/Employment Eligibility Verification Program and soon after, it became a permanent program of the U.S. government. E-Verify works by comparing information in an employee’s I-9 to U.S. government records. E-Verify does not replace or eliminate the legal requirement for an employer and employee to complete a Form I-9. It is a mostly voluntary program, with some limited exceptions, such as the E-Verify rule for federal contractors.
The E-Verify rule (sometimes referred to as the “Federal Contractor Rule”) requires a federal contractor to enroll in E-Verify upon executing a federal contract. As part of that requirement, the employer must verify the employment eligibility of each employee that performs work under the federal contract through E-Verify. Additionally, any new hires, regardless of whether they perform work under the federal contract, is required to have their employment eligibility verified through E-Verify. This rule has been in place since 2008 and every federal contract since then has the E-Verify rule in it.
What Kind of Strategies can Contractors Employ to Limit Their Exposure to the “Federal Contractor Rule” and E-Verify?
The E-Verify rule only applies to the company that signs a federal contract. This means that only the employees of the company that signs the federal contract are subject to E-Verify. To avoid subjecting all your current and future employees to E-Verify, one strategy is for contractors to form a separate company that will only be used to bid on federal contracts. By forming a separate company that is strictly for the federal contract business, a company can insulate its exposure to E-Verify liability to just the federal contract company. By keeping the non-federal contract work separate, the contractor does not have to enroll the non-federal contract company in E-Verify and the employees of that company will never be subject to E-Verify.
The original company can remain as the non-federal contract company. Additionally, the original company can remain as the parent company of the two separate and newly formed companies or a new parent company can be formed. The illustration in Figure 1 shows the original company remaining with the non-federal contract business. Figure 2 illustrates maintaining the original company or setting up another parent company to own the subsidiary companies.
It is recommended that a tax professional or tax attorney is consulted before implementing this strategy to understand any tax benefits and consequences.
An alternative strategy is to hire independent contractors to perform work for the company. If a contractor’s workforce consists entirely of independent contractors, they will not be subject to E-Verify. E-Verify only verifies the employment eligibility of employees. It only checks the information in a completed Form I-9 against government records. Form I-9 does not apply to independent contractors. Therefore, since independent contractors are not employees, they are not subject to E-Verify. If a contractor’s workforce is made up of independent contractors, the contractor could accept a federal contract and not be subject or expose the company to any liability. This strategy will not work with subcontractors. Subcontractors will be subject to the E-Verify rule, as the federal contract will require the prime contractor to ensure the subcontractor also enrolls and participates in E-Verify.
While having a workforce consisting of independent contractors will eliminate the need to participate in E-Verify, the act of determining and classifying who is legally an independent contractor is a complicated matter. An independent contractor is not just an independent contractor because the company or the independent contractor says he or she is. Having the title or designation of independent contractor does not mean that the individual is actually working as an independent contractor. The general rule is that an individual is an independent contractor if the payer only has the right to control or direct the result of the work, not how or what will be done. As part of the analysis, there are 3 categories to assist in determining how to classify a worker: Behavioral Control, Financial Control and the Relationship of the Parties. Within these categories are many different factors that are used to determine whether an individual should be classified as an employee or an independent contractor. The IRS has its own set of factors and each state has their own set of factors, which mirror the IRS’ factors to some degree.
The consequences for misclassifying a worker can be dramatic and extend beyond simple tax consequences. Making a mistake can be a costly one. It is important to consult with an employment attorney before implementing this strategy to make sure each worker is properly classified.
E-Verify can expose an employer to unwanted and possibly avoidable liability. Having the right strategy in place is a must. It is important that you consult with an experienced attorney before deciding on which strategy is best for your company.
Attorney Paul Messina focuses his practice on all aspects of employment-based, investor-based and family-based immigration law. He has extensive experience in proceedings before United States Citizenship and Immigration Services (USCIS) and the Consular Section of the United States Department of State. He has handled a variety of immigration cases, including employment-based green cards, EB-5 investment-based green cards (direct and through regional centers), and many of the non-immigrant visa/status categories as well as family-based green cards.
Author’s note: The Immigration Corner presents current and relevant topics in immigration law. The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.