Deal Breakers: Hiring & Employment Practices - Undocumented Workers

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To inaugurate the Deal Breakers series, we’ll cover a topic relevant to just about every company in the United States: protecting against the risks associated with hiring and employing undocumented persons.

An estimated 11 million immigrants (approximately 3% to 5% of the U.S. population) currently live in the United States illegally, without proper legal documentation and authorization. Every business has exposure to the risks associated with hiring and employing undocumented persons, but those engaging in essential services (e.g., janitorial services, child care, food prep, building maintenance services, landscaping services, waste collection services, and security services), construction, transportation, farming, fishing, and forestry are particularly susceptible.

Hiring and Employment Practices – Undocumented Workers
Although U.S. law is clear about the consequences of hiring undocumented persons, many are employed in some capacity. Consequences associated with hiring and employing undocumented workers can include penalties (usually in the form of fines) and criminal prosecution. The severity of imposed repercussions depends on the circumstances surrounding each violation. In addition, upon discovery that a worker is undocumented, the employer is required to terminate employment. From a practical perspective, replacement of terminated individuals could be difficult in a low unemployment environment, such as the one the U.S. is experiencing today. Employee replacement challenges are exacerbated if an identified person has special skills or held a hard-to-fill technical position.

In the context of a sell-side transaction, a few accidental hires may not be of concern for a buyer. However, the absence of an established hiring and employment policy to protect the company – or worse, a pattern of willful neglect – is usually a major problem. Depending on the number, skill level, and experience of discovered undocumented personnel (and subsequent mandatory terminations), a buyer could conclude that the target company can no longer perform normal course operations. In extreme circumstances, feasibility of the company’s financial projections could also be called into question. These risks have real consequences to sale value and certainty to closing.

In addition to the direct repercussions of discovering undocumented workers, a deal could suffer from secondary consequences as the buyer’s comfort level with the target company’s risk profile and proposed deal terms deteriorates. In these cases, a buyer’s concerns over a specific discovery can trigger enhanced scrutiny of other business diligence areas otherwise unrelated to employment practices. In short, even if the initially-discovered issue doesn’t impact the deal, the buyer could expand due diligence scope; and in turn, expose other hidden risks.

Finally, transaction structure should also be considered carefully by both buyer and seller as it relates to potential ramifications of undocumented persons on a deal. In an asset deal, for example, it’s common practice to terminate all employees at the time of deal closing. Subsequently, those persons intended to continue their employment with the buyer are rehired, typically shortly after closing. Discovering undocumented persons amongst a target’s workforce at this stage can be very costly to the buyer and, depending on the terms of the deal, to the seller as well.

Countermeasure: Establish Hiring and Employment Policies Compliant with Federal & State Laws
What can business owners do to protect themselves? Fortunately, mitigating risks associated with inadvertently hiring and employing undocumented workers is relatively straightforward:

Hire an independent reviewer. An independent, third-party consultant can audit the status of your current workforce and make recommendations regarding appropriate next steps. Be prepared to act on any findings made by the consultant to ensure company compliance with federal and state labor laws.

Establish a compliant hiring policy. Set up a hiring procedure that ensures a legal workforce, then train the human resources team accordingly to ensure everyone in the company abides by the new policy. Implementing this recommendation is a matter of routine, and compliance is inexpensive: (i) complete an Employment Eligibility Verification Form (Form I-9) for all new hires, regardless of citizenship (note: many employers also use E-Verify to electronically verify Form I-9 information); (ii) ask for proof of citizenship or work authorization documents from all employees, and terminate those who fail to produce proper documentation; (iii) only accept documents that appear genuine; and (iv) in cases of provisional visas, track expiration dates.

Form I-9 is only expensive to not fill out. Provided that a Form I-9 is completed for each employee, law enforcement authorities cannot charge the employer with a verification violation. If the company can show that it filled out a Form I-9 for each employee, and received proof of the employee’s legal status, the business should be safe. Finally, be sure to keep detailed records in case the company is ever audited for compliance.

Don’t play detective. Employment enforcement agencies always balance the need to enforce undocumented worker legislation with workforce anti-discrimination initiatives. For this reason, all new hires should be subject to a company’s employment eligibility verification policy. Business owners should never speculate as to which candidates should provide proof of legal status. Selective employment policy application can potentially lead to violation of equal opportunity statutes, which make it illegal to discriminate against a job applicant or an employee on the basis of the person’s race, color, religion, sex (including pregnancy, gender identity, and sexual orientation), national origin, age (40 or older), disability, or genetic information.

Proactive Steps Help Ensure Successful Deal Outcomes
As with many issues having to do with regulatory compliance, following a few simple steps can significantly mitigate business owners’ risks. However, business owners will never be able to completely eliminate risks associated with hiring and employing undocumented workers. Specifically, employees who successfully navigated the Form I-9 verification process, but who are subsequently discovered to be undocumented, must be immediately terminated by the employer. These terminations can lead to business disruption while positions are refilled. The best defense against these risks is understanding generally accepted hiring protocols and establishing company practices to mitigate them well in advance of a sale process.

Read the first post in the series here.

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