Under the Immigration Reform and Control Act of 1986 (IRCA), all employers are required to complete an Employment Eligibility Verification Form I-9 on the first day of employment for all hired employees. While most employers are aware of this requirement, unique Form I-9 issues arise in corporate acquisitions.
Importance of I-9 compliance
As indicated above, Form I-9 is used by employers to verify the identity and work authorization of all employees hired after November 6, 1986. Since IRCA became law almost 30 years ago, the form has changed many times. What has remained constant is the requirement for the employer and employee to complete the form on the first day of employment, and to have the employee present a document which proves both: (i) identity and the ability to work legally in the U.S. or a document which proves identity, and (ii) a document which proves ability to work in the U.S.
The Form I-9 is not submitted to a government agency, but must be kept on file by the employer for the duration of the employee’s employment and for a certain period beyond. If requested by U.S. Immigration and Customs Enforcement (ICE) in an audit, the employer is required to provide the I-9s to ICE for review. ICE will decide whether the employer has made any errors in completion of the form. Penalties, including civil and criminal fines and/or imprisonment, can be levied against the employer for such, and the size of the penalty will depend on the number and severity of the errors.
When negotiating the purchase of a business, a buyer will want to include consideration of the I-9s as a part of due diligence. Once the deal closes and the buyer is the new owner, the buyer will be responsible for any I-9 errors uncovered in an ICE audit. It is important to know what errors may exist, and to correct such errors at the first available opportunity. It is also important to know if the target company has been illegally employing large numbers of employees. In some transactions, a steady, immediately available workforce will be critical to the ability to continue conducting business. If the target business employs undocumented workers, such employees must be terminated. If a large number of employees, or if key employees, must be terminated, the buyer may need to reconsider acquiring the business.
A buyer may want to conduct their own I-9 audit prior to closing. An audit would consist of comparing the current I-9s against a current list of employees and ensuring that the forms are correctly completed. Each employee on the payroll must have a completed I-9, unless he or she was hired on or before November 6, 1986. If there are any employees on the payroll for whom a form has not been completed, such an omission represents the most egregious of I-9 errors, and should be immediately corrected. Other errors would include failing to review appropriate documents for the I-9, failing to list the documents on the form, failing to complete the I-9 on the first day of employment, and failing to have either the employer or employee sign the I-9 where required.
If the buyer conducts their own I-9 audit, they should require the seller to correct all I-9 errors prior to closing. Any corrections must be initialed and dated as of the date of correction. Corrected I-9s could still result in fines, however, ICE considers corrections to be a mitigating factor when assessing fines.
In some cases, the buyer may decide not to audit the I-9s, either because of a timing issue or because the workforce is too large to make an audit practical pre-closing. In such cases, the buyer would be prudent to make arrangements to audit the I-9s at the first available opportunity post-closing.
Whether the buyer decides to audit the I-9s pre-closing or post-closing, there are certain inquiries that should be made as a part of due diligence. The buyer should find out whether the target has ever been the subject of an ICE audit and, if so, whether penalties were imposed, and in what amount. If the business has been audited in the past, ICE may audit again in the future to ensure that the business has been in compliance, so the buyer will want to be ready for a future audit. The buyer will want to know whether the business has ever been the subject of any other kind of immigration-related investigation or proceeding. An inquiry should also be made regarding whether the target has received any social security number “no match” information. A “no match” will occur when either the Internal Revenue Service (IRS) or Social Security Administration (SSA) finds that a person’s name does not match the social security number he or she has provided. Although a “no match” letter does not immediately indicate that the individual is an undocumented worker, it is a red flag that there may be issues.
Any acquisition agreement should include an indemnification clause regarding the I-9 issues. The clause should require the seller to disclose any prior I-9 or other violations of the Immigration and Nationality Act (INA) or IRCA, and an agreement should be made to indemnify the buyer for any violations that occurred pre-closing.
Generally a successor in interest in a stock purchase transaction is not required to complete new I-9s for the employees after acquisition. However, as indicated above, any I-9 violations will be inherited by the buyer. The new owner may decide to either audit the existing I-9s post-closing or to reverify all employees.
If the new owner decides not to audit the I-9s pre-closing, it is important to audit the I-9s post-closing. Any errors in the I-9s should be corrected at the time of audit, initialing and dating the corrections as of the date of correction. If the I-9 is missing information required of the employee, such as appropriate documents or signatures, the employer should make arrangements with the employee to have the employee bring in the missing documents or provide the missing information. The employee should be apprised of a reasonable time frame in which to bring in required documentation.
Note that in a case where a buyer acquires anything less than all stock of the business, such as an asset purchase, the buyer may not be considered a successor in interest for I-9 purposes and may need to complete new I-9s for each employee.
Whether the new owner audits the existing I-9s, or decides it is necessary to reverify the workforce, there are a few important rules to follow. For example, any audit or reverification must be conducted of all employees and the employer cannot selectively decide which I-9s to audit based on foreign sounding names or other such factors. If the employee is required to bring in documentation to prove identity and ability to work, the employer cannot require specific documents, but must present the employee with the full list of documents acceptable under the I-9 regulations. The employee can choose whichever qualifying documents he or she wants to present. If an employee cannot provide proper documentation, employment must be terminated.
As indicated above, one of the benefits of auditing I-9s pre-closing is that the buyer should be able to learn if there are problems with undocumented workers in the workforce. The buyer should also find out if the target is employing anyone with temporary work status that will need to be renewed. Any employee who has temporary work status must be reverified at the time of expiration of the work status to ensure the ability to legally continue to work. In some cases, the employee’s temporary work status will be tied to the employment, requiring the employer to prepare and submit a visa application or petition or other application to enable the employee to continue to work.
An employee who has temporary work status in the U.S. will have a limited time during which he or she can work, even after obtaining extensions of the status. If the employee is valued by the business, the employer may need to assist the employee in obtaining U.S. permanent residence to ensure the ability to continue to work in the future without limitation. The employer will want to know that this is an issue at the first available opportunity, as obtaining permanent residence can be a lengthy and time consuming process.
Any corporate acquisition will involve I-9 issues that will need to be resolved, both pre-closing and post-closing. A buyer must include the I-9 and visa issues in its due diligence and should include an indemnification clause for I-9 issues in the purchase agreement. After closing, the new owner will be responsible for any inherited I-9 problems and will want to be reimbursed by the seller for any fines which may be levied by the government for I-9 errors which existed at the time of closing. A wary buyer will also want to know whether there are any employees who must be terminated based on their undocumented status, or who will need assistance in extending temporary work status in the future, because such issues may impact the buyer’s desire to acquire the business. With prudent pre-closing and post-closing planning, most I-9 problems can be avoided.