Whenever a corporate transaction involves a business whose employees include foreign nationals, a proper HR due diligence is necessary. Most work visas for foreign nationals are employer specific, changes in a company's structure could put the validity of the work visa into question. Dismissing immigration due diligence could potentially lead to employees losing their jobs and lawful status in the U.S., not to mention penalties and sanctions that a company could face. Inheriting immigration glitches in a corporate transaction is no longer a mere inconvenience for a company and immigration consequences should be taken seriously.
There are immigration issues that apply to most corporate transactions-stock or asset acquisitions, mergers, consolidations, initial public offerings, spin-offs, restructuring and the relocation of an employer or its employees. For instance, take the case of an acquisition where a Japanese executive on a L-1A visa (granted to intra-company transferees) is sponsored by the U.S. subsidiary of a Japanese parent abroad. If the U.S. subsidiary is acquired by another U.S. company, the executive's U.S. employer will no longer be a subsidiary of the foreign parent, thus terminating the "qualifying relationship" as required under a L-1 visa and, consequently, rendering the executive's visa invalid. In this article, we set out the basic structure and nuances of various U.S. work visas and how a corporate transaction can affect the status of a foreign worker and the company.
Key Concerns: I-9 Compliance
One of the most important but often overlooked factor that an employer should take into account at the time of a corporate restructuring is the I-9 compliance. All employers in the U.S. are prohibited from hiring unauthorized employees. The I-9 compliance requires all U.S. employers to verify and confirm work authorization of each employee.
To ensure that employers comply with the above, the law imposes some harsh penalties. These penalties are not only restricted to employing workers who are unauthorized to work but also extend to the failure to properly execute and retain records of employees, whether U.S. citizens or not. These penalties can range from $110 - $1,100 per record for not maintaining the proper documentation with additional sanctions that may include bars to filing for any immigration benefit.
Some work visas, for example, the L-1 intracompany transferee visa is linked to the existence of an overseas parent or subsidiary company. In the absence of an I-9 due diligence, a U.S. entity acquiring a U.S. subsidiary of a foreign Indian IT company may discover after the closing of the corporate deal that key foreign Indian engineers on L-1 visa transferred over from the Indian parent, may no longer be able to work. Therefore, during the due diligence process or prior to the closing of a transaction, the I-9 compliance of an entity should be examined carefully. In a merger case where the acquiring entity is a "successor-in-interest,"- where the rights, interests, duties and obligations of the target entity are taken over by the acquirer- new I-9s are not needed.
It is good practice for an acquired or merged entity to get all of their employees to complete new I-9s on the date of closing in order to ensure that past violations are not continued and also to ensure that they have a handle on which employees have a temporary employment authorization document that will require reverification at a later time.
I-9 non-compliance is taken rather seriously as evidenced by the $1 million fine settlement that the Immigration and Customs Enforcement reached with clothing retailer Abercrombie & Fitch in 2010 for lapses in their I-9 compliance software.
What immigration law concepts come into play? --Different Visas, Different Implications
There are immigration issues that apply to most corporate transactions-stock or asset acquisitions, mergers, consolidations, initial public offerings, spin-offs and reorganization, etc. In the U.S., there are two visa classifications for a foreign worker: (i) non-immigrant; and (ii) immigrant. Non-immigrant workers usually fall under the H, L, TN and E visa categories, while immigrant workers are those who have obtained lawful permanent status or are in the process of doing so.
The consequences of a merger or acquisition or other corporate transactions depend upon the type of nonimmigrant visas that the company's employees hold.
Impact on H-1B Filings:
The most popular and commonly used temporary work visa is the H-1B visa. For a company with H-1B employees, the questions to consider are whether the transaction will result in a new employer and to what extent will the new entity assume the interests and liabilities of the target company. Where the new employer is a "successor-in-interest" that assumes the interests and the obligations of the prior employer which includes the assertions the former employer made on its labor condition application (LCA), filing a new H-1B petition is not necessary. This may therefore allow H-1B workers to continue employment without any interruption. Having said that, any material changes accompanying corporate changes will require action steps, for example, relocation of the employee and/or a substantial change in the employee's duties will require filing of an updated LCA and, in most cases, also an amended H-1B petition.
An issue likely to come up and affecting only a small percentage of companies, is the loss of eligibility of H-1B cap exempt status. Certain employers such as governmental research organizations, non- profits, certain colleges and universities are exempt from the H-1B quota cap. Depending on the corporate change, the cap-exempt status could be lost by the new employer, for example when a non-profit entity is replaced by a for-profit entity as a sponsoring employer. This loss of status could render an employee unauthorized to work if his/her H-1B was granted on the basis of the cap-exempt status. Thus, it is important to take this factor into account prior to closing.
Impact on L-1 Visas:
For an L-1 visa, the law requires a qualifying relationship between the U.S. entity and the foreign entity from which the employee will be transferring and the relationship must be that of either a "parent, branch, affiliate or subsidiary." A merger or acquisition resulting in change in the ownership structure of either entity could terminate the qualifying relationship as required under the L-1 visa, thereby invalidating the visa, as explained earlier. If it can be proved that the qualifying relationship remains intact, only an amended petition is required.
Impact on Green Card Applications:
A lawful permanent residence (green card) application can be broken down into 3 steps- labor certification, filing the I-140 petition and filing of the adjustment of status application. Companies that fall within the successor-in-interest requirements generally are allowed to continue the green card application filed by the predecessor company.
For a labor certification that is filed by the former employer, as long as the new employer assumes all rights, duties, liabilities and obligations of the former employer, the labor certification will remain valid, provided the job position and location of the employee remain unchanged. However, if there are any changes in job position or location, or if the new employer does not qualify as a successor-in-interest, the pending labor certification will be invalidated and the new employer will have to file a new labor certification. This could affect the lawful status of a foreign worker who has relied on a pending labor certification in order to extend his or her H-1B visa. An employee could also lose his priority date thereby significantly delaying the already lengthy green card process.
During the I-140 stage, if the I-140 is pending, but the adjustment of status application is not filed at the time of the corporate change, then the new employer will have to file an amended I-140 demonstrating the successor-in-interest relationship. On the other hand, when a corporate change comes into effect after the I-485 adjustment application is filed, an amended I-140 may not be required. This is because the American Competitiveness in the 21st Century Act (AC21) allows a foreign national to change employers if the I-140 has been approved and the adjustment of status application has been pending for 180 days or more, as long as the new position is in the "same or similar occupational classification."
Immigration Due Diligence and Best Practices
As companies conduct a financial and legal due diligence in order to detect potential risks and liabilities, an immigration due diligence should also be performed to determine and resolve visa and immigration related issues of key employees and corporate executives, to ensure a smooth transition to the new company and avoid any last minute surprises.
Any immigration related issues should be addressed and incorporated into the representations and warranties of the key transaction documents. It is a good practice to identify all employees on non-immigrant visas or in the process of applying for green card and understand future action steps to be taken to ensure continuation of their lawful status. Some best practices for immigration compliance to be followed by corporates are:
- Corporates should adopt a best practice checklist for a corporate immigration program- immigration policies should be in writing
- Corporates should ensure that approval of visas, extension of visa and transfer of employees across borders is done in a timely manner
- Tone from the top- corporate policy should state clearly that the company will remain compliant with all immigration laws, such as timely completion of employment verification and provision of appropriate employment benefits.
As pointed out, immigration concerns and issues, if ignored during a corporate transaction, could potentially cause problems for a company both from a reputational and financial standpoint. Therefore, to make sure that a smooth transition occurs, any immigration disruption that could potentially affect the transaction should be identified ahead of time and resolved in the best manner possible.