United States: Employment Law Commentary - July 2005

In a recent, highly publicized settlement between Wal-Mart and the Department of Homeland Security ("DHS") arising from the employment of undocumented workers by Wal-Mart contractors, Wal-Mart agreed to pay $11,000,000 to resolve charges that it violated the Immigration Reform and Control Act ("IRCA").¹ Most employers assume that they are not responsible for the employment practices of their contractors. The Wal-Mart settlement has left many employers wondering whether they too could be held liable for IRCA violations committed by vendors and consultants they thought were independent. In this article, we explain the legal background of IRCA and what went wrong at Wal-Mart. We then offer tips to minimize the risk of incurring liability arising from contractors’ IRCA violations.

Under IRCA, employers must not knowingly hire or continue to employ any person not authorized to work in the United States. Employers also have an independent obligation under IRCA to verify the employment eligibility of every person hired by the employer through the I-9 process.² An employer acts knowingly if it has constructive knowledge that a worker is not authorized to work in the United States.³ Constructive knowledge can be inferred "through notice of certain facts and circumstances which would lead a person, through the exercise of reasonable care, to know about a certain condition."⁴ Such knowledge can be inferred where the employer "(i) Fails to complete or improperly completes the I-9; (ii) Has information available to it that would indicate that the alien is not authorized to work . . . ; or (iii) Acts with reckless and wanton disregard for the legal consequences of permitting another individual to introduce an unauthorized alien into its work force or to act on its behalf."⁵

The law also makes it clear that an employer cannot evade the requirements of IRCA through the use of independent contractors. To that end, if an employer uses a contractor for the purpose of retaining the services of an illegal alien, the employer is deemed to have illegally "hired" the alien as though he or she were an employee.⁶

In general, an employer has no obligation to complete an I-9 for the employees of its independent contractors and should not be liable for IRCA violations committed by these contractors unless the employer knowingly uses the contractor to evade IRCA. A separate but related issue arises where an employer misclassifies a worker as an independent contractor when the individual is, in fact, an employee (for whom the employer must complete an I-9). The test for independent contractor status under IRCA is similar, but not identical, to tests used by the Internal Revenue Service, the California Employment Development Department, and other government agencies. The determination as to whether a worker is an employee and not an independent contractor turns on a number of factors, primarily whether or not the employer has the right to control the work of the contractor or its workers.⁷ (For a thorough discussion of independent contractor tests, see "Are Your Independent Contractors Really Independent Contractors?", Employment Law Commentary, October 1998.)

While employers are obligated not to employ illegal aliens and to complete I-9’s, the flip side of these obligations is that it is illegal under IRCA to discriminate against an applicant or employee because of his or her citizenship. One form of discrimination is "document abuse," the practice of asking for more or different documents than the I-9 regulations require.⁸

In the Wal-Mart case, U.S. Immigration and Customs Enforcement ("ICE") (a division of DHS which used to be part of the now-defunct INS) raided 60 Wal-Mart stores, resulting in the discovery of 245 illegal immigrants working as night janitors and cleaners for the company.

It is not entirely clear on what basis ICE asserted that Wal-Mart was responsible for its contractors’ employment of illegal aliens. We know, however, that in another lawsuit, a federal judge in New York approved a collective action against Wal-Mart based upon the allegation that Wal-Mart developed "a fraudulent scheme" with its maintenance contractors across the United States "to use undocumented workers to provide janitorial and cleaning services.⁹ The complaint alleged workers were ‘locked-in’ to stores overnight to perform cleaning services." Thus, it may be that the sheer number of undocumented workers led ICE to conclude that Wal-Mart knowingly used contractors to evade IRCA. It may also be that the workers at issue were treated in such an egregious manner by the contractors that ICE concluded that Wal-Mart had to have been complicit for the contractors to have gotten away with the misconduct. It is not clear, however, whether ICE contended Wal-Mart was liable because it was a joint employer of the workers along with the contractors.

In general, employers should not be liable for IRCA violations committed by parties with whom they contract—including their contractors’ employment of unauthorized aliens—provided that there is a true independent contractor relationship between the employer and its contractors. The constructive knowledge standard suggests, however, that employers may not stick their heads in the sand with regard to their contractors’ conduct and should take affirmative steps to ensure their contractors’ compliance with IRCA. In taking such steps, employers must be mindful not to over-verify, which could result in claims of document abuse or citizenship discrimination.

Following are several steps employers can consider taking. Any of these steps can be used alone or in conjunction with the other proposed options, as part of a coordinated IRCA compliance policy.

(a) a provision stating that it is the contractor’s responsibility properly to complete I-9’s for all employees assigned to the employer’s place of business;

(b) a representation by the contractor that it is aware of and understands IRCA and is in compliance with IRCA;

(c) a representation by the contractor that it is not knowingly employing any workers assigned to the employer who are not authorized to work for the contractor in the United States;

(d) an indemnity provision under which the contractor agrees to defend and indemnify the employer for any liability arising out of claims that the contractor’s employees are not authorized to work in the United States for that contractor and/or any other claims based upon alleged IRCA violations committed by the contractor.

In making this request of contractors, employers must be cognizant of their contractors’ obligations to protect the privacy rights of the contractors’ employees. Because I-9 forms and supporting documentation may contain personal information such as home addresses and social security numbers, the parties may want to agree upon a consent form to be executed by the contractors’ employees, authorizing the disclosure of I-9’s by the contractor to the employer. (By contrast, we recommend that employers not complete I-9’s for their contractors’ workers as this might suggest that the workers are company employees and might also result in IRCA violations for employers who complete I-9’s incorrectly or inadvertently engage in document abuse).

This step obviously makes more sense for larger companies with which an employer contracts. Most smaller companies are not likely to have written policies.

(a) Include a provision in the contract with the contractor reciting that the relationship is an independent contractor relationship and tracking, to the extent possible, the factors used to determine independent contractor status set forth in the DHS regulations;

(b) Establish guidelines for the use of independent contractors which also track the DHS regulations. For example, establish guidelines for managers that instruct them not to provide tools and equipment for contractor use, not to direct the means and methods used by contractors, not to set the contractor’s hours of work, not to use the services of contractors in a way that prevents the contractors from doing work for other clients, etc.

(c) Conduct audits or reviews of independent contractors to make sure the relationships are in fact being maintained as independent contractor relationships and are not crossing the line into employment. Conversely, where it is likely that a worker really is an employee, treat the worker as such and complete an I-9 form for that individual. For example, make sure that managers are not directing the work of the cleaning crew if the cleaning crew is ostensibly employed by an independent contractor; recognize, however, that a computer "consultant" who works for the company full-time for a year under the direction of the IT supervisor is probably an employee, not a contractor.

(a) Conduct training for employees, especially managers, to make sure they understand IRCA and I-9 compliance, including the obligation to report suspected violations by contractors. Consider setting up a hotline for such reports.

(b) Conduct training for employees, especially managers, to make sure they understand the limits of independent contractors. For example, managers need to understand they may not control the work of contractors’ employees or provide them with tools and equipment, etc.

(c) Conduct training for contractors regarding IRCA and I-9 compliance. Even the most sophisticated employers make mistakes in verifying employment eligibility. Smaller or unsophisticated companies like janitorial services or garment sewers are more likely not to understand IRCA and the importance of compliance. Employers who decide to undertake training for contractors must take care not to do it in a way that suggests the employer is controlling the manner or means of the contractors’ work. Rather, the training could be presented as a perk or service provided by the company to its business partners.

Establish and publicize Draconian penalties, such as immediate termination, for employees who use contractors to evade IRCA, and immediate contract termination for contractors who use illegal aliens on company contracts.

Reading between the lines of the Wal-Mart case, it appears that the problem there came to light because the janitorial employees were allegedly being mistreated by being paid less than minimum wage, not being paid overtime, and being "locked in the store overnight" and made to work. While an employer should not become overly involved in its contractors’ supervision of their employees lest the employer be accused of controlling the contractors’ workers (and hence be deemed a joint employer), the employer could include in its contracts with contractors representations by the contractors that they are in compliance with all applicable labor and employment laws. Likewise, the employer can train its own employees to report suspected violators.

Before entering into any substantial contract with an independent contractor, an employer could check the contractor’s litigation history and other public records to determine whether the contractor has a history as a problem employer.

There is no doubt that since 9/11, the government and the nation as a whole take more seriously the issue of undocumented aliens. The issue spawns intense, emotional debate across the political spectrum. Regardless of personal beliefs, however, the Wal-Mart case makes it clear that employers must be vigilant about not only the immigration status of their own employees, but the status of those individuals who provide services via "independent" contractors as well. Being proactive with contractors takes effort up front but may provide necessary peace of mind down the road.

Footnotes:

In a second memorandum to the staff dated May 31, 2005 [http://www.mofo.com/docs/PDF/ELC0507_PDF2.pdf], the Labor Commissioner ordered removal of a DLSE opinion letter dated August 30, 2002, signed by former Labor Commissioner Arthur S. Lujan. The issue addressed in this DLSE internal memorandum involves an employer’s ability to mandate use of vacation pay by exempt employees. The 2002 letter required nine months’ notice to an exempt employee if the employer intended to require use of vacation or PTO, for example, in a forced shutdown of a facility or employee furlough. The Labor Commissioner could find no authority for the nine-month rule announced in the 2002 letter. Accordingly, she revised this rule to require only that reasonable notice be given, which she determined could be no less than one fiscal quarter, or 90 days.

The Labor Commissioner’s internal memorandum contains another ruling with regard to partial-day deductions for and use of vacation or PTO. The opinion letter brings California law into line with federal law, which permits an employer to require the use of partial days of vacation or PTO so that, as long as the exempt employee receives the full salary required for the week, there is no violation of the salary basis rule and exempt status has not been lost for the week.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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