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It has become an annual rite of spring: Throngs of immigrants march though city streets across the U.S. on May 1, draped in flags and toting placards pleading for reform of the nation’s immigration laws. They demand solutions for the estimated 12 million undocumented aliens already here and for those whose attempts to enter the country legally are frustrated by visa restraints.

More quietly but with equal urgency, business leaders seek similar changes. Some employers contend the U.S. is losing ground in scientific, engineering and technical fields because caps on H-1B visas keep them from hiring the best and the brightest from around the world. Others are alarmed by a recently announced government policy focusing immigration law enforcement on employers who hire illegal workers, concerned it will unfairly punish those whose violations are unwitting. And many worry about the fate of valued workers–some here for decades–who could be deported at any time.

President Obama has promised to push for immigration reform, but hasn’t yet revealed what pieces of the puzzle he will try to put in place. And with the economy and health care reform taking priority, prospects for Congressional action remain uncertain.

“Most employers are trying to follow the laws, but the laws are confusing and there are gaps,” says Elena Park, who heads the immigration practice at Cozen O’Connor. “We don’t really know what is going to happen in Congress, so employers have to stay tuned, stay alert and try to stay in compliance.”

Help Wanted

Kurt Strack’s Houston-based business, which develops advanced technologies for the oil industry, is growing–but not in the U.S. Due largely to difficulties obtaining visas for the highly specialized workforce he needs, Strack, president of KMS Technologies, established a subsidiary in Germany.

“I can’t have a contract from an oil company and say, ‘We can’t do the work because I can’t get the visas we need,’” he says. “They will just look at me and say, ‘We’ll get somebody else.’ That’s why we have a subsidiary in Germany–for the sole purpose of not having to deal with U.S. visa laws.”

While the issue of immigration reform often conjures up images of uneducated farm workers, a critical element of the debate for many companies centers on whether the U.S. should allow in more economists, computer programmers, physicians, engineers and mathematicians.

Strack searches universities around the world for top students in geophysics. For example, he brought recent college graduates from South Africa and India into his company’s facility in Germany. “We started in October, and they were both at work on the 4th of January,” he says. “That would not have been possible in the United States.” But he would have preferred to train the new recruits in Houston, where most of his training staff is based.

“It’s a very difficult situation–most of our activities are in Houston, and we will not move our headquarters out of Houston,” he says. “But we are moving more and more of our people outside the United States.”

Homeward Bound Strack is not alone in seeking foreign professionals for highly skilled positions. For the two years prior to 2009, the annual allotment of H-1B visas, restricted to applicants with at least a bachelor’s degree, was exhausted within a few days of April 1, the first date on which they were available. When the number of applicants exceeds the quota of 85,000 H-1B visas, including 20,000 designated for foreign students who have completed advanced degrees at a U.S. university, U.S. Citizenship and Immigration Services (USCIS) holds a lottery. In 2008, companies applied for 163,000 H-1B visas. People whose educational or work visas were expiring who weren’t picked in the lottery had to leave the country.

“The stars of our universities in science, engineering and math are foreign students,” says Judy Lee, a partner at Foster Quan. “We have an incredible talent pool, and employers need them.” This is particularly true in fast-growing niche fields such as nanotechnology, biomedical engineering and green energy, she adds.

This year, because of the economic downturn, H-1B visas were still available in June for the first time since the current cap was set in 2004. As of May 29, USCIS reported that employers had filed petitions for approximately 45,800 H-1B petitions, plus 20,000 for students with U.S.-earned advanced degrees.

Opponents say the H-1B visa program suppresses wages and denies jobs to qualified Americans. But proponents say not enough American students are pursuing scientific and engineering careers to meet the needs of U.S. companies. For example, a study by the National Center for Education Statistics found that in the computer and information sciences, foreign students earned 39 percent of all master’s degrees and 61 percent of Ph.D.s granted by U.S. universities in 2005 and 2006.

“If the best and the brightest from around the world come to our universities, aren’t these the people we want to keep here?” asks Mark Koestler, co-chair of the business immigration practice at Kramer, Levin, Naftalis and Frankel. “Otherwise you are sending them home after you have trained them.”

Burdensome Requirements

And if U.S. companies can’t hire those foreign students when they graduate, or bring in specialists with the skill they need, they will, like Strack, move the jobs out of the country. For example, Microsoft (which declined a request for an interview for this story) opened a new software development center in the Vancouver, British Columbia, area in 2007 to attract leading software developers from around the world.

Microsoft General Counsel Brad Smith advocated in an April blog post for more H-1B visas. Despite the economic downturn, in order to remain globally competitive, “Microsoft and other U.S. companies must be able to hire top talent wherever it is located,” he wrote.

Some in Congress take the opposite view, pointing to the escalating U.S. unemployment rate as evidence that rather than expanding opportunities for foreign workers, the U.S. should be further restricting them. When Congress passed the TARP bailout plan for the financial services industry in February, it precluded firms receiving the government money from obtaining H-1B visas unless they can prove they tried to recruit American workers and that the foreigners aren’t taking the jobs of U.S. citizens.

A bill pending in the Senate would extend similar H-1B restrictions to all companies. It would require employers seeking H-1Bs to first make a “good faith attempt” to recruit qualified U.S. workers and would prohibit them from replacing U.S. citizens with H-1B visa holders. Co-sponsors Sens. Chuck Grassley, R-Iowa, and Dick Durbin, D-Ill., said in a statement that the bill is needed because current law allows companies to “legally discriminate against qualified Americans by firing them without cause and recruiting only H-1B guest-workers to replace them.”

But Jackson Lewis partners Sean Hanagan and William Manning contend that most employers wouldn’t invest the money and time to obtain H-1B visas if they could find the skilled workers they need at home.

“With government filing fees [$2,320] and equal or greater legal costs, it is quite a commitment for the company,” Hanagan says. “Most employers come to us for visa sponsorship help because they can’t fill that professional position with a U.S. worker.” As to the argument that H-1B workers lower wage levels, Manning adds that H-1B employers are required to pay the prevailing wage for that job in that location.

Manning points out that the H-1B visas are only good for three years, after which the employer can file for a three-year extension, incurring additional costs. Ensuring an indefinite stay means gaining permanent residency, which can take five to six years for professional-level employees.

“It is very burdensome on the employer,” Manning says. “It gums up the works.”

Brain-Dead Policy

In fact, Ted Ruthizer, co-chair of the business immigration practice at Kramer Levin Naftalis & Frankel, contends that the complications of obtaining permanent residency illustrate why Grassley and Durbin’s effort to require employers to show they tried to find American workers before applying for H-1Bs should be defeated.

The so-called labor certification process requires advertising both in Sunday newspapers and on the Internet, and then measuring to see if any American worker can be found who meets the minimum requirements. “The Labor Department has a tough time making these determinations,” Ruthizer says. “Cases are pending there for many years.” For example, the Labor Department might challenge whether a senior financial analyst needs a master’s degree.

Beyond the bureaucracy and delays, “The whole notion of measuring a smart foreign national professional against the least qualified American worker is a very brain-dead type of policy,” Ruthizer adds. “The H-1B was never intended to be premised on a showing that no U.S. worker was available. It was a way to have a meritocracy, where U.S. employers could hire people with the greatest skill set and the most talent.”

Worksite Worries

For employers, the April 30 announcement was ominous: The Department of Homeland Security (DHS) said it was shifting the focus of its worksite enforcement strategy away from undocumented workers and toward the employers who hire them.

“Effective immediately, ICE (Immigration and Customs Enforcement) will focus its resources in the worksite enforcement program on the criminal prosecution of employers who knowingly hire illegal workers in order to target the root cause of illegal immigration,” DHS said in a press release.

The announcement followed orders from DHS Secretary Janet Napolitano to review the worksite enforcement program after a February ICE raid on a Bellingham, Wash., engine plant took her by surprise. Agents arrested 28 workers and threatened them with immediate deportation. That type of raid, sometimes sweeping up hundreds of workers while TV cameras documented crying children whose parents were taken away, marked an important and controversial element of the Bush administration immigration enforcement effort. In its April release, DHS noted that of more than 6,000 worksite enforcement arrests in 2008, only 135 were managers or owners of the businesses.

Paul Virtue, a partner at Hogan & Hartson, believes the Obama administration may be following the same political strategy its predecessor pursued–albeit with a different emphasis. The Bush administration stepped up workplace raids after its efforts to pass comprehensive immigration reform died in the Senate in 2007.

“The criticism was that the administration was not doing enough on enforcement,” Virtue says. “They wanted to answer that, but they also wanted to create a crisis so Congress would act. They hoped constituencies including business would go to the Hill and say, ‘We need to fix this. This is affecting our ability to have a stable workforce.’”

While the last Congress wasn’t persuaded to pass immigration reform, the Obama administration may be following that same line of thinking, Virtue says. “The current administration may be feeling, ‘We have a good prospect for passing comprehensive immigration reform. Let’s not throw people who might benefit from reform in a few months out of the country, but let’s focus on employer enforcement and keep business focused on the need for reform legislation.’”

In fact, one month after the Bellingham raid, the government released 27 of the 28 people arrested and offered them temporary work permits. ICE agents then returned to the engine plant with a subpoena to search the company’s files and computers in an apparent attempt to build a case against the employer.

Audit Acceleration

But the real impact of the enforcement policy change remains to be seen. In its press release, DHS indicated it would focus on employers that commit serious crimes, rather than those with paperwork violations: “ICE will look for evidence of the mistreatment of workers, along with evidence of trafficking, smuggling, harboring, visa fraud, identification document fraud, money laundering and other such criminal conduct.”

That type of employer behavior is rare. “Most employers take their responsibility seriously,” says William Manning, a partner at Jackson Lewis. “But they may be misled by forged documents.”

But even employers with strictly administrative errors are not off the hook. In a May 19 meeting with reporters in Washington, Napolitano reportedly said that as part of its new strategy, DHS would step up audits of I-9 forms, used to determine if new employees are authorized to work in the U.S. I-9 audits, she said, are one of “a whole host of investigative techniques you can use” to find employers who are violating the law.

“I’m not sure how much change [the new DHS policy] represents,” says Manning. “But it does mean that employers must be more vigilant.”

Joycelyn Fleming, a partner at Ford & Harrison, says she has already seen an uptick in I-9 audits, and not just in the industries with concentrations of illegal workers, such as restaurants, construction and agriculture. Technology and white collar staffing companies are among those to have been audited recently.

“We are seeing the government looking for minutiae and fining for minutiae,” Fleming says. She explains that careless errors, such as not signing or dating a form, can constitute a violation. “Employers better get their I-9s in order before they are audited,” she adds. “We are finding that the government is very inflexible on fines and not willing to negotiate.”

John Nahajzer, co-managing partner at Maggio & Kattar, says that in the past, government investigators often allowed employers to correct such paperwork errors, only fining egregious violators, because their focus was on deporting illegal aliens.

“Now they will not ignore employers’ errors,” he says. “Apparently they will just start fining people. When dealing with a system that can fine you for each error, it can really add up.”

Preventive Medicine

Business immigration attorneys warn in-house counsel that in the face of stepped up enforcement, they should get involved with I-9 compliance and work authorization training, typically the domain of human resources.

“Attorneys think it is just paperwork,” says Nahajzer. But when companies conduct internal I-9 audits, they usually find the technical violations that can lead to fines. Such an audit provides a chance to correct such errors before they create liability, he adds.

One typical problem internal audits reveal is inadvertently keeping employees on the payroll after their temporary work visas expire.

“Some employers don’t realize they are responsible for keeping track of visa expirations,” says Sean Hanagan, a partner at Jackson Lewis. “An internal audit of I-9 forms is one way to prevent employees from falling through the cracks.”

The expectation of upcoming immigration reform, which would legalize undocumented workers with no criminal records, should not lull employers into complacency, says Frida Glucoft, a partner at Mitchell, Silberberg & Knupp.

“All of us are waiting for immigration reform,” Glucoft says. “But no matter what kind of reform will be proposed, inside counsel should focus on internal audits so that I-9 forms are in order. Enforcement is already a priority, and keeping unauthorized people out of the employment pool is a priority that has not changed.”

Congressional Conundrum

During the presidential campaign, Barack Obama promised to reform the nation’s immigration laws–but he had a few more pressing issues to deal with first. At press time, there were media reports that he would convene Congressional leaders in June to begin the discussion of comprehensive immigration reform. But few expect a vote on the plan until 2010 or 2011.

One boost to reform came in April when the nation’s two major labor federations, whose disparate positions helped doom a 2007 immigration bill, announced agreement on key issues.

But standing in the way of any quick Congressional action is a combination of factors, including political concerns that easing the way for immigrants in the workforce will look bad to constituents who have lost, or are worried about losing, their jobs. Other factors include a Congressional agenda overflowing with complex issues from global warming to health care, the usual conflicts between business and organized labor and the perilous state of Sen. Edward Kennedy’s health. While Rep. Luis Gutierrez, D-Ill., has been championing immigration reform on the House side, no one has stepped up to fill the role Kennedy, D.-Mass., has played in the Senate.

“Unfortunately for proponents of immigration reform, Sen. Kennedy will make it his dying wish to reform the health care system,” says Paul Virtue, a partner at Hogan & Hartson. “If Kennedy is focused on health care, we lose him as a champion on the immigration side because I don’t think he has the energy or the time to focus on both.”

Difficult Path

President Bush tried and failed to pass a reform package that included a “path to citizenship” for undocumented workers with clean records, coupled with tougher border enforcement. While Obama has yet to articulate his own proposal, he supported the Bush plan as a senator.

“I think they will start with something similar,” says Virtue. “I haven’t seen anything indicating they have a new answer. So I think there will be a balance between enforcement and a path to citizenship, along with reform of the system to allow for a meaningful guest worker program.”

Those broad outlines address business’ major concerns.

“There are two prongs to comprehensive immigration reform, both very important to employers,” says William Manning, a partner at Jackson Lewis. “The first is to do something with the 12 million illegal aliens in the country. We hear horror stories of a foreman who has been at a company for 10 years and then gets deported. There is nothing the employer can do on his behalf.”

The other prong involves allowing in more workers on temporary visas for jobs at both ends of the economic scale. “The immigration system does not have a way for low-end employees to enter the country legally,” Manning adds. “Even in a recession, employers are having trouble hiring people for fast food restaurants” and other low-wage jobs. At the other end of the scale, caps on H-1B visas limit employers’ ability to fill technical jobs.

Hot-Button Issue

Whether more temporary or “guest” workers should be allowed into the country will be the hot-button issue in the upcoming immigration debate, according to Randel Johnson, vice president for labor, immigration and employee benefits at the U.S. Chamber of Commerce.

“We think the demographic trends show we will need expanded temporary worker programs,” Johnson says. “The unions are more skeptical about that.”

The union agreement announced in April, while supporting legalized status for workers already in the U.S., opposes expansion of temporary worker programs. Instead, the AFL-CIO and Change to Win called for creation of a commission to recommend a new system for determining how many foreign workers should be admitted each year. The unions believe guest worker programs threaten the jobs and wages of U.S. workers and invite abuse of the foreign workers.

“There should be strict controls to ensure [guest] workers are here to fill real vacancies where American workers are not available,” says Orrin Baird, associate general counsel of the Service Employees International Union. “And they have to ensure the workers aren’t abused.”

While the unions said the proposed commission would be independent, Johnson says the devil is in the details.

“How will it be structured? Who will be on it? Who will staff it?” he asks.