Check out our Cheat Sheet on this story for a quick guide to the key points of the immigration imbroglio.

On June 25, the Supreme Court ruling in Arizona v. United States decisively reaffirmed the federal government’s right to control immigration policy and enforcement. Among other things, the high court precluded states from making it a criminal act for undocumented workers to seek employment or work in the state.

While essentially upholding the status quo and addressing a law aimed at illegal aliens rather than employers, the decision had two important implications for the corporate world: It seemed likely to quash efforts in other states to take over immigration enforcement, and it reopened the political debate over comprehensive immigration reform.

The stalemate in that debate has put some companies in the hot seat, unable to obtain the employees they need—whether highly skilled technicians or unskilled farm, manufacturing and hospitality workers— while making employers the focus of the immigration service’s enforcement efforts.

Business groups argue the limits on legal immigration put American business at a competitive disadvantage in the world economic market. In a report issued in May titled “Not Coming to America: Why the U.S. is Falling Behind in the Global Race for Talent,” a coalition of mayors and business leaders laid out the case for an immigration system overhaul.

“Artificially low limits on the number of visas and serious bureaucratic obstacles prevent employers from hiring the people they need—and drive entrepreneurs to other countries, who are quick to welcome them,” the report said. “In fact, other nations have witnessed the importance of immigrants to the American economy and are employing aggressive recruitment strategies to attract the key high- and low-skilled workers their economies need to compete and grow. In the 21st Century global economy, the stakes in the global talent rush are only increasing, and our loss has been the rest of the world’s gain.”

On the following pages, InsideCounsel looks at the implications of the Supreme Court’s decision, the pressure the immigration service is putting on some employers and the frustrations businesses face when trying to legally bring highly skilled foreign nationals into their U.S. workforce.

Preemption Affirmed

The 5-3 Supreme Court decision in Arizona v. United States struck down three of four contested provisions of Arizona’s 2010 immigration law, known as SB 1070, that sought to pressure illegal immigrants into returning to their homelands. Among the sections the court said federal law preempted was one making it a crime for an unauthorized worker to apply for work or be employed in the state. The federal government argued the provision “upsets the balance struck by the Immigration Reform and Control Act of 1986 (IRCA)” and is “pre-empted as an obstacle to the federal plan of regulation and control.”

Writing for the majority, Justice Anthony Kennedy agreed. He explained that IRCA already requires aliens to register with the federal government and to carry proof of status, mandates that employers verify prospective employees’ employment authorization status and imposes sanctions on employers who hire unauthorized workers. But IRCA does not impose criminal penalties on employees. Although the Arizona provision and IRCA share a common goal of deterring unlawful employment, the state law has a conflicting method of enforcement, he concluded.

“The correct instruction to draw from the text, structure, and history of IRCA is that Congress decided it would be inappropriate to impose criminal penalties on aliens who seek or engage in unauthorized employment. It follows that a state law to the contrary is an obstacle to the regulatory system Congress chose,” Kennedy wrote.

In the wake of Arizona’s adoption of SB 1070, five other states—Georgia, South Carolina, Indiana, Alabama and Utah— all passed similar or even tougher laws aimed at chasing illegal immigrants from their states. Challenges to those laws are pending in the federal courts. Those state legislatures may rewrite their laws in light of the Supreme Court ruling.

“The state governments will have to revisit the language of their statutes and study this decision to see what may be preempted,” says Andrew Merrills, an Ogletree Deakins shareholder, who adds that the states are “hand-tied” by the decision.

In clearly upholding the supremacy of the federal government in immigration enforcement, the court likely will discourage additional states from attempting similar legislation. That’s a victory for employers in industries such as agriculture and hospitality that are heavily dependent on immigrant labor. They feared such laws would scare away unskilled workers, citing reports of labor shortages in Georgia and Alabama after those states passed immigration enforcement laws.

“It’s very encouraging that the Supreme Court has made a strong statement about the fact that states can’t legislate immigration enforcement,” says Geetha Adinata, counsel at Ford & Harrison. “From the employer perspective, the concern that states could make conditions so onerous that people would selfdeport is a little less now.”

The reiteration of the supremacy of federal law in immigration enforcement also is reassuring to multistate employers, who prefer the consistency of federal law to 50 state variations.

“The high court has sent the powerful and necessary message that states should refrain from legislating in this area,” says Sean Hanagan, a Jackson Lewis partner. “Employers can breathe a bit easier with the implication from this ruling that the growing trend of a patchwork of different state immigration laws may finally abate.”

But Arizona v. United States does not preclude all state immigration laws impacting business. In a May 2011 decision in Chamber of Commerce of the United States of America v. Whiting, the Supreme Court said states could use their licensing power to punish employers who hire illegal workers. It upheld an Arizona law that calls for licenses of state employers that knowingly employ unauthorized aliens to be suspended or revoked and requires all Arizona employers to use E-Verify, the federal Internet-based system for determining if prospective employees are in the country legally. The most recent high court decision doesn’t impact states’ ability to pass or enforce such licensingbased laws.

Seventeen states currently require at least some employers to use E-Verify. Some require all employers, public and private, to use the system; some limit the requirement to public agencies; and some confine the obligation to state contractors and subcontractors.

Adinata says the number of states requiring employer use of E-Verify will continue to grow, and she predicts it ultimately will become a federal requirement.

“For employers, the bottom line of Arizona v. United States is that it prevents states from imposing criminal sanctions on illegal workers seeking employment, but does nothing to put the brakes on innovations being developed at the state level to impose verification burdens on employers,” she says. “Employers need to continue to comply with I-9 and verification obligations in their areas and stay on top of what is happening at the state level.”

Enhanced Enforcement

While some states have begun putting the pressure on employers to verify immigration status, the Obama administration has been pursuing a similar tack. It has replaced the Bush administration’s focus on workplace raids by Immigration and Customs Enforcement (ICE) agents followed by mass deportations of illegal workers with ICE paperwork audits followed by fines on employers.

Although the Obama administration has actually increased the number of illegal aliens deported to a record 396,906 in fiscal year 2011, it says it’s concentrating on finding and removing those with criminal records. In June, the president announced an amnesty policy allowing illegal aliens under age 30 whose parents brought them into the U.S. as children to stay in this country and work if they have lived here for at least five years and have clean criminal records.

Meanwhile, the administration has ramped up enforcement of employer compliance with I-9 forms, which attest the employer has verified a new worker is legal. Since 2009, ICE has conducted more than 6,000 I-9 compliance audits and levied fines on noncompliant employers of more than $76 million. Even if employers have not hired unauthorized workers, ICE can levy hefty fines for noncompliance with I-9 recordkeeping requirements. For example, in 2010, Abercrombie & Fitch paid more than $1 million when ICE found the retailer’s electronic system for completing and storing I-9s did not meet legal requirements.

Earlier this year, ICE said it would revisit approximately 500 employers audited in the previous three years to determine if noncompliant activity found during prior audits had been remedied. Businesses could be subject to treble damages if ICE special agents find that the employer continued to make the same mistakes.

“The nature of enforcement has changed,” says Ford & Harrison Partner Charles Roach. “Under President Bush, it was much more helicopters going overhead and agents circling worksites, going after foreign nationals as well as employers. Now, the focus is on the employer and doing desk audits of I-9s. The incidence of I-9 audits has increased in number, frequency and fines under the Obama administration.”

Another recent concern for employers is cases brought by the Office of Special Counsel (OSC), an agency within the Department of Justice charged with investigating discrimination based on national origin. Such charges may arise when an employee claims he was required to provide more documentation than a U.S. citizen. The OSC is focusing on companies with electronic “onboarding systems” that capture information about the new employee, according to Ian Macdonald, a Littler Mendelson shareholder. He notes that companies can be hit with fines even if they had no intent to discriminate and thought they were being good corporate citizens by seeking additional documentation.

“In the past 18 months, we have seen fines from the OSC increase 3,000 percent, but the issue has gone below the radar,” he says.

Hiring Handcuff

For many employers, the most galling aspect of U.S. immigration policy is the handcuffs it places on companies seeking to hire or transfer workers from abroad.

The H-1B visa quota illustrates the problem. Employers sponsor job candidates qualified for specialized occupations such as architecture, engineering, medicine and mathematics for H-1B visas, which are valid for three years and renewable for another three years. H-1B visa caps fall into two categories—20,000 a year for foreign students who have received a master’s degree at a U.S. university, and 65,000 for other people with the required training. 

For the past two years, as employers put hiring on hold during the economic downturn, the caps remained open until late in the year. But this year, the quotas filled up quickly. On June 12, U.S. Citizenship and Immigration Services (USCIS) announced that both H-1B caps for the fiscal year beginning Oct. 1 had been reached. That means that employers who identify a candidate for the rest of the year will have to wait until October 2013 to bring the new employee into the country under the H-1B program. Such delays in filling key positions can have a significant impact on company operations, says Aleksandar Dukic, a Hogan Lovells partner.

At the same time, the immigration service is taking a more stringent view of what constitutes a specialized occupation. “It is becoming increasingly difficult to get H-1B visas for a number of occupations that traditionally would have been approved,” Dukic says, including computer systems analysts. “Very nonsensical interpretations [of H-1B requirements] appear to be causing problems for companies.” USCIS also is requiring more documentation, which adds to employers’ costs and processing time, he adds.

“Quota issues coupled with more stringent, and in some cases unreasonable, interpretations of the regulations mean you may have a hard time getting your petition approved,” Dukic says.

Roach adds that immigration authorities have started doing on-site inspections of H-1B sponsors to make sure information on the petitions is correct. “That has a chilling effect on employers,” he says.

As a result of those roadblocks, some large companies unable to bring highly educated workers into the country are instead employing them outside the U.S., Merrills says.

“We have a worldwide economy, and with advances in technology it is possible to employ people abroad and remain productive,” he says. “This has a very negative effect on the U.S. economy.” A related problem involves heightened scrutiny of applications for L-1B visas, used for intracompany transfers of highly specialized workers.

“This is creating a massive headache for companies trying to bring in knowledge capital for short-term assignments so they can remain competitive,” Macdonald says.

Macdonald says past abuses of the L-1B visa program by some consulting companies “put the government in a difficult place,” but he adds there should be a middle ground of application approval so companies that use the program properly aren’t penalized.

Call for Action

A growing chorus of voices from the business community is making the argument that caps and other roadblocks to visa approvals are bad for the economy, and immigration reform is a business issue that Congress urgently needs to address. 

“With projections of a talent shortage growing to 225,000 STEM (science, technology, engineering and math) workers by 2018, USCIS’s recent increase in challenges issued to employers who apply for permission to hire foreign skilled workers illustrates what many in the business community feel to be a misapplication of efforts to protect American workers,” Hanagan says. “Until we have sufficient STEM professionals in the local market, U.S. companies will need to rely on foreign graduates from U.S. schools to meet the demand.”

In a statement submitted to the Senate Judiciary Committee last year, the U.S. Chamber of Commerce outlined “the economic imperative for immigration reform.” Among its recommendations: exempting graduates who have earned a master’s degree or higher at a U.S. institution from H-1B and green card caps, or exempting those with advanced degrees in science and engineering fields from the caps.

“This would allow the very individuals to remain in the U.S. who are interested in making contributions to the American economy, who have already successfully navigated American culture, who have already shown they speak English and who have already started adopting the American research or business philosophy,” the Chamber said.

It also recommended raising the total H-1B cap to 115,000, expanding the following year by 20 percent if the cap is met and reverting to the prior year total if it is not met.

In its report “Not Coming to America: Why the U.S. is Falling Behind in the Global Race for Talent,” The Partnership for a New American Economy recommended giving green cards to those with advanced STEM degrees from American universities and eliminating the H-1B cap altogether (see “Fixing the Immigration System: Q & A With John Feinblatt,” p. 46).

“When firms cannot find the scientific talent they need among native workers, they have two options: hire immigrants to fill these vital jobs or establish facilities in countries with more welcoming immigration policies,” the report said. “The choice is clear—the U.S. must allow businesses to hire the talent they need to expand and innovate in America.”

Fixing the Immigration System: Q & A with John Feinblatt

In May, The Partnership for a New American Economy, a group comprising 400 mayors and business leaders, released a 42-page report titled “Not Coming to America: Why the U.S. is Falling Behind in the Global Race for Talent,” documenting the case for removing immigration restrictions that keep businesses from hiring workers from abroad.

The central argument of the report is that U.S. immigration policy should focus on meeting the country’s economic needs for both skilled and unskilled workers, and it explores how other countries differ from the U.S. in their immigration priorities. According to the report, the U.S. admits only 15 percent of immigrants based on employment needs—and family members take about half of those visas, so the real number is closer to 7 percent. By contrast, South Korea, Switzerland and Spain all issue around 80 percent of their visas for economic reasons, while Italy, Germany and the U.K. issue around 60 percent.

John Feinblatt, chief policy adviser to New York Mayor Michael Bloomberg and co-chair of the Partnership for a New American Economy, answered questions about the report and its impact.

Q: What kind of reaction has “Not Coming to America” received from key audiences, such as congressional leaders and the Obama administration?

A: The findings of the Partnership’s report—that America is at risk of losing the global race for talent because our antiquated immigration laws turn talented workers away even as other countries tailor their immigration laws to their economic needs—enjoy broad, bipartisan support. Even so, Washington has failed to take action, putting our economic future in jeopardy.

Q: A few bills addressing some of the key issues in the report have been introduced in Congress in recent months, but does any immigration legislation realistically have a chance in this election year?

A: Yes, even with a divided Congress and election year politics, there is a very realistic chance we can achieve reform. Two years ago, no one was talking about immigration as a jobs issue. But now, there is bipartisan support in both houses for bills that will keep us from endangering our competitive advantage in attracting talent. 

The Fairness for High-Skilled Immigrants Act (HR 3012) passed in the House 389-15—an overwhelming margin that proves Democrats and Republicans agree on the need for smarter immigration policies, even if they don’t agree on much else. Both the Startup Visa Act 2.0 and the SMART Jobs Act are sponsored by Republicans and Democrats. We just need leaders in Washington to summon the political will to enact reform before November.

Q: Where do you find resistance or opposition to the ideas outlined in the report?

A: The immigration debate has been dominated by emotions—argued at the extremes—and it needs to be about economics. But there is an appetite for targeted immigration reform, and new bipartisan alliances have the potential to transcend the political gridlock.

Q: Are there steps the administration can or should take in the absence of legislation that would address some of the issues?

A: We must continue to attract the world’s best minds and incentivize them to come and work here. We already have an advantage—bright, talented foreigners want to come here more than anywhere else because there is no better place to start a business, and no other country has a culture of innovation like ours. Instead of sending the world’s best entrepreneurs and inventors to China, Australia, Singapore or other countries [by making it difficult for them to obtain approval to work in the U.S.], we need to do everything we can to keep them here. In the absence of legislation there are things the administration can do to make things better, like remove many of the needless obstacles and arbitrary criteria that stymie business visitors and tourists who often wait for weeks or even months to get visas to come here, spend money and help our economy.

Q: Do you expect immigration policy to be an important topic in the upcoming presidential election?

A: Immigration will be a central issue in the upcoming presidential election, but the top priority for many Americans this election season is the economy. It is important for the President and Congress to tackle immigration policy with a goal of creating jobs and economic growth. We know that by 2018, the U.S. will have a shortage of more than 200,000 advanced-degree STEM [science, technology, engineering and math] workers, so we must use strategic reform to make up the difference because the potential economic benefits are huge. Scientists and engineers create jobs for all Americans—an average of 2.62 for every advanced degree foreignborn STEM worker.