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In October, federal agents raided nearly 60 Wal-Mart stores across the nation and arrested more than 250 illegal aliens — all but 10 of whom were working as janitors for outside contractors used by Wal-Mart. Agents searched executive offices at the company’s headquarters in Arkansas, hauling away several boxes of confiscated documents. The nationwide sweep, dubbed “Operation Rollback,” was based on suspicions that outside contractors had recruited and hired illegal aliens as janitorial workers, allegedly with the knowledge of some Wal-Mart officials. Wal-Mart vehemently denies that it was involved in any scheme involving illegal aliens and has not been charged with a crime. A federal grand jury, however, is currently investigating the matter. See Ann Zimmerman, “After Huge Raid on Illegals, Wal-Mart Fires Back at U.S.,” Wall St. Journal, Dec. 19, 2003, at A1, A10. The October raids and allegations of wrongdoing came as a surprise to Wal-Mart, which now states that it was betrayed by federal investigators. See Zimmerman, at A1. Wal-Mart says that it knew about the potential for illegal alien problems in its stores and had been cooperating with federal investigators for the past three years. With Wal-Mart’s help, federal investigators taped conversations between its store managers and employees of various independent contractors, which resulted in several indictments. Wal-Mart maintains that it continued to use the independent contractors because federal officials had specifically requested it leave the relationships intact. Id. at A1, A10. The federal investigators, claims Wal-Mart, had assured it that the company was not the target of the investigation, and that Wal-Mart would not be held liable for immigration law violations. Id. Wal-Mart’s predicament has not only put the spotlight on the debate concerning immigration policy reform in the United States, it has also raised serious issues concerning the application of the employer-sanction provisions under the Immigration Reform and Control Act of 1986 (IRCA). In particular, many companies like Wal-Mart, which use the services of independent contractors, are questioning whether they may be held liable for an outside contractor’s failure to comply with the immigration laws. As long as a company does not knowingly use contract labor to circumvent the law against hiring unauthorized workers, there is no liability under IRCA. Only an “employer” may be held liable for IRCA violations, not third parties that legitimately use the services of independent contractors. Out of an abundance of caution, however, companies that regularly use independent contractors should take some steps to help ensure that there is no confusion regarding the characterization of the employment relationship. ILLEGAL ALIENS CANNOT BE HIRED Under IRCA, employers are prohibited from knowingly hiring illegal aliens, and are required to verify the legality of each potential employee’s status. Specifically, IRCA makes it unlawful for an employer “to hire, or to recruit or refer for a fee, for employment in the United States an alien knowing the alien is an unauthorized alien” or “to continue to employ the alien in the United States knowing the alien is (or has become) an unauthorized alien with respect to such employment.” 8 U.S.C. 1324a(a)(1)(A), 1324a(a)(2). To ensure that employers do not hire unauthorized aliens, IRCA mandates that employers verify the identity and eligibility to work of each new hire by examining certain documents that evidence identity and work authorization before they begin work. See 8 U.S.C. 1324a(b). Verification of employment eligibility is accomplished through the completion of Form I-9. See 8 U.S.C. 1324a(b)(1)(A); 8 C.F.R. 274a.2(b). The employee tenders to the employer specified identification documents, which are then listed on the form. See 8 U.S.C. 1324a(b); 8 C.F.R. 274a.2(b). An employer must accept all documents that appear genuine on their face. See 8 U.S.C. 1324a(b). If an employer complies with the employee verification requirements, the employer then has a good-faith defense to civil or criminal liability if it mistakenly employs an unauthorized alien. See 8 U.S.C. 1324a(a)(3). If an applicant is unable to present the required documentation, the applicant cannot be hired. See 8 U.S.C. 1324a(a)(1). Similarly, if an employer unknowingly hires an unauthorized alien, or if an alien becomes unauthorized while employed, the employer is required to discharge the alien immediately upon discovery of his unauthorized status. See 8 U.S.C. 1324a(a)(2). Employers that violate these provisions under IRCA face civil penalties, and are subject to criminal prosecution. See 8 U.S.C. 1324a(e)(4)(A), 1324a(f)(1). One problem companies must deal with when hiring independent contractors concerns the uncertain characterization of the employment relationship. The government may challenge the independent contractor relationship as an attempt to circumvent the employer-sanction provisions under IRCA. If a company has incorrectly characterized its employment relationship with an entity, the company may be subject to sanctions for that entity’s violations under IRCA. While the term “employer” does not appear in the statutory language, the regulations under IRCA define “employer” as: “[A] person or entity, including an agent or anyone acting directly or indirectly in the interest thereof, who engages the services or labor of an employee … for wages or other remuneration. In the case of an independent contractor or contract labor or services, the term employer shall mean the independent contractor or contractor and not the person or entity using the contract labor.” 8 C.F.R. 274a.1(g). The regulations further define “employee” as “an individual who provides services or labor for an employer for wages or other remuneration but does not mean independent contractors.” 8 C.F.R. 274a.1(f). The term “independent contractor,” in turn, is defined as including “individuals or entities who carry on independent business, contract to do a piece of work according to their own means and methods, and are subject to control only as to results.” 8 C.F.R. 274a.1(j). Whether an individual or entity is an independent contractor, regardless of what an entity calls itself, will be determined on a case-by-case basis. Id. Some factors that should be considered in that inquiry include whether the individual or entity supplies the tools or materials, makes services available to the general public, works for a number of clients at the same time, has an opportunity for profit or loss as a result of labor or services provided, invests in the facilities for work, directs the order or sequence in which the work is to be done and determines the hours during which the work is to be done. Id. COMMON LAW FACTORS In addition to the regulatory factors, the courts have looked to the common law developed in non-IRCA areas, including the level of skill required in the particular occupation, the method of payment (whether it is by time or by job), whether the parties believe they are creating an employer-employee relationship, locality and/or industry practice and whether the worker is in business for himself or herself. See U.S. v. Bakovic, OCAHO (Office of the Chief Administrative Hearing Officer) Case No. 92A00122 (Jan. 15, 1993); U.S. v. Robles, OCAHO Case No. 90100210, at 9 (March, 29, 1991). Under any of these various characteristics to determine employee/independent contractor status, no single factor is determinative, although it does appear that the degree of control is often given the greatest weight. See Robles, OCAHO 309, at 9. If a company establishes an independent contractor relationship, the only way it may be held liable for sanctions is if it “knowingly” used a contract, subcontract or exchange to obtain the services of an unauthorized alien. IRCA regulations expressly preclude the use of a contractor or subcontractor knowingly to obtain the labor of an unauthorized alien. Specifically, the regulations provide: “Any person or entity who uses a contract, subcontract, or exchange … to obtain the labor or services of an alien in the United States knowing that the alien is an unauthorized alien with respect to performing such labor or services, shall be considered to have hired the alien for employment in the United States in violation of [IRCA].” 8 C.F.R. 274a.5. To be liable for sanctions under � 274a.5, employers must have actual or constructive knowledge that one of their employees lacks work authorization. CONSTRUCTIVE KNOWLEDGE Proving “actual knowledge” may seem difficult, but the employer-sanction provisions of IRCA are not limited to situations in which the employer has actual knowledge that an alien is unauthorized. Instead, under the regulations, the term “knowing” is defined to include “not only actual knowledge but also knowledge which may fairly 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.” 8 C.F.R. 274a.1(l). The regulations further provide that “constructive knowledge” may include, but is not limited to, situations in which an employer fails to complete or improperly completes Form I-9; has information available to it that would indicate that the alien is not authorized to work; or 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. Id. Because the case law on this issue is sparse, the exact parameters of the constructive knowledge doctrine have yet to be precisely defined by the courts. In construing the constructive knowledge standard, most courts finding liability on the basis of “reckless and wanton disregard” have done so only in the context of an employer receiving direct information from the Immigration and Naturalization Service (INS) that casts doubt on the authorization of a specific employee, which then subsequently fails to take adequate steps to reverify the employee’s eligibility or fails to take such steps in a timely manner. See, e.g., New El Rey Sausage Co. v. INS, 925 F.2d 1153 (9th Cir. 1991); Mester Mfg. Co. v. INS, 879 F.2d 561 (9th Cir. 1989); see also Noel Plastering, Stucco Inc. v. Office of Chief Administrative Hearing Officer, U.S. Dept. of Justice, Executive Office for Immigration Review, 15 F.3d 1088 (9th Cir. 1993). Arguably, the regulatory language suggests that in the context of an independent contractor relationship, if a company hires an independent contractor, knowing that the contractor has used unauthorized aliens in the past, the company may be held to have constructive knowledge. Such an interpretation is unlikely, however, as courts are reluctant to use the constructive knowledge doctrine to expand employer liability under IRCA, and have cautioned that “the doctrine of constructive knowledge must be sparingly applied.” Collins Foods Int’l, Inc. v. U.S., 948 F2d 549, 554-55 (9th Cir. 1991) (reversing a finding of constructive knowledge by the administrative law judge and chief administrative hearing officer in an initial-hire situation when no INS warning existed); see also U.S. v. American Terrazzo Corp., OCAHO Case No. 95A00097, 5 (Dec. 13, 1995) (ruling that it is inappropriate to grant summary decision to an initial-hire situation when no INS warning was given). More importantly, to hold a third party liable for the actions of an entity it does not control could be viewed as unreasonable and contrary to the intent of 8 C.F.R. 274a.5. Unless there is a showing of intent (i.e., knowingly hiring an unauthorized alien as an “independent contractor” in order to circumvent the employment-sanction provisions under IRCA) at the time the contract between the parties was entered into, a company cannot be held liable under IRCA for its independent contractor’s violations. Indeed, IRCA was not designed to hinder legitimate business activities. The use of independent contractors is a common business practice, and companies should not be deterred from using contractors simply because of potential liability under IRCA. SUGGESTED PRECAUTIONS Nevertheless, companies that regularly hire independent contractors should take some precautionary steps to avoid potential liability under IRCA. From the outset, parties should make clear their intentions in the underlying contract establishing the independent contractor relationship. In so doing, the parties should clearly define the parameters of their relationship, keeping in mind the independent contractor factors cited in the regulations. Moreover, a company hiring the independent contractor should insist on a provision in the contract that requires the contractor not to commit any violations under IRCA, and in particular requires that the contractor hire only individuals authorized to work in the United States. For example, in Wal-Mart’s case, the arrested aliens were employed by independent contractors that were required to employ only legal workers. The contract should also contain an indemnity clause, whereby the contractor is required to indemnify the company for any sanctions incurred as a result of the contractor’s noncompliance with IRCA. This provision should also indemnify the company from the costs of any IRCA investigation or litigation, even when the company ultimately prevails. Finally, although a company is not required under IRCA to keep track of all of its contractors’ workers, a company may want to take a more active role in the verification process-e.g., it may be advisable for a company periodically to review the contractor’s I-9 Forms. The obvious downside to this last suggestion is that the company risks being characterized as the “employer” for IRCA purposes. This precaution may be prudent, however, for companies that wish to avoid accusations of IRCA violations. G. Daniel Ellzey and Stephen C. Mitchell are members of Columbia, S.C.’s Ellzey & Brooks, a management labor and employment law firm.

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