Analysis of employer liabilities over illegal employees

Risk & Insurance Magazine published an article by me on the current employer dilemma with regard to hiring of illegal immigrants: the workers are needed, but the practice is illegal. Employers hiring workers who live in the United States illegally risk fines and civil lawsuits. In addition, the huge size of the illegal work force is causing the workers’ compensation system in some states to deteriorate.
Here is the full text of the article:
The last time the United States tried to reform its immigration laws was in 1986. Now the economic stakes are a lot higher, and vastly more employers are at legal risk. Twenty years ago, illegal workers were mainly in agriculture. Because the 1986 legislation did nothing to prevent more illegal workers from entering the United States, and because the law also fell short in giving them a legitimate status regarding their employment, the reform efforts of 20 years ago are considered a failure.
Since then, the illegal U.S. work force has increased to 7.5 million persons, growing at a rate of 350,000 annually. This is about equal to the number of new legally authorized foreign workers who come each year. Employers large and small who hire illegal workers risk incurring heavy fines from federal immigration authorities. They also risk being targeted by new state laws and aggressive state attorneys general. And they risk private action law suits. Any of these actions can lead to financial ruin. In addition, employers, workers’ compensation insurers and state regulators are coping with the impact of the illegal work force on the workers’ comp systems, which have deteriorated under the weight of hidden employment practices and legal quandaries.

In Florida, for example, where illegal workers make up 7 percent of the total work force, some employers have been convicted of using forced labor. An investigation by the Palm Beach Post into the practices of the vegetable farming industry documented serious safety and health problems. Florida has long allowed illegal workers to obtain workers’ comp benefits. But until 2003, a worker who died on the job and who was neither American nor Canadian was entitled to just 50 percent of workers’ comp death benefits. And until a court struck down a state law in late 2005, injured workers were required to show valid Social Security numbers.
Farther north, in Massachusetts, as many as half of serious on-the-job injuries to undocumented workers go unreported. These lapses are most common in high-risk industries, like the restaurant and construction industries.
The majority of illegal workers in the United States come from Mexico. It is estimated that as many as one out of every 100 Mexican workers decides to cross the Rio Grande into the United States. Originally, these workers were part of seasonal farm-worker migrations, a phenomenon of American agriculture since the first half of the 20th century. In recent decades, illegal immigrants have moved into every metropolitan area and many other economic sectors thirsting for large numbers of workers with limited education.
Surveys and statistical studies of these workers reveal how those of Hispanic origin have successfully penetrated the American work force, even though only 3 percent say they speak English very well. Half of these workers have been here for at least five years. About two-fifths live with their spouses, and one-fifth with their children. Half are paid entirely in cash, and the other half presumably have tax deductions taken from their paycheck.
Most say their employer does not demand any work documentation, and those who do are usually satisfied with a facsimile of a Social Security card. Their legal advisers may encourage them to pay taxes, as doing so may help their case in the event of a future amnesty or guest-worker program. The vast majority want to learn English and become American citizens.
Today, it is the housing boom that provides the highest paid jobs. In the space of a decade, Hispanic employment in construction in the United States more than doubled, from 650,000 in 1990 to 1.4 million in 2000, according to estimates by the Pew Hispanic Center. The center estimates this year that illegal workers make up 29 percent of all roofing workers. While the housing boom may have been good for property values, it appears also to have had a negative effect on workers’ comp systems. A recent study by one researcher, for example, found that Hispanic workers incur more frequent construction deaths than do non-Hispanic white or black workers; this higher frequency holds up even when workers are matched by age, tenure of work and job classification.
Pro-immigrant community activists allege many construction firms are guilty of shoddy safety practices, payroll abuses and failure to file workers’ comp claims. They allege that employers who cheat their illegal workers are often cheating the workers’ comp system as well. Regulators in numerous states are concerned about the incidence of employer insurance fraud. Some employers fail to buy any workers’ comp cover at all.
The more common trick is to reveal only a small portion of their total work force in their payroll disclosure, but run all injuries through to the insurer. These dodges end up cheating insurers, hurting the bulk of law-abiding employers by raising premiums, and creating a huge enforcement problem.
Some states have tried to shore up their workers’ comp programs by cracking down on employers who skirt the rules. Massachusetts, for instance, began to make prime contractors more financially responsible for workers’ comp practices of subcontractors. This may pose, at least initially, a heavier burden on employers who act within the law and refrain from committing insurance fraud. It does so because the primary contractor must now be responsible for enforcing workers’ compensation laws vis-à-vis subcontractors.
As the immigration issue bubbles up in Congress, employers are going to feel even more heat. If Congress fails to pass some kind of illegal-worker enforcement package this year, popular anger may be yet more intense than it already is. Employers today who hire illegal workers directly or through contractors run the risk of federal raids to enforce immigration laws. Though federal resources are scant — the Department of Homeland Security is reported to assign only 325 employees to enforce employer practices — states have become involved, too, with an emerging strategy of imposing penalties through state tax codes. In April, for example, Georgia enacted a law disallowing as a corporate tax expense wages paid to illegal workers.
And perhaps most harmful to employers’ bottom line is the risk that they may find themselves the subject of racketeering lawsuits from aggressive plaintiff attorneys. Employers can take measures to protect themselves from future political and legal hassles in hiring immigrant labor, says Overland Park, Kan., immigration attorney Mira Mdivani. She suggests that employers prepare a written immigration compliance plan. Companies should also brief managers on legal developments and show them how to resolve labor shortages without resorting to the use of illegal workers.
In the future, employers may be asked to document that their compensation to foreign workers was reasonable given prevailing wages. In addition, companies need to conduct regular in-house audits, says Mdivani. Suppliers should certify in writing their compliance with the law and agree to indemnification provisions.
The best way to minimize employer risks will be to pass a federal guest-worker program that does not include trap doors for employers. For a guest-worker program to succeed where the 1986 immigration reform initiative did not, three mutually reinforcing elements are vital. One is a comprehensive program to authorize millions of workers and their households while severely limiting the number of evaders. Another is a fast and error-free method of verifying legal status. A third is a path for employers to eliminate their legal risk.
The business lobby in Washington has favorably received the Senate’s efforts to pass a bill that combines a guest-worker program with a tough border-enforcement provision. Lobbyists with the U.S. Chamber of Commerce say they’re worried about language that may make a business liable for the infractions of its suppliers, or liable for sanctions simply on the grounds of having hired illegal workers. The chamber is trying to eliminate liability arising out of errors and delays that occur when an employer seeks to verify work authorization status. And it has been seeking to limit employer liability to private action suits.
Even if a well-designed act were enacted in 2006, its implementation will take years. And, at the state level, the workers’ comp systems need shoring up. These are not about to happen overnight.