Staffing Company Escapes Potential $1.4 million Form I-9 Penalty

Employers often consider the Form I-9 verification process to be overly burdensome and downright difficult to get right – a sentiment frequently expressed by organizations of all sizes and shapes that have frequent employee turnover. Nowhere is this more evident than within the temporary staffing world where workers placed at various client sites are considered “employees” of the staffing agency. Even the smallest of staffing firms may hire hundreds or even thousands of employees a year, each of whom will need to complete a Form I-9.

The concern (as with any other employer) is ensuring that all of the I-9s are completed properly and on-time as required by law. Practically speaking, these organizations also want to avoid the potentially crippling fines and penalties which may result in the event violations are discovered by the U.S. Immigration and Customs Enforcement (“ICE”) auditors during an investigation. We often refer to this as the dreaded “knock on the door” when ICE auditors and agents deliver a Notice of Inspection demanding I-9 forms and related documents.

successor-pointingBut as it turns out, a company may also be dragged into an ICE investigation based on its relationship with another company that is accused of Form I-9 violations. One of the ways this may occur is if ICE believes that one organization is a “successor in interest” of another organization based on their business relationship and other external factors. This so-called “successor liability” has been recognized in the courts for years, and is designed primarily to prevent organizations from avoiding liability by changing their corporate structure. However, as described below, determining successor liability can be complex, and the answer will largely depend upon the facts at hand.

With that disclaimer in mind, read on to learn about how one staffing company managed to escape liability for a whopping $1.4 million fine for alleged I-9 violations.

U.S. v. Spectrum Technical Staffing Services and Personnel Plus, Inc.

At the onset, it’s important to note that all of the information presented in this blog is based upon the published OCAHO decision, U.S. v. Spectrum Technical Staffing Services and Personnel Plus, Inc., 12 OCAHO no. 1291 (Nov. 2016). The respondent staffing companies may not entirely agree with the facts presented (or arguments made) in this decision, and so I wouldn’t necessarily draw any conclusions about the companies involved or the alleged violations.

What we do know, however, is that ICE filed a four-count complaint against Spectrum Technical Staffing Services, Inc. (“Spectrum”) in November 2015, alleging that the company should be held liable for 3 violations relating to the employment of unauthorized workers and 2,147 violations relating to Form I-9 verification failures. The total assessed fine amounted to $1,434,719.00. ICE later amended its fine calculation relating to the unauthorized worker charge (to $1,375 per violation) and adjusted the overall fine to a slightly lower (but still significant) $1,432,953.50.

The case does not specifically state how ICE charged the Form I-9 violations, but based on the total amount, it appears they assessed $605 per violation and further enhanced the fine by 10% to arrive at $665.50 per violation. Following ICE’s chart for determining I-9 penalties, it would appear they determined that Spectrum had substantive or uncorrected technical violations on approximately 30 to 39% of the forms under inspection (a charge, which if true, would actually place them below the national average for I-9 fines).

The More the Merrier? Not so with I-9 Complaints

The next major development in the case occurred in March of 2016 when ICE amended the complaint to add another staffing company, Personnel Plus, Inc. (“Personnel Plus”) as a respondent to the Form I-9 charges. According to ICE, a husband and wife team (now divorced) ran Spectrum for many years and then the husband, Mr. McKay, setup Personnel Plus just 16 days after ICE served the Notice of Inspection on Spectrum and the wife, Ms. Goslin, in 2013.

ICE found the timing relating to this new company formation suspicious and argued that Personnel Plus was created just to absorb Spectrum’s workforce – an argument bolstered by the fact that as of the fourth quarter of 2015, Spectrum only had 12 employees and Personnel Plus had 1,155 individuals on staff. ICE also noted that Personnel Plus offered the same services; operated out of the same location; used the same website, telephone number, and fax numbers; and had “significant employee” overlap.

Finally (and perhaps most significantly from ICE’s perspective), Spectrum listed Ms. Goslin and Mr. McKay as owners in response to the I-9 subpoena, and Mr. McKay actually identified himself as an owner of Spectrum on his Form I-9. In addition, their divorce decree stated with respect to both companies that Ms. Goslin and Mr. McKay would maintain an “equal division of profits, losses, and liabilities of said company as set forth in in the company’s current corporate governing documents.”

Personnel Plus Arguments

In response to the complaint, Personnel Plus argued that its formation had nothing to do with the ICE investigation against Spectrum Staffing, but rather, Mr. McKay had already been planning for some time to start a new staffing company in the same general area (with a slightly different focus). This also coincided with the fact that both Mr. McKay and Ms. Goslin had begun divorce proceedings several months prior.

With respect to the shared office space, Personnel Plus argued this was only for a short period of time and noted that they borrowed from Spectrum’s resources for convenience purposes only. Moreover, Personnel Plus contended that both companies continue to operate separately, and that Spectrum is still very much in business (although on a smaller scale than before).

Lastly, Personnel Plus pointed to records maintained by the State of Minnesota which indicate the sole-ownership arrangements of each business, and argued that the divorce decree referenced by ICE does not purport to transfer or create any ownership interests outside of this arrangement.

Determining Successor Liability

At the onset, OCAHO noted the traditional rule that mere asset purchasers are not liable as successors unless: (1) the purchasing corporation expressly or impliedly agrees to assume the liability; (2) the transaction amounts to a de facto consolidation or merger; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction was fraudulently entered into in order to escape liability.

With respect to the first point, the court noted that neither party alleged that Spectrum sold any assets to Personnel Plus. And while ICE argued that the sharing arrangement between the two companies constituted a transfer of assets, the court noted that there was no evidence of any “consideration” for using these resources.

For the sake of argument though, the court also analyzed the other factors but ultimately determined that ICE had failed to show any exceptions to the general rule that asset purchasers are not liable as successors. First, the court noted that the divorce decree does not sufficiently demonstrate that there was a common identity of officers, directors, and stock between Spectrum and Personnel Plus – a fact which would have supported ICE’s contention that there was a continuation of the business.

In doing so, the court seemed to give more weight to the relevant state of Minnesota corporate filings (showing the ownership as entirely separate) and discounted the company’s previous admission that Mr. McKay was an owner of Spectrum as well as the Form I-9 describing him as an owner (although the court did describe these as “suspect”).

The court also analyzed whether there was a “de facto merger” between the two staffing companies, a determination which involves looking at a variety of factors such as continuity of management, personnel, assets, and operations; continuity of shareholders; the ceasing of business operations by the seller; and the assumption of obligations necessary for uninterrupted continuation of the business.

The key factor, as described by the court, is the continuity of shareholders, and once again, they noted there was no evidence that a transfer had taken place (a point that ICE believes it may have found later through discovery). The court similarly dismissed ICE’s other arguments concerning the continuity of management and Spectrum’s reduced business operations as insufficient.

Finally, the court analyzed an even broader test of successor liability that looks to see if there is relevant similarity and continuity of operation across a change in ownership such that a purchaser could be found liable for a predecessor’s wrongs which were fully known prior to the acquisition. Under this test, the method of transfer of the assets and the commonality of the ownership are not determinative, and the court can also consider “whether the purchaser retained the same facilities, same employees, same name, same production facilities in the same location, same supervisory personnel; and produced the same product; maintained a continuity in assets; continued the same general business operations; and held itself out to the public as a continuation of the previous enterprise.”

While acknowledging that ICE had presented some evidence of the above, the court ultimately determined that the so-called “continuing enterprise/substantial continuity test” is more appropriate for cases involving labor disputes and employment discrimination (i.e., instances where there is a need to protect individual workers). Form I-9 violations, while painful, are directed solely at the company, and the court further noted that Spectrum still exists and may be held liable for any established violations.

Takeaways

Evaluating successor liability for Form I-9 violations is exceedingly complex and nuanced, involving a variety of tests, a deep analysis of the evidence, and a consideration of the choice of law to apply (another factor that was discussed at length here but ultimately considered irrelevant by the court in its decision). Regardless, there are some clear takeaways for employers (whether you’re in HR or legal) regarding the increasingly complexities associated with I-9 compliance:

  • Form I-9 violations can lead to massive potential liability, with fines reaching into the millions of dollars – particularly for large organizations and those with frequent turnover. And contrary to popular belief, some of the largest fines do not even involve allegations of unauthorized employment.
  • ICE will seek to hold all parties accountable for I-9 and immigration violations and will examine (closely) the relationship between your organization and other related entities involved (whether that be a successor, contractor, or staffing agency).
  • Most I-9 violations are considered “continuing violations” until they are corrected, and so employers should act now to remediate past compliance mistakes (where possible) and avoid the successor liability conundrum altogether!

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John Fay is an immigration attorney and technologist with a deep applied knowledge of I-9 compliance and E-Verify rules and procedures. During his career, John has advised human resource managers and executives on a wide variety of corporate immigration compliance issues, including the implementation of electronic I-9 systems. In his current role, John serves as Vice President and General Counsel at the LawLogix division of Hyland Software, Inc., where he is responsible for overseeing product design and functionality while ensuring compliance with ever-changing government rules.