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Ketchikan – A Landmark Court of Appeal Decision Regarding I-9 Compliance

[Editor’s Note: Today’s article is courtesy of Josie Gonzalez, Partner and Amanda Paquet, Attorney at Stone Grzegorek & Gonzalez LLP.]

On August 6, 2013, the Ninth Circuit Court of Appeals issued the first appellate court decision on Form I-9 fine assessments in Ketchikan Drywall Services, Inc. v. Immigration and Customs Enforcement. In this landmark opinion upholding civil penalties of $173,250 against the employer, the court elucidates on what is a technical or procedural I-9 deficiency that can be corrected and not result in a fine versus a substantive I-9 error resulting in fines, ranging from $110 to $1,100 per deficient I-9. Of utmost significance, the court gave deference to Immigration’s Interim Guidelines reflected in the Virtue Memo. These Guidelines were issued by Immigration in 1997, with a promise that formal rulemaking would follow.  Over 16 years later, ICE has still to issue regulations.
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This article will tell the sorry tale of how a construction company with a workforce of only four full-time and 20 part-time workers received an initial fine assessment of $286,624 (reduced to
$173,250 by the Administrative Judge) for 271 deficient I-9s.  The facts of this decision provide good practical illustrations of I-9 compliance lessons for employers.  Lastly, this article will also suggest ameliorative agency and legislative changes in how fines are assessed.

How does Ketchikan Drywall Services, Inc. (KDS), a Washington drywall installation company with a small workforce engage in I-9 recordkeeping deficiencies that result in such a large fine? Let’s review point by point:

  1. When it comes to I-9 audits by ICE, ICE can demand the records of I-9s for employees who were terminated in the last three years, as well as for current employees. Practice makes perfect.  The condition of older I-9s may not meet the standards of recently completed I-9s.
  2. In addition to its 24 employees, it hired many more employees on a “project-by-project basis.”  These employees might have been hired in a rush, without attention to detail.
  3. Over the years, more than a dozen different employees were responsible for managing and completing the I-9s. It didn’t employ any staff with I-9 compliance training until two years before the audit.
  4. It was under the incorrect notion that merely copying documents presented at the time of hire would substitute for a well-completed I-9.
  5. Copies of documents were not maintained with the I-9.  Further, Ketchikan didn’t surrender those documents to ICE at the time of the inspection in spite of explicit instructions otherwise.  To ICE’s credit, ICE did accept some copies after it issued its Notice of Intent to Fine and eliminated some counts.  However the Administrative Judge refused to accept more copies at the time of hearing reasoning it was too late and that some of the documents appeared to have been issued after the workers’ hire dates.
  6. It completed I-9s after the three days of hire timeline.  ICE showed no forgiveness for untimely completed I-9, making it impossible for an employer to fall into compliance.  (Had the I-9s been completed 5 years prior to the time of the audit, the employer could have invoked the five year federal statute of limitations provision.  In this case, it didn’t apply.)
  7. The I-9s, Section 1 contained a myriad of errors, including no box checked attesting to the employee’s status, no signatures provided, multiple boxes checked attesting to conflicting statuses (attesting to being both a U.S. citizen and a permanent resident concurrently), and failing to provide alien registration numbers.


Section 2 Challenges

For Section 2 of the I-9s, the employer fared no better.  What errors were viewed as “substantive” resulting in a fine in Section 2?

  1. Of critical importance, the employer representative failed to sign the I-9, thus failing to attest under penalty of perjury that it examined the original documents, that they appeared to be genuine-looking, and that they believed the new hire was work-authorized.
  2. Document information was not fully recorded on the I-9.  Since copies of the documents were not retained and presented to ICE with the I-9, what could have been a technical fine with an opportunity to correct transformed into a substantive violation.
  3. Unacceptable documents not listed in the “List of Acceptable Documents” in the accompanying I-9 instructions were recorded.  For example, in lieu of a U.S. or Canadian driver’s license, the company accepted a “matricular consular,” which is an identity document issued by Mexican consulates to Mexican nationals. Other examples include a social security “letter” not the actual card, or a social security card with the notation: “Valid for work only with INS (or DHS) authorization” and no agency work authorization were also recorded.  (Note: These restricted social security cards are issued to foreign nationals with just temporary work authorization.)


Other Issues of Fairness

Unfortunately, the Court gave insufficient attention to the issue of the fairness of the penalty assessment – a topic ripe for judicial attention and interpretation.  KDS argued that the Administrative Judge should not have used ICE’s penalty guidelines to calculate fines.  Like the Virtue Memo, these penalty guidelines were also issued informally without notice and comment rulemaking.

Upon a close examination of these Guidelines, one might conclude that they should not be given deference because they are not well-reasoned.  In fact, in almost all of the decisions rendered by the ALJ since the ALJ decision underlying this case, the ALJ has not followed the Guidelines and has found deficiencies in the reasoning supporting the Guidelines.

For example, the Administrative Judge has found that an individualized determination should be made whether to aggravate or mitigate the penalty if the employee is unauthorized. It also held that not all violations are equally serious; clearly, no I-9 or no signatures on the I-9 is more serious than failure to provide the issuing authority for the driver’s license.

Regarding other regulatory factors [1] impacting the fines, such as “good faith,” “size of the business,” and “history of previous violations,” there was no need for an individualized treatment. The Administrative Judges have also found that mere noncompliant I-9s do not necessarily equate to lack of bad faith, nor does a volume of non-compliant I-9s impact the “seriousness” or “good faith” factors.

In Ketchikan, the Ninth Circuit provided clarity on a number of significant issues:

  • One receives no credit for copying documents if they are not attached to the I-9 and presented to ICE at the time of an audit.
  • If critical information isn’t inserted in the I-9, such as attesting to one’s legal status in Section 1, copying identity and work authorization documents as an alternative is insufficient.
  • Errors and omissions that thwart the intent of the statute to verify the status of new hires will be considered substantive errors that trigger a fine assessment.
  • The employer is responsible for errors made by employees in Section 1: “Where KDS chose to hire employees who had failed to fill out Section 1 completely, it did so at its own peril.”  (Ketchikan, at15.)
  • Although the agency failed to promulgate regulations, the Virtue Memorandum was given deference because it showed “thoroughness in its consideration,” “validity in its reasoning,” “consistency with earlier and later pronouncements” and it provided “detailed, concrete guidance for dealing with omissions that might appear on an I-9 Form.”  (Ketchikan, at 13-14.)
  • The Ninth Circuit held that the Administrative Judge’s refusal to reduce the penalty was neither arbitrary nor capricious because the statute establishes broad discretion in determining the penalties and the ALJ’s choice of calculation methods was “clearly allowable.” (Ketchikan, at 20.)

In conclusion, we offer some suggestions for legislative and agency fixes in order to provide a more balanced, fair approach toward I-9 compliance and reduce the harsh financial impact huge fines have on the small business sector.

  • Late completion of I-9s should be forgiven in order to allow employers to come into compliance.
  • I-9 audits should focus on the I-9s of the current workforce, as some auditors do in certain cities, rather than demand I-9s for employees terminated in the last three years.
  • Employers who participate in E-Verify should be relieved of the burden to maintain I-9s. There should be one simple compliance step rather than two.
  • The weight given to lack of an unauthorized workforce should be significant.
  • Over 25 years since the passage of the Immigration Reform and Control Act of 1986, ICE should promulgate regulations governing good faith compliance and defining what is a substantive versus technical violation. Similarly, it should also issue regulations regarding how fines are assessed.
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