The Merger and Acquisition Process: Staying I-9 Compliant

According to the latest report from Morningstar, the first half of 2011 was an impressive one for mergers and acquisition deals, though it slowed for the second half of 2011.  Overall deals still exceeded that of years prior.  Along the same lines, Berkery Noyes’ recent report confirms similar growth for 2011 in the education industry, with growing momentum for the first quarter of 2012.  Apple’s recent announcement to launch textbooks via the iPad has also created a big buzz in the education sector. Mergers and acquisition deals, in fact, have peppered news outlets in recent months.  Amidst the excitement of a merger or an acquisition, the challenges of staying I-9 compliant can easily be overlooked, particularly since most attorneys managing the M&A process are not traditionally immigration or employment attorneys, and the transaction itself can be lengthy and complex. In the context of I-9 compliance, mergers and acquisition deals occur in various forms, including mergers of companies to form a new entity, acquisition of other companies, consolidations and spin-offs, to name a few.  The issues of concern are two-fold, assessing non-compliance liability before and after the deal. I-9 Risk Assessment Before a Merger or Acquisition Deal Due diligence is an important process for any financial transaction. From a Buyer’s perspective, assessing risk is usually the overarching objective in order to determine a fair purchase price.  But how do we assess risk in the I-9 compliance arena? First and foremost, we start with an evaluation of the current enforcement climate. And in my November blogarticle discussing Secretary Janet Napolitano’s testimony before the U.S. House of representatives Committee, the statistics were startling!  Since 2009, ICE conducted more than 6,000 I-9 audits of U.S. employers and issued more than $76 million in fines.  The DOJ also increased criminal investigations of U.S. employers as a result of ICE I-9 audits.  In short, the risks for non-compliance are not only real, but very costly.  Potential Buyers should certainly take note, particularly where the legal ramifications involve transactions where a Buyer assumes most or all of a Seller’s liabilities.  Here are some basic yet important considerations for pre-deal due diligence:

  1. Evaluating a Seller’s I-9 Form Environment: This would involve understanding how I-9 forms have been completed, where the I-9 forms are housed, whether or not an electronic I-9 software solution was used and if so, whether the electronic I-9 solution contained the necessary security and recordkeeping controls that are compliant with ICE policy and federal regulations.
  2. Conducting Soft Audits of the Sellers’ Form I-9s: Timing, human resources, document volume and costs can often constrain this critical step.  Nevertheless, the ability of a Buyer to conduct a soft audit of the Seller’s I-9 forms is a crucial step in assessing the value of a Seller’s assets against its liabilities.  Where a Seller uses an electronic I-9 software solution to house and complete its I-9 forms, running a comprehensive audit report (available only in well-designed systems) can alleviate a lot of the up-front time and costs of conducting a soft audit.  In addition, recruiting the assistance of external and experienced experts in I-9 compliance will help a Buyer determine potential monetary fines or penalties and help devise post-deal I-9 compliance strategies.  Experts who have a history of successfully conducting  I-9 audits will know how to balance the information contained in I-9 forms against additional payroll or Social Security Administration records.
  3. Accessing Samples of I-9 Forms:  When time, costs, and human resources cannot allow for a full and complete audit of all Seller’s I-9 forms, or the sheer number of I-9 forms would simply not be practicable, the alternative is to conduct a partial audit which looks at a representative sample of the Seller’s I-9 forms based on divisions, departments, regions, or whichever approach accurately represents the Seller’s organizational structure.
  4. Assigning Monetary Figures to I-9 Form Errors:  Audits are a good exercise in determining whether a Seller gets a passing or failing grade when it comes to I-9 compliance.  Failing grades usually involve multiple technical and substantive errors, and/or other regulatory violations.  Most I-9 audit experts can assist in assigning a monetary value to those errors such that the Seller can make a final, educated determination of what costs a Buyer could truly incur if the deal were to proceed.
  5. Understanding the Seller’s Compliance Culture:  In the event of an actual ICE audit, having a demonstrated practice of attempting to remain I-9 compliant indeed holds some weight in court.  This is where a Seller’s “Compliance Culture” can be converted into an asset.  The “Good Faith” defense has been invoked in numerous audit cases both in court and during actual ICE audits.  Buyers should explore a Seller’s I-9 compliance policies, training and internal enforcement mechanisms, if any, to understand the Seller’s Compliance Culture.

Armed with all the information above regarding a Seller’s I-9 compliance, a Buyer is now in a good position to assess a Seller’s liabilities (and hopefully make an informed decision on price). I-9 Risk Assessment After a Merger or Acquisition Deal The reality of most M&A transactions, however, is that I-9 compliance assessment is given little (if any) attention.  Where Sellers are unable or unwilling to provide a Buyer pre-deal access to all of its I-9 forms for an audit, or where the Buyer simply could not conduct an audit of the I-9 forms, post-deal risks assessments can certainly be utilized.  Steps 1 through 4 are helpful for post-deal Buyers in assessing potential I-9 penalties and/or fines.  The following steps also allow post-deal Buyers to remediate any potential liabilities:

  1. Transitioning I-9 Forms:  Depending on the risk level for potential fines, the number of existing I-9 forms, the availability of human resources and experience of experts, Buyers must decide whether to impose a requirement for all of Seller’s employees to complete new I-9 forms, or to accept the existing I-9 forms.  Successor in interest risks of this nature should be made in conjunction with experienced attorneys or I-9 compliance experts.  For some companies, the transitioning of I-9 forms can be challenging by its sheer volume. Now would be the best time to investigate solutions to help with that onboarding process, including utilizing electronic I-9 software solutions to assist in migrating I-9 form data into one compliant repository.
  2. Adopting a Compliance Culture: Given the environment government audits have created in recent years, it goes without saying that improving I-9 compliance is becoming both a requirement and a business necessity.  Creating a company-wide policy and ensuring the policy is followed is a great way to reduce risk and facilitate a merger or acquisition.

Staying I-9 compliant does not have to be a complex process even though M&A deals usually are.  No doubt, the savvy Buyer will already have understood the risks of I-9 non-compliance and made headway into adopting and promoting a strong and comprehensive I-9 compliance policy.