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Feb 18, 2020

Construction E-Verify May Force Some Companies Out

David Spaulding

In “Hiring Strategies for a Candidate-tight Construction Labor Market,” Debra Holden and Rich Laibson argue that a tightening employment market necessitates moving quickly to offer employment, developing better retention strategies, communicating more effectively with employees, and focusing on compensation.  Construction Executive ran the piece on November 13, 2018 and the advice remains relevant because manufacturing and construction industries report that the tightening job market necessitates hiring, compensation, and retention policy changes. We see a similar observation in CNBC reports that employers for highly skilled positions have had to lower minimum qualifications to fill essential vacancies and the Wall Street Journal confirms what many business owners have noted: there aren’t enough workers, qualified or not, to fill vacant jobs.

These aren’t mere narrative observations either.  When we look at verified labor market information, we find that The Bureau of Labor Statistics (BLS) data supports the claim that there is a nexus between increasing compensation and the tightening labor market. This doesn’t surprise; after all, employees within specialty occupations are not interchangeable.  Skilled labor is not as fungible as less skilled labor, on which both construction and manufacturing have some reliance.  It follows that, since less skilled labor can move more easily between manufacturing and construction, it is highly volatile. The hotter the economy runs, the more impact compensation has on employment stability, particularly among less skilled laborers.

In addition to the labor market impacts of a roaring economy, we have the Trump Administration’s crackdown on immigration violations and, as we discussed in November, a requirement that Pennsylvania construction companies comply with the Construction Industry Employee Verification Act (“Construction E-Verify Act”).  Taken together, these factors present a substantial challenge to the status quo. Coupled with general worksite enforcement and Social Security Administration No Match Letters, the employment market seems poised to tighten further and, if recruiting and retention hinge on compensation, some construction industry businesses will find adapting to these changes difficult. 

In a sense, using compensation to address labor market changes is business as usual since employers are accustomed to looking at labor market conditions to determine compensation but, looked at in isolation, labor availability presents a skewed picture. A better approach to workforce forecasting includes an assessment of what will be required to employ only authorized workers. Liability is increasing and the likelihood that government will discover violations has increased with it. The risks of government audits, inspections, and investigations are more significant now than ever before and they have to be part of the recruiting and employment analysis if companies are going to position themselves correctly in the labor marketplace.

CBS News reports that between 2% and 4% of all Pennsylvania employees are not authorized to work in the US; agriculture, construction, and manufacturing employ 77% of those unauthorized workers. To be sure, the employer may be unaware that the worker is not authorized to work in the US but not knowing doesn’t eliminate the liabilities. The criminal liability of knowingly employing unauthorized workers is just a portion of the consequences companies face and the disruption of having to abruptly terminate employment can have as profound an impact on a company as any raid.  The bottom line is that, knowingly or not, employers cannot lawfully employ unauthorized workers.

The mechanism for documenting authorized work status in the US is the Form I-9, Employment Eligibility Verification (“Form I-9”). Employers are required to complete one for every employee and those documents are subject to audit by U.S. Immigration and Customs Enforcement (ICE).  Audits of those documents have become far more frequent in recent years and we expect that to continue through at least 2020.  It is against that backdrop that the Construction E-Verify Act should be analyzed.

By October 6, 2020, Pennsylvania construction industry companies are required to enroll in E-Verify, a “web-based system that allows enrolled employers to confirm the eligibility of their employees to work in the United States.” The Construction E-Verify Act affirms the federal prohibition against employing unauthorized workers and adds a requirement that construction industry companies use E-Verify. Effectively, this means that many unauthorized workers will fall out of the prospective employment pool almost immediately, reducing the number of potential workers available to the industry. Given the broad description of what qualifies as a “construction industry” company, subject to the Construction E-Verify Act, this will likely make the labor market tighter, particularly among the less skilled laborers that the construction and manufacturing industries share.

Perhaps the biggest legal risks rise from the nexus between Construction E-Verify Act compliance and worksite enforcement actions.  It is worth considering that Immigration and Customs Enforcement (ICE) has unfettered access to both E-Verify enrolled organizations and corporation data. It isn’t difficult for ICE analysts to figure out which construction industry companies have enrolled and which haven’t, and failing to enroll likely increases the risks of being subject to a worksite enforcement. As discussed back in October, better government data access, stronger analysis, and better inter-agency cooperation reduces the chances that violations, knowing or unknowing, will go unnoticed.

Pennsylvania construction industry companies have around eight months to enroll in E-Verify.  New employees will have to present documents which contain verifiable data and some prospective employees won’t clear that vetting process.  For companies that have the means to adjust compensation and that have effective policies and procedures in place, complying may not have dramatic effect. For such companies, legal guidance can be oriented to avoid verification and reverification compliance pitfalls and policies and procedures can be reoriented to maintain the company’s interests in hiring only authorized workers. Looked at this way, the Construction E-Verify Act may present the right companies with an opportunity to grow through acquisition of less adaptable companies. For some, implementation of the law may provide a unique opportunity to buy competitors which are more sensitive to the changing environment.

For companies which lack the resources to offer competitive compensation or the administrative structures to fully comply with the legal requirements, the next eight months may become increasingly uncomfortable. Kim Slowey’s piece “The Dotted Line: The growing perils of using undocumented workers” points to the challenges that companies which rely upon unauthorized workers will face in this enforcement-heavy environment. This does not mean that there is nothing companies can do though; timely and creative solutions may position struggling companies in a better place to compete.

Each situation is unique but there may be opportunities for vulnerable companies to, for example, merge with long-term partners to form more competitive companies. In the alternative, a sale may be structured to place the principals of the company being dissolved in a good employment position in the new entity. Solutions have to be carefully tailored but it is likely that the challenges will grow as we get closer to full implementation of the Construction E-Verify Act. Once we move beyond the October 2020 implementation, the worksite enforcement risks increase exponentially and the asset value assessments become less advantageous to the selling company.  

Green and Spiegel’s Compliance and Regulatory Enforcement Practice is uniquely positioned to assist companies in these matters. We assess liability in discrete and economical ways that place companies in good positions to make decisions. For companies which would benefit from adapting policies and procedures to meet the changing environment, our attorneys can conduct thorough audits, work with the management team on policy and procedure overhaul, and assist in revamping hiring and employment to improve competitiveness. For companies for which asset purchases are either a benefit or a remedy, we can conduct the kind of discrete assessments that place sellers and purchasers in the right place to move forward on a deal.

Please give us a call if we can be of any assistance to you on these matters.

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