The past two years have seen significant growth in the number of mergers and acquisitions nationwide with many business owners choosing to liquefy their assets and move on. At the same time, employers have had to cope with numerous challenges that have made the otherwise routine task of employee onboarding and I-9 preparation more difficult. Some employers (unlawfully) stopped preparing I-9s for new hires altogether. Others found alternative means to prepare and store them that didn’t require new hires to meet with an HR representative in person, usually through the use of emailed forms, electronic signatures and document review conducted online/remotely. While the U.S. Department of Homeland Security (DHS) did issue temporary guidance in March 2020 that allowed some employers to prepare and retain I-9s electronically/remotely, the exemption only applied to relatively few companies. Only those companies that had no employees working onsite at all (including skeleton crews) due to Covid-19 related precautions were allowed to prepare I-9s for new hires remotely. All other employers were required to continue the preparation of I-9s per normal procedure. Many employers misunderstood the guidance, stopped preparing I-9s correctly and, as result, are now out of compliance and ripe for audit and penalties imposed by DHS. Note: In addition to the temporary guidance, DHS recently announced a Proposed Rulemaking that, if implemented, would allow for alternative means of preparing I-9s remotely but it is not yet in effect, and standard I-9s requirements still apply.
Buyers of a business and their counsel know (or should know) to be on the lookout for I-9 compliance as a threshold matter for due diligence. Employers that are lax in their I-9 compliance make for higher risk acquisition targets because their I-9s may be a ticking time bomb just waiting for the next DHS audit. Also, because many employers that are lax with their I-9s also tend to have a higher percentage of employees who are non-U.S. citizens, many of whom may have presented fake or stolen identification documents. No buyer wants to acquire a company with the intention of continuing the employment of the existing workforce only to lose half the legacy employees on day one, once I-9 requirements are properly enforced.
Some sellers incorrectly assume that their deficient I-9s are simply a problem the buyer can deal with after acquisition. There is a rule that allows new owners to prepare new I-9s for all employees after acquisition, but it only applies to those transactions where the buyer intends to treat the existing employees as “new hires” rather than seamlessly continuing in their employment post-closing. Unless the buyer plans to treat the acquired employees as “new hires” and prepare new I-9s post-closing, it will inherit the seller’s I-9s as they stand and usually assume full responsibility and liability for them post-closing. Therefore, most buyers want to see a target’s I-9s cleaned up pre-closing. Deals are being held up over I-9 related due diligence. And some risk-averse buyers may simply choose to walk away from a seller that appears to play too fast and loose with its I-9s.
The obligation to prepare and retain a Form I-9 for each new hire is not new, and DHS/Immigration and Customs Enforcement (ICE) has been auditing and penalizing non-compliant employers for years. In 2019 (the last year for which statistics are available), DHS conducted 2,496 audits, which resulted in over $10 million in administrative fines for improperly prepared I-9s and 713 workplace arrests, including 221 company owners, managers, and HR officials, for I-9 related violations. Even a well-meaning employer can still face serious fines for relatively minor “paperwork violations” if multiple forms contain them. On January 11, 2022, DHS increased the base fines for minor “paperwork” violations from $252 to $2,507 per violation. Importantly, the base fine increases exponentially along with the percentage of forms that contain errors and omissions. The base fine for I-9 violations where DHS finds more than 50% of the forms contain errors is $2,507 per violation. Multiply that amount by even 50 I-9s, and you could be looking at a significant six-figure fine.
If you are contemplating selling in the near future, consider auditing I-9 records and ensuring they are fully complaint so that they don’t hold up your deal. Also, with most employers returning (or already returned) to the office, and with the temporary guidance scheduled to expire on October 31, 2022, NOW is a great time to review and take stock of your company’s I-9s by self-auditing to ensure your company is ready in case DHS/ICE ever comes knocking.
Schwabe has extensive experience with mergers, acquisitions and I-9 compliance. Please feel free to reach out to us if you have questions or we can be of assistance.
This article summarizes aspects of the law and does not constitute legal advice. For legal advice for your situation, you should contact an attorney.