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Gerard Centioli, Icon LLC, Founder, President and Chief Executive Officer, www.icon.com
Kurt Huffman, Chefstable LLC, Owner, http://chefstablegroup.com
Sam Goldfinger, The One Group, CFO, www.theonegroup.com
Brad Klapper, Nourish Capital, Managing Partner, www.nourishcapital.com
Marc Williams, DWT, Attorney, www.dwt.com

Session Purpose:

Earlier stage restaurants have learned to be extra creative and resourceful in obtaining financing over the past few years. The purpose of this session was to learn different strategies employed by operators and investors, and to discuss laws that apply to the offer and sale of securities.

Key Take Aways:

• Deal only with accredited investors. Accredited investors are those that can “fend for themselves” given their wealth and/or investment experience (and as defined by applicable securities laws). Although the offer and sale of securities to any investor comes with inherent risks, the laws are protective of non-accredited investors (those without wealth and/or sophistication) and selling to them without legal compliance (which is costly and burdensome) can land an offeror in hot water. The lesson: review any proposed offer with a securities lawyer before making any commitments.
• Those who treat their investors well do better in the long run. Treating an investor well does not necessarily mean agreeing to economic terms that are lopsided in the investor’s favor. On the contrary, one of our panelists informed the audience that his primary financing mechanism these days are interest-free promissory notes, given that he has reached a level of notoriety and success where he can command such terms. That said, he provides all investors with online access to the financial performance of the business in addition to annual dining credits. Another panelist has had the good fortune of working with the same group of high net worth investors for years. In all of their deals, they look to provide a meaningful return to their partners over the course of time, and have fostered such goodwill that financing new projects is without significant challenge.
• Private equity is a viable option for early stage restaurant companies. Professional funds, more than ever, are willing to entertain investment in top emerging concepts. Expect a private equity investor to take a more active role than most “friends and family” partners in the business; provided, however, a private equity group coupled with meaningful restaurant experience can be a valuable asset for a growth brand.
• Take out a loan when you don’t need it. A strong performing business is well-advised to obtain a commercial line of credit when the money is not needed – because when money is needed, the business will likely not qualify for a loan.
• Educate yourself on different financing options, market terms, etc. Every deal is different and there are a variety of different financing structures available to growth stage restaurateurs. That said, there are common/market terms in each of these structures and a restaurateur is advised to do as much research as possible before committing to a given option.
• Be realistic. Early-stage restaurant investment is primarily relationship driven. Odds are most of your investors will be friends or family. If your friends/family networks are not accredited investors and/or they’re the type that need/want a quick return on their investment, you are likely setting yourself up for trouble. If you have insufficient strong financial contacts, it is also probably not worth investing the time and effort into a private offering. It is very difficult to convince strangers to invest in a restaurant, not to mention legally risky. The law prohibits the general solicitation of securities.
• Preserve your equity. Don’t give up the house or you won’t have a house to live in. If you find yourself giving away too much of the business, you should rethink your strategy.

Faculty:

Manny Valdes, Frontera Foods, CEO, http://www.fronterakitchens.com/
Michael Dellar, Lark Creek Restaurant Group, CEO, http://www.larkcreek.com/aboutus.html
Michael Levine, Tastes on the Fly, LLC, CEO, http://tastesonthefly.com/press.html

Key Take Aways:

• Educate yourself. Before embarking on any non-traditional development plan, familiarize yourself with the essential basics, which are:
  1. Every channel is different. No channel is the same. Your approach to developing in airports will likely be very different than an approach focused on development on university campuses or other channels. The operators, decision-makers, deal terms, and contractual options all differ based upon the channel. The more you know, the better your prospect to grow.
  2. Be patient. Non-traditional restaurant opportunities are becoming increasingly competitive and specialized. While a 20-store development deal was possible with an airport concessions operator 15 years ago, this is no longer the case. Concession opportunities in airports (and other certain channels) are now often subject to competitive bidding, and brand preferences, by and large, and are trending towards local as opposed to national concepts. There are exceptions of course, but it is important to understand the landscape in order to plan and manage expectations.
  3. Be smart. Select only those opportunities that will develop and enhance your brand. Since the majority of contractual relations in non-traditional venues are licenses/franchises, you will likely find yourself working with an operating partner. To preserve brand integrity (and your sanity), it is critical to take the proper steps to ensure that you are working with a partner that will represent your brand in accordance with your expectations. Ask for references, speak with current/former licensees, and talk to others who can provide objective guidance about the qualifications of a particular operating partner.
• Be an active operator/partner. If you’re actively operating your concept (under a lease, management agreement, or joint venture), this goes without saying. However, as a licensor, you will not have control over day-to-day operations and things can go in a negative direction quickly if you’re not an active partner. Active partners insist on adherence to quality standards, provide meaningful training to the licensee throughout all periods of the relationship, and provide valuable feedback on operations and other matters.
• Understand the laws that may apply. Regardless of whether the parties call their relationship a “franchise,” most license relationships will meet the legal definition of a franchise under federal law and under the definitions of those states that have franchising statutes. Unless an exemption applies, the law requires franchisors to provide pre-sale disclosure to a prospective franchisee and, in a number of states, to register the franchise offering prior to offer/sale. Fortunately, exemptions are often available in a wide variety of non-traditional license relationships, but not always. The consequences of failing to comply with franchise laws can be severe, so it is critical to assess franchising issues before reaching an agreement with an operating partner.
• The contract matters. Many non-traditional operators like to provide their form of agreement that will often lack critical provisions that protect the interests of the restaurateur. Working with counsel with the experience and relationships in non-traditional channels can help ensure that you reach an agreement that protects your brand and provides certainty in your relationship.

Examples of Non-Traditional Venues where Food Service Development is becoming Prevalent:

• Airports
• Hotels, resorts, casinos
• College campuses
• Department stores
• Corporate campuses
• Health care facilities
• Train stations and other travel centers
• Stadiums, arenas and convention centers
• Theme parks
• Airlines and cruise lines
• Military bases
• Convenience stores (store within a store)

Chris Reilly, KarpReilly LLC, Co-Founder, http://www.karpreilly.com/
Jon Owsley, Catterton Partners, Partner, http://www.cpequity.com/
Laird Koldyke, Winona Capital Management, Managing Partner, http://www.winonacapital.com/index.htm
Mark Saltzgaber, http://www.marksaltzgaber.com/index.php
Russ Bendel, Habit Restaurants LLC, CEO, http://www.habitburger.com/no-substitute-for-quality/
Greg Dollarhyde, Veggie Grill, Inc., CEO, http://veggiegrill.com/

Session Purpose:

Not surprisingly, growth financing for emerging restaurant concepts has been challenging to obtain the past several years. With banks not lending, restaurateurs have by and large been resigned to self-financing or going to friends and family/high net worth route. While these options suit many growing businesses just fine, private equity continues to be an increasingly viable option for development stage restaurant concepts. There are a select number of groups that have long-financed earlier concepts and a number of others that have entered the space. For this session, we were fortunate to have several talented and seasoned industry experts from both the financing and operations sides. They lent their vast experience and knowledge to help our session audience, which consisted largely of growth stage brands, to better understand how private equity works – and what to look for (and avoid) in a prospective financial partner.

Key Take Aways:

• Not all private equity is alike. One of the most significant misimpressions that we see with a number of our emerging clients is the belief that all private capital is roughly the same. It’s not. Although all are looking for a return on investment, investment philosophies, restaurant investment experience, deal criteria, risk tolerance, and a variety of other factors differ from group to group. It is the people behind the capital that matter most, and any restaurateur considering private equity investment should dedicate a considerable amount of time to getting acquainted with the potential investment partner. Correspondingly, you will find that the most serious private equity investors will thoroughly evaluate you and your business prior to making an investment. As noted in the “red flags” below, any group that would invest in your concept without doing their homework is probably not worth doing business with. As an entrepreneur, you will want to fully understand how the post-investment relationship will work in practice, and this is best accomplished by candid discussions with the investment group about these items prior to making any commitment.
• Private equity is a business and is not right for everyone. Private equity groups are accountable to their investors who have investment return expectations. This differs from other deals, such as those with friends/family or high net worth individuals, who may have their own expectations, but with no obligation to anyone else. Accordingly, private equity investors, even in minority investment situations, will need to insist on certain provisions (e.g., veto rights, redemption rights, voting rights, etc.) that are difficult for some emerging entrepreneurs to accept. As some of our panelists commented, a private equity relationship is like a marriage. Both parties have a lot on the line, and the restaurateur can expect the investment partner to be actively involved in the monitoring of the business. In many cases, active involvement is of great benefit to the restaurateur, especially when the financial partner has significant experience with restaurant growth and development. That said, a restaurateur that would prefer a “silent” partner should pursue other financing options.
• There are many posers out there – watch out for red flags. Nothing can destroy a business faster than a bad partnership and far too often restaurateurs jump into bed with financial partners without seeing obvious – and not so obvious – warning signs. First, the absence of any restaurant investment/operations experience on the investment team is an immediate point of concern. Restaurants are a very different investment than some other businesses which can only be fully appreciated with some form of prior restaurant experience. If the investment group does not have it, they hopefully add someone who does, whether in a consulting role or something else. Also, if the prospective investor has to go out and find the money after reaching terms, it is not a professional private equity deal. This is not to say that a “cat herding” approach is never successful – we have seen situations where it is. However, this process is inefficient and uncertain. One must also be wary of prospective investors with unrealistic expectations, especially wanting/promising to scale a concept faster than reasonably possible. This often involves plans to engage in aggressive franchising before a concept is proven/ready or other revenue generation plans that are not necessarily in the best interest of the brand. Another red flag is the investor who wants to opine on matters beyond their scope of expertise. This can come in a number of forms, but is frequently seen as an investor that wants to meddle in everything, including menu development and other day-to-day operating details where input is not desired or solicited.
• The right financial partner can be a business’ greatest asset. With all of the skepticism surrounding private equity, the reality is that an exceptional financial partner can be the decisive factor in the success of a restaurant concept.

The date and location for Restaurant High 2013, along with our next “honorary principal” will be announced shortly. Until then, in the commencement address words of Principal Judge Reinhold, “Learn it. Know it. Cook it!”

Click below to read the highly anticipated yearbook.

1.  Things move very quickly after you learn that authorities are investigating a large outbreak which may be associated with your restaurant.  Therefore, it is critical to have a team already in place to immediately address the operational, legal and media issues which will arise.  It is especially important to have someone available who can “speak the language” of public health authorities.
2. Everything you do should be in furtherance of the goal of protecting the health of your customers.  But getting customers back in your restaurant is also a critical goal, and if handled thoughtfully and with care, the two goals are not mutually exclusive.
3. You can always buy insurance to protect your assets from claims or lawsuits, but you can never buy enough insurance to protect your brand.  Lawsuits and lawyers can be dealt with at the appropriate time, but your first priority should be to achieve the two goals discussed above.
4. In our opinion, it  is never wrong to say “I’m sorry” to an injured customer, regardless of the connection of their injury to your restaurant.  Just as an example, who wouldn’t feel sorry for the parents  of a very sick child who developed E. Coli ?

We have worked with many restaurant clients on putting together crisis response plans and would be pleased to assist you and your team in thinking through these critical issues.

Under the Consumer Credit Protection Act, only certain types of income can be garnished. Generally tips are not considered income for such purposes. Notably, tips paid directly to an employee by a customer and tips charged to credit cards that briefly pass through the employer before remittance to the employee are excludible from garnishment. Garnishment is merely a mechanism where employer can appropriate funds in their possession on behalf of a creditor. However, some direct tips are never in the employer’s possession and accordingly are not likely subject to garnishment.
A directive in the DOL Handbook dated February 9, 2001, eliminates doubt that a gratuity paid directly to an employee is not considered earnings. Chapter 16 of the DOL Handbook specifically describes the applicability of the CCPA to tips and gratuities. It states the following:

1. Bona fide tips are not subject to the provisions of the CCPA. A garnishment is inherently a procedural device designed to reach and sequester earnings held by the garnishee (usually the employer). Tips paid directly to an employee by a customer are not “earnings” within the meaning of [15 U.S.C.A. 1672] the CCPA, since they do not pass to the employer. This includes gratuities transferred free and clear to an employee at the direction of credit customers who add tips to the bill.
2. Service charges added to a customer’s bill constitute “earnings” within the meaning of [15 U.S.C.A. 1672] when passed on to the employee. As such, they are subject to the provisions of the CCPA. The following examples demonstrate the point.

1. A restaurant charges a customer 15% of the check, as a service charge, and in turn pays this amount to the server (debtor). Since this is an automatic charge, there is no gratuity by the customer. The compensation passed from the employer (garnishee) to the server.
2. The employment agreement is such that the customer’s tips belong to the employer and must be credited or turned over to the employer.(i.e. shared tips or pooled tips that go the employer and are then later turned back over to the employee less some sharing, processing fee, etc.)

Even some nationally recognized payroll processing services aren’t aware of these distinctions and also most restaurant employers aren’t either. Employers should verify with their payroll processing companies or their internal payroll staff that tips are being allocated correctly in garnishment processing.

Fact: It is estimated that about 24% of the employees in the food services and restaurant industries are immigrants.

Fact: Illegal workers often have fake green cards or social security cards that appear to be genuine and cannot be detected in the I-9 employment eligibility verification process.

Conclusion: Many restaurants are likely employing illegal workers, whether they know it or not.

How do we know whether our employees are legal or illegal? You don’t. Not unless you sign up for a special government program that involves an audit of all your I-9 forms and verification by the Department of Homeland Security (DHS) and Social Security Administration (SSA) of the employment authorization and social security numbers of all of your current employees. But if you do that, it could result in a major disruption of your business if it turns out you are unknowingly employing a substantial number of illegal workers and if you cannot find enough legal workers to replace them on short notice.

What should we do about this?

• Do not knowingly hire or continue to employ illegal workers. You could go to jail!
• Make sure your I-9 forms are in order. You could incur big fines for paperwork violations!
• Do not ignore social security no match letters. But do not overreact or do more than is required by law – you could be charged with document abuse, discrimination or wrongful termination.
• Consider signing up for E-Verify to avoid unknowingly employing illegal workers going forward.
• Tell your Congressman to get busy on comprehensive immigration reform.
• In the meantime, make yourself as comfortable as possible between that rock and a hard place!

The purpose of this article is to provide practical advice on (i) completion and retention of I-9 forms, (ii) the pros and cons of signing up for E-Verify, and (iii) responding to social security no match letters.

CURRENT IMMIGRATION ENFORCEMENT POLICY

DHS and ICE have announced their intention to increase worksite enforcement of U.S. immigration laws. A number of states also have enacted laws aimed at curbing the employment of illegal workers. Thus, it is more important than ever for U.S. employers to make sure they are in compliance with all applicable immigration laws and regulations. This is especially true for firms that (i) employ workers at airports, nuclear power plants, chemical plants, seaports, and other critical infrastructure that are important to national security; (ii) have received Social Security “no-match letters” from SSA for a significant number of employees in past years; or (iii) are in industries that have a chronic shortage of U.S. workers, a reputation for attracting undocumented workers, or a history of being targeted by DHS and ICE in past worksite enforcement actions.

In fiscal year 2011, 2,496 employers had their I-9 records audited and 383 of them received final fine notices totaling more than $10 million. Also, 221 owners, employers, managers and/or supervisors were the subject of criminal charges. Although the focus seems to be on the most egregious cases, innocent employers who unknowingly hire illegal aliens can be the subject of immigration raids which are costly and disruptive. For an explanation about the government’s current immigration enforcement policy and for a summary of recent enforcement actions against restaurants, see the ICE web site.

TIPS ON HOW TO PROPERLY COMPLETE AND RETAIN I-9 FORMS

Pursuant to the Immigration Reform and Control Act of 1986 (IRCA), U.S. employers must complete and retain Form I-9 (Employment Eligibility Verification) for all new hires after November 6, 1986, including U.S. citizens. IRCA imposes substantial fines on employers who do not complete the required documentation procedure or who knowingly hire or continue to employ unauthorized aliens. IRCA also contains prohibitions against employment discrimination on the basis of national origin and citizenship. The current I-9 form can be found on the USCIS website. Also available on the USCIS web site is an I-9 Employer Handbook, which provides detailed instructions and very useful FAQ’s. Below are some tips about how to properly complete and retain I-9 forms:

• New Hire Must Submit Documents and Complete Section 1. Section 1 of Form I-9 contains identifying information and is to be completed by the new hire at the time employment begins. By signing Section 1, the new hire attests that he/she is a U.S. citizen, an alien lawfully admitted for permanent residence, or is otherwise authorized to work in the United States for a specified period of time. The employer is responsible for ensuring that Section 1 is properly completed. The employer should make sure the employee does not check more than one box in Section 1. A lawful permanent resident should only check the third box, not the third and fourth boxes. After completing Section 1, the new hire should be given up to three business days to submit one or more of the documents listed on the back of the I-9 form showing both identity and employment eligibility.
• Employer Must Examine Original Documents and Complete Section 2. Section 2 is completed by the employer’s representative within three business days of the date employment begins. Employers must examine original documents presented by the new hire that evidence identity and employment eligibility. By completing and signing Section 2 of the I-9 form, the employer is attesting that the employer has examined originals of the required documents and that they appear to be genuine and relate to the new hire in question. New hires can submit whichever documents they choose from the list attached to the I-9 form. The documents listed in Column A will satisfy both the identity and employment-eligibility requirements (e.g., U.S. passport, permanent resident card, foreign passport with a temporary I-551 green card stamp, employment authorization document, or foreign passport with an I–94 card authorizing temporary employment). The documents listed in Columns B and C establish either identity only (such as a driver’s license) or employment-eligibility only (such as a U.S. birth certificate or unrestricted social security card) and must be presented in combination to satisfy Section 2. The employer must record the document title, issuing authority, document number, and expiration date, if any. The employer must also record the date employment began. The law does not require an employer to photocopy documents, but we recommend that you do so to facilitate an internal audit at a later. One advantage of keeping photocopies is that they can be used to provide missing details on the I-9 form if the employer inadvertently fails to record the document numbers or other document details in Section 2 of the I-9 forms, thereby avoiding potential penalties for I-9 violations. If photocopies are made, they must be made for all employees and retained with the I-9s. The employer should not photocopy documents of only foreign-looking employees.
• Employers Should Not Ask for Additional Documents or Insist on Seeing Social Security Card. Employers should not go beyond the required documents during the I-9 process. Attempts to obtain extra documentation from minority group members may constitute document abuse and violate antidiscrimination requirements. Note: The employee is not required to fill in his or her social security number in Section 1 unless the employer uses E-Verify. Employers can ask for a new hire’s social security number for payroll purposes, but employers should not insist that a new hire submit a social security card as part of the I-9 process or payroll process.
• Retention of Forms I-9. Employers must keep Forms I–9 until three years after hiring or one year after termination, whichever is later. Employers should maintain two separate I-9 files, one for current employees and the other for terminated employees. For terminated employees, the I-9 forms should be marked for destruction 1 year from the date of termination or, if later, 3 years from the date of hire. The I-9 forms for terminated employees should be kept in chronological order by date for destruction with the earliest dates on top.
• I-9 Audits and Potential Penalties for I-9 Violations. ICE has the right to inspect an employer’s I-9 records and to request administrative law judges to issue subpoenas to compel the production of documents. Employers are entitled to three days’ notice before an inspection. Legal counsel should be contacted immediately upon receipt of an audit notice. Notices also are required before ICE imposes a penalty or other sanction. An employer that receives a notice of violation must request a hearing within 30 days of the date of the notice in order to preserve its right to appeal. Because of the possibility of substantial monetary penalties and the short time period for appeals, legal counsel should be contacted immediately upon receipt of a notice of violation. Civil and criminal penalties may be imposed for knowingly hiring or continuing to employ an unauthorized alien, as well as for failing to properly complete the I-9 form. Civil penalties may also be assessed for violation of the nondiscrimination provisions.

• First violation: $375-$3,200 per unauthorized alien;
• Second violation: $3,200-$6,500 per unauthorized alien;
• Third violation: $4,300-$16,000 per unauthorized alien;
• Failing to complete the I-9 form may result in a penalty of $110-$1,100 per individual;
• A pattern or practice of hiring or continuing to employ illegal aliens may result in injunctions and/or criminal penalties ($3,000 per unauthorized alien and/or six months’ imprisonment, without regard to the number of aliens, and five years’ imprisonment for persons who knowingly hire more than 10 illegal aliens within a 12-month period).
• Violation of nondiscrimination provisions may result in a fine of $250-$10,000 per person, and document abuse may result in a fine of $100-$1,000 per person.
• Correction of Technical Mistakes. Under new rules enacted as part of the Illegal Immigration Reform and Immigrant Responsibility Act of 1996 (IIRAIRA), employers who have made a good faith effort to comply with the I-9 employment verification requirements in effect at the time new employees are hired are considered to have complied with the requirements even if there is a technical or procedural failure to meet the requirements. To benefit from this new and more flexible standard, employers must correct the failure. This only applies if ICE or another enforcement agency explains the basis for the failure to the employer, provides not less than 10 business days within which to correct the failure, and the employer corrects the failure. This provision does not apply to employers who engage in a pattern or practice of violations.
• Periodic Self Audits. Employers should consider conducting periodic internal audits of their immigration compliance practices. In light of the complexity and newness of many immigration regulations, both ICE and DOL may exercise leniency toward an employer who has conducted an internal voluntary immigration audit. Employers are encouraged to utilize neutral third parties, preferably with expertise in immigration law, to carry out internal audits to give an accurate impression to employees and outsiders of the company’s intention to comply with applicable immigration laws. If possible, the audit should be broad so as to ensure uniformity and should concentrate on areas that traditionally cause employers the greatest difficulty, including I–9 documentation. If you find mistakes on I-9 forms during an internal audit, date and initial the corrections using different color ink. Do not use white out. If the correction cannot reasonably be made because the employee is no longer employed and is unavailable to make the correction to Section 1, place a note in the file to that effect.

PROS AND CONS OF SIGNING UP FOR THE E-VERIFY PROGRAM

The E-Verify program provides employers with automated confirmation of employee’s work authorization through the Internet. Participation in the program is voluntary, except for federal contractors and in certain states where it has been made mandatory for certain types of employers (e.g., Arizona).. It is important to note that employers must still properly complete Form I-9 for all new hires and participation in the E-Verify program does not provide employers with immunity from potential I-9 penalties.

Under the E-Verify program, after properly completing Form 1-9, employers submit certain I-9 data into a web-based system to SSA and DHS. If employment eligibility is confirmed, the employer receives a message within two or three seconds that the employee is authorized to work and the process is finished. If the procedure does not provide verification of employment eligibility, the inquiry will result in further instructions to the employer. In some cases, the employer will be directed to contact SSA or DHS to follow alternative verification procedures. In other cases, the employer will receive notification of a “tentative nonconfirmation” of employment eligibility. Tentative nonconfirmation does not mean that a person is not authorized to work, and employers cannot treat it as proof that the individual is not employment authorized. Employers cannot terminate an employee based upon an initial nonconfirmation. Employers must provide the employee with an opportunity to contest the tentative nonconfirmation with SSA or DHS. However, if an employee does not contest a tentative nonconfirmation or the tentative nonconfirmation is not successfully contested, it becomes a final nonconfirmation. At that point, the employer may terminate the employee without civil or criminal liability.

• Advantages of Signing Up for E-Verify. The main advantage of signing up for E-Verify is that it will ensure that future hires are legal (except in rare cases of stolen identity). Thus, if you have a high rate of turnover, you may cleanse your workforce of illegal workers over time and you will not face such a severe disruption in the event of an ICE audit or mandatory E-Verify in the future. As more and more companies in the industry sign up for E-Verify, it can be expected that those who don’t will have a higher concentration of illegal workers.
• Disadvantages of Signing Up for E-Verify. Companies that sign up for E-Verify have to undergo training and sign a Memorandum of Understanding (MOU). The MOU lists the general responsibilities of employers participating in the E-Verify program and is available on the USCIS website at www.uscis.gov. Employers that use E-Verify must post a sign at the place of employment that is visible to job applicants. The E-Verify process takes additional time and effort and does not relieve the employer from completing the normal I-9 paperwork. The E-Verify system is not perfect and there are a small percentage of cases where the system makes an error which takes time and effort to clear up.

On July 26, 2006, DHS rolled out a program called the ICE Mutual Agreement between Government and Employers (IMAGE). IMAGE is designed to train employers on best practices to verify their employees’ work status. Participation in IMAGE is completely voluntary. In order to enroll in IMAGE, employers will be required to submit to an initial I-9 audit by ICE to detect existing violations, enroll in E-Verify, and establish a written hiring and employment eligibility verification policy that includes internal Form I-9 audits at least once per year. In return, ICE will: (1) waive potential fines if substantive violations are discovered on fewer than 50 percent of the required Forms I-9; (2) in instances where more than 50 percent of the Forms I-9 contain substantive violations, mitigate fines or issue at the statutory minimum of $110 per violation; (3) not conduct another Form I-9 inspection of the company for a two-year period; and (4) provide information and training before, during, and after inspection. One risk of signing up for the IMAGE program is that an employer may face a sudden disruption in its workforce if it turns out that it is unknowingly employing a large number of illegal workers who presented false documents that could not be detected during the I-9 process.

DO’S AND DON’TS FOR RESPONDING TO SSA NO-MATCH LETTERS

Each year SSA sends thousands of letters to employers across the country listing the names and Social Security numbers (SSNs) of employees whose SSNs do not match their names on the earnings records of the SSA. The purpose of the so-called “no-match” letter is to properly credit earnings records to the employee’s SSA account for future benefits, not to identify illegal aliens. Social Security no-match letters had been put on hold since 2007 when a federal judge issued a preliminary injunction preventing the DHS from implementing a proposed rule that would have made employers liable for the continued employment of an unauthorized alien if the employer failed to follow certain steps in responding to a Social Security no-match letter. This was called the “safe harbor” procedure which has since been rescinded.

Employers are advised not to take adverse action against an employee solely based on the Social Security no-match letter. At the same time, employers should follow the instructions of SSA set forth in the no-match letter. Although SSA has no enforcement authority against employers who ignore such no-match letters, failure to follow SSA instructions could result in liability under IRCA for “constructive knowledge” that an employee does not have employment authorization. “Constructive knowledge” is defined as “knowledge which may fairly be inferred through notice of certain facts and circumstances which would lead a person, through the exercise of reasonable care, to know about a certain condition.”

The Department of Justice (DOJ) has developed guidelines for responding to SSA no-match letters. The DOJ’s guidelines specifically state the following:

DO:

1. Recognize that name/SSN no-matches can result because of simple administrative errors.
2. Check the reported no-match information against your personnel records.
3. Inform the employee of the no-match notice.
4. Ask the employee to confirm his/her name/SSN reflected in your personnel records.
5. Advise the employee to contact the Social Security Administration (SSA) to correct and/or update his or her SSA records.
6. Give the employee a reasonable period of time to address a reported no-match with the local SSA office.
7. Follow the same procedures for all employees regardless of citizenship status or national origin.
8. Periodically meet with or otherwise contact the employee to learn and document the status of the employee’s efforts to address and resolve the no-match.
9. Review any document the employee chooses to offer showing resolution of the no match.
10. Submit any employer or employee corrections to the SSA.

DON’T:

1. Assume the no-match conveys information regarding the employee’s immigration status or actual work authority.
2. Use the receipt of a no-match notice alone as a basis to terminate, suspend, or take other adverse action against the employee.
3. Attempt to immediately reverify the employee’s employment eligibility by requesting the completion of a new Form I-9 based solely on the no-match notice.
4. Follow different procedures for different classes of employees based on national origin or citizenship status.
5. Require the employee to produce specific I-9 documents to address the no-match.
6. Require the employee to provide a written report of SSA verification (as it may not always be obtainable).

The DOJ guidelines are silent on what the employer should do, if anything, if the employee is unable to resolve the no-match. Under those situations, the employer should consult with legal counsel before taking any adverse action. Of course, if the employee admits that he or she has no work authorization when presented with the no-match letter, the employer is obligated to terminate his or her employment immediately. Some useful FAQs about what an employer should and should not do in response to an SSN no-match notice. Here are some excerpts:

Q: If an employee’s name and SSN don’t match SSA’s records, doesn’t that mean the employee is not authorized to work?
A: No. There are many possible reasons for a no-match letter, many of which have nothing to do with an individual’s immigration status or work authorization. An employer should not assume that the employee is not authorized to work, and should not take adverse action against the employee. Such action could subject the employer to liability under the antidiscrimination provision of the Immigration and Nationality Act (INA), codified at 8 U.S.C. § 1324b.

Q: What might cause a no-match?
A: There are many reasons for a no-match notice, including but not limited to: an unreported name change due to marriage, divorce, or naturalization; input errors by SSA staff; reporting errors by an employer or employee; identity theft; errors in reporting proper culturally based hyphenated or multiple surnames; and fraud.

Q: What action should an employer take upon receipt of an SSA no-match letter or other notice of a no-match?
A: To confirm that a reporting or input error is not the cause of a no-match, an employer, with the assistance of the referenced employee, should confirm that the reported name and SSN are correct. If no error is discovered, the employer should then advise the employee to contact the local SSA office to address the reported no-match. An employer should not use the no-match letter or other no-match notice by itself as the reason for taking any adverse employment action against the referenced employee. In addition, employers should not use the receipt of a no-match letter or other no-match notice (or the fact that an employee raises any objection to the employer’s no-match response procedures) as a basis to either retaliate against the employee or otherwise subject the employee to heightened scrutiny. Doing so may violate the antidiscrimination provision of the INA or other state or federal equal employment opportunity or labor laws. While not required to do so, an employer may schedule (and document) periodic meetings or other communications with the employee during the resolution period to keep abreast of the employee’s efforts to resolve the no-match, and to determine whether the employee needs more time to resolve the no-match.

Q: Do no-match letters or other no-match notices create “constructive knowledge” that an employee is not authorized to work?
A: The mere receipt of a no-match letter or other no-match notice does not, standing alone, constitute “constructive knowledge” on the part of an employer that the referenced employee is not work-authorized. Only DHS is legally authorized to conclusively determine an individual’s authorization to work. An employer should give a referenced employee a reasonable period of time to address and correct information contained in a no-match letter or other no-match notice.

Q: What is a “reasonable period of time”?
A: There are no federal statutes or regulations that define a “reasonable period of time” in connection with the resolution of a no-match notice. As a practical matter, a “reasonable period of time” depends on the totality of the circumstances. Of note, in the E-Verify context SSA has the ability to put a tentative nonconfirmation into continuance for up to 120 days. This recognizes that it can sometimes take that long to resolve a discrepancy in SSA’s database.

CHECKLIST OF IMMIGRATION COMPLIANCE “BEST PRACTICES”

What can employers do to minimize the risks of immigration violations? Below is a checklist of immigration compliance “best practices.”

1. Written Compliance Policy. Adopt a written Immigration Compliance Policy and communicate to all managers and staff the importance of adhering to this policy.
2. Warn Managers About Criminal Penalties and ICE. Alert managers and staff to the risk of civil and criminal penalties for immigration violations, the use by ICE of undercover agents posing as job applicants, and the use by ICE of current or former employees wearing a hidden wire (including illegal aliens granted amnesty in exchange for their cooperation and testimony).
3. I-9 Training. Train the person or persons responsible for I-9 form completion. Centralize the completion and retention of I-9 forms as much as possible to promote uniform practices and to facilitate periodic internal audits and producing documents on short notice in case of a government audit.
4. Internal Audits. Conduct an internal audit of I-9 forms on a regular basis (once a year or in conjunction with other types of internal audits). The audit should be done by someone who is knowledgeable and experienced but not the person responsible for completing I-9 forms on a regular basis (e.g., in-house or outside counsel or a trained paralegal).
5. Nondiscrimination. All new hires should be treated the same. Do not take extra measures for foreign-born employees or persons of certain ethnic groups. Do not require U.S. citizenship as a condition of hiring unless required by law or federal government contract. But it is permissible to ask applicants if they will be authorized to work in the United States at the time of hire and whether they will require immigration sponsorship by the employer.
6. Timing of I-9. In most circumstances, the I-9 form should be completed within three days after the person is hired. It cannot be used to screen job applicants. Social Security name checks also cannot be used to screen new hires.
7. Document Abuse. The new hire can submit any of the documents listed on the I-9 form. The employer cannot tell the new hire which documents to submit or require different documents than the ones chosen by the new hire.
8. False Documents. Check to make sure the documents submitted by new hires appear to be genuine and relate to the person in question. Ask the new hire to explain if there are inconsistencies or irregularities. Consult with counsel if there are reasons to doubt the authenticity of documents.
9. Document Retention. Keep I-9 forms in central location separate from individual personnel files. Keep separate files for current and past employees. Discard I-9 forms three years after date of hire or one year after date of termination (whichever is later).
10. Reverification. If the new hire’s employment authorization has an expiration date (such as H-1B, TN, or F 1 OPT), be sure to reverify using Section 3 of the I-9 form prior to the expiration date. Also be sure to assist the employee in applying to extend his or her employment authorization if needed three to four months before the expiration date. Use a tickler system to set reminders for these dates. There is no need to reverify an expiring green card, passport or driver’s license.
11. SSN No-Match Letters. Do not ignore Social Security no-match letters or other information relating to discrepancies between an employee’s name and Social Security number. Follow instructions in the SSA no-match letter and encourage the employee to resolve the discrepancy. Do not take adverse action (such as suspension or termination) based solely on an SSA mismatch.
12. Termination of Workers Found to be Illegal. Terminate any employee immediately if you have actual knowledge that the employee is not authorized to work (e.g., if the employee confesses to having submitted false documents for I-9 purposes).
13. Harboring Illegal Aliens. Do not say or do anything that may be interpreted as helping or assisting an illegal alien gain employment or continue working with false documents. Recognize that an illegal worker or job applicant may be a wired informant working with ICE on a prolonged worksite enforcement action, both prior to and after an immigration audit or raid.
14. Corrections to I-9 Forms. If you find mistakes were made on I-9 forms, correct them and date and initial the changes (do not redo the forms with original date or try to hide the mistake and correction).
15. Copying Documents Submitted for I-9 Purposes. Although not required, it is permitted to make copies of the original documents submitted by the new hire during the I-9 process. Making copies will provide supporting materials and facilitate corrections during an internal audit. Whatever you do, be consistent with all new hires.
16. E-Verify. If you are in an industry with high rates of SSN no-matches or a high rate of actual or suspected illegal workers, consider signing up for the E-Verify program to screen new hires against SSA and DHS databases.
17. Visa Status and Document Retention for Non-U.S. Workers. Use a tickler system to track the expiration dates of I-94s and visas for non-U.S. workers and their dependents and apply for any necessary extensions four to six months in advance. Keep H-1B public access files and PERM document retention files in a central location for the required period of time (one year after validity period of LCA and five years after filing PERM application).
18. Timing to Begin the Green Card Process. Begin the PERM recruitment process not later than four and a half years after the H-1B first acquired H-1B status so that the PERM application can be filed before the end of the fifth year in H-1B status. This will allow the H-1B worker to continue living and working in the U.S. beyond the six-year limit so long as the green card application is in process. For university professors, the PERM application should be filed within 18 months after the professor was hired in order to take advantage of the “special handling” procedures that are applicable to college and university professors.
19. Wages, Benefits, Filing Fees, and Legal Fees for H-1B Workers. Pay the same (or higher) wages and benefits to H-1B workers as U.S. workers. Remember that if you require H-1B workers to pay or reimburse legal fees or filing fees for visa petitions, it will be deemed a deduction from their wages and it may cause their wages to fall below the prevailing wage requirement. Also, certain legal fees and filing fees cannot be paid or reimbursed by non-U.S. workers (e.g., the $1,500 H-1B education and training fee and legal fees relating to PERM labor certification in connection with green card process).
20. Termination of H-1B Workers. Notify USCIS if you terminate an H-1B worker prior to the expiration date of the H-1B petition approved by USCIS and offer to purchase a return air ticket to the home country as part of a severance package if the foreign worker intends returns to home.
21. Notice to U.S. Workers of Immigration Filings for Non-U.S. Workers. Post the required notices to U.S. workers at the place of employment for H-1B filings and PERM application filings on behalf of non-U.S. workers.

SAMPLE IMMIGRATION COMPLIANCE POLICY

If you are considering adopting an immigration compliance policy, below is a sample to get you started.

It is the policy of ABC Corporation to comply with all applicable federal and state laws relating to immigration. ABC Corporation:

• Shall not knowingly hire an unauthorized alien or continue to employ an unauthorized alien.
• Shall immediately terminate any employee who is discovered to be an unauthorized alien.
• Shall timely complete an I-9 form for each new hire (generally within three days of hiring), and, if applicable, shall reverify an employee’s employment authorization prior to the expiration date thereof.
• Shall only accept original employment authorization and identity documents that appear genuine and relate to the individual presenting them, and shall not harbor an illegal alien or cooperate in any way with an individual who submits false documents.
• Shall not discriminate against any individual on the basis of national origin or citizenship, and shall not require new hires to submit employment authorization or identity documents beyond those specified on the I-9 form.
• Shall pay prevailing wages and benefits to H-1B workers and shall provide notice to U.S. workers, in the form required by U.S. Department of Labor rules, with respect to H-1B petitions and PERM labor certification applications filed on behalf of foreign workers.
• Shall follow instructions received from the Social Security Administration and the Internal Revenue Service with respect to errors or mismatches on names and Social Security numbers of employees.
• Shall retain I-9 forms until the later of three years after the person was hired or one year after the person stopped working; shall maintain H-1B public access files for one year beyond the period of employment specified on the Labor Condition Application; and shall retain PERM documents for five years after the PERM application was filed.
• Shall not disclose technical data that is subject to U.S. export license requirements to business visitors, H-1B workers, or other non-U.S. persons (i.e., persons who are neither U.S. citizens or green card holders) unless an export license has been obtained authorizing such disclosure.
• Shall not retaliate against any employee who reports a suspected violation of U.S. immigration laws.