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Illegal Immigration and Your Business: Are you ready to E-Verify your potential employees?

Will your business be responsible for screening potential employees’ immigration status? Under a new state law, employers may be required to use an online software program to screen employees in order for their business to qualify for government contracts or grants. On May 10, Governor Daniels signed Indiana Senate Enrolled Act 590 (SEA 590) into law, which becomes effective July 1, and will have many employers using E-Verify to flag unauthorized aliens among their pool of potential employees. Under SEA 590, failing to maintain a legal workforce could now come at a cost to many Hoosier businesses.

How the bill will impact businesses

The main purpose of SEA 590 is to reduce the effects of illegal immigration on Indiana taxpayers. The bill will significantly affect Indiana businesses and business owners in three ways:

  1. SEA 590 imposes penalties on businesses that do not comply with its mandates;
  2. the bill restricts a business’s or its owner’s ability to deduct certain tax items with respect to its employees if the employees are not authorized to work in the U.S. under federal law; and
  3. the bill requires businesses contracting with the state or other political subdivision to use the federal E-Verify system.

E-Verify overview
E-Verify is a free online tool operated by the Department of Homeland Security (DHS) and the Social Security Administration (SSA) where employers can use information reported on a prospective employee’s I-9 (Employment Eligibility Verification) Form to determine if the prospective employee is eligible to work in the U.S. An employer enters data from a prospective employee’s I-9, and the system checks the information against DHS and SSA records, including visa information, immigration status and passport information. The system usually provides results in less than five seconds, and if the information is a match, that prospective employee is eligible to work in the U.S. If the information does not match, E-Verify sends notice to the employer of the inconsistency. In the event of such an inconsistency, the employer prints and reviews the notice with the prospective employee, who can then contest the result with either the DHS or SSA, as appropriate. If the prospective employee’s contest of the E-Verify result is successful, the prospective employee will be authorized to work. If the prospective employee’s contest of the E-Verify result is unsuccessful, the employer may terminate the employee. Occasionally, DHS or SSA will continue a contest if more time is needed, at which point the employee would be able to work until a final disposition of the employee’s contest is made.

SEA 590 E-Verify requirements

SEA 590 places new requirements on Indiana state and local governments that directly affect businesses pursuing state and local government contracts. Under the new law, Indiana businesses may not enter into or renew a contract with a state agency or political subdivision to provide public services unless the contractor participates in the E-Verify program and signs an affidavit that the contractor does not knowingly employ an unauthorized alien. If a state agency or political subdivision makes a grant of larger than $1,000, the recipient of the grant must certify that it uses E-Verify and that it does not knowingly employ an unauthorized alien.

If a contractor knowingly employs or contracts with an unauthorized alien, the contractor has 30 days to remedy the violation or the state agency or political subdivision will terminate the contract. If a contractor provides services under a public contract to a state agency or political subdivision and utilizes a subcontractor, the subcontractor must not knowingly employ or contract with an unauthorized alien or with a person the subcontractor subsequently learns is an unauthorized alien. Further, the subcontractor must certify to the contractor that it uses E-Verify and that it does not knowingly employ or contract with an unauthorized alien, or risk termination of the contract by the contractor. SEA 590 gives a business using E-Verify a rebuttable presumption that it did not knowingly employ an unauthorized alien.

Consequences for non-compliance with SEA 590

Businesses that do not comply with SEA 590 face significant tax consequences as well as potential civil liability. The first tax consequence is that SEA 590 disallows any trade or business deduction under the Internal Revenue Code for wages, reimbursements or other payments made for services provided in Indiana by an individual or business for services as an employee, if the individual was an unauthorized alien. The disallowance contains an exception if the payments were provided to a business enrolled and participating in the E-Verify program. The second tax consequence is that, with respect to the EDGE Tax Credit, SEA 590 disallows inclusion of incremental income tax withholdings on employee income if the employee was an unauthorized alien, and the taxpayer was not enrolled and participating in E-Verify.

In the event that an unemployed person receives unemployment insurance benefits, and the employer is later found to have knowingly employed the person when that person was an unauthorized alien, the employer can be held civilly liable for the reimbursement of the unemployment insurance benefits, unless the employer used E-Verify to verify the status of the unauthorized alien. If a contract with a state agency or political subdivision to provide public services is terminated for violation of SEA 590, the contractor will be liable to the state agency or political subdivision for actual damages.

For more on compliance with SEA 590, please contact us.

  • Partner

    Keith Bice serves as a Partnership Board Member, focusing his practice on business and real estate debt, equity and acquisition deals. In his role as co-chair, Keith leads the group's attorneys in continually anticipating the needs ...

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