Although immigration reform has been a hot topic amid our current administration’s efforts to crack down on the hiring of unauthorized immigrants, little attention has been given to a federal program that, if used uniformly, could be effective toward halting the practice. E-Verify is a website operated by the U.S. Department of Homeland Security in partnership with the Social Security Administration that allows businesses to determine the eligibility of their employees to work in the United States. Because this program is frequently overlooked and misunderstood, immigration compliance issues have become more common in mergers and acquisitions and a basis of claims under representations and warranties insurance policies.
Furthermore, because representations and warranties insurance has become an increasingly indispensable part of M&A transactions, insurers and corporate attorneys alike are anxiously watching a case pending in the Delaware Chancery Court, Post Holdings Inc. et. al. v. NPE Seller Rep LLC et. al., which claims the seller breached the representations in the purchase agreement related to immigration compliance, among other alleged breaches.
The case arises out of Post Holdings’ claim that three former executives of National Pasteurized Eggs Inc., or NPE, which it acquired in 2016 for $100 million, knew that representations and warranties in the purchase agreement relating to employee authorization to work in the United States were false. The specific representations at issue include that NPE was in compliance with all laws pertaining to employees and labor and that NPE had complied in all material respects with all regulations requiring that it complete Form I-9s for all employees. Post Holdings claims that the former NPE president, CFO and vice president of operations were each aware that many of NPE’s employees’ Form I-9, which are used for verifying identity and employment authorization in the United States, were either incomplete or obviously inaccurate.
Additionally, during the diligence process, the seller’s former CFO warned a human resources manager at Post Holdings that it would be a mistake to give employees preliminary notice that Post Holdings would implement the federal government’s E-Verify program to confirm their eligibility to work in the United States. The E-Verify website compares an employee’s Form I-9 to data from federal government records. If the information matches, then the company will receive confirmation that the employee is eligible to work in the United States; however, if there is a mismatch, the issue must be resolved or the employee cannot continue to work for the company. E-Verify is a voluntary program for most employers, but mandatory for some, such as employers with federal contracts or subcontracts that contain the Federal Acquisition Regulation, or FAR, E-Verify clause and employers in certain states that have legislation requiring its use.
After the deal closed in October 2016, Post Holdings proceeded with implementing the E-Verify program at the company because it is required for Post Holdings to maintain its status as an approved government contractor. After news of the E-Verify program spread to NPE employees, most workers at the company’s Illinois and South Dakota facilities went on strike. Post Holdings claims that 124 of 159 workers at the Illinois plant failed to submit the necessary documentation to show that they were authorized to work in the United States, and that the sellers actually knew that many of NPE’s employees were not authorized to work in the United States.
Further, Post Holdings claims that NPE knowingly hired employees even after they informed the company that they were not authorized to work in the United States. As a result of the alleged intentionally false misrepresentations contained in the purchase agreement, Post Holdings claims that it suffered multimillion-dollar losses, including costs associated with hiring temporary employees, hiring and training new employees at higher wages, and productivity delays.
Tips for Buyers and Representations and Warranties Insurers
During the diligence process, M&A attorneys and insurers should consider the type of business that is being acquired and conduct thorough immigration diligence to avoid possible post-closing liabilities. At the outset, it should be determined whether the business uses E-Verify. The deciding factor in whether a company uses E-Verify might not be federal or state law alone, but also whether a business is one that relies heavily on an immigrant workforce. The following are some characteristics of businesses that may be at a high risk of employing workers not authorized to work in the United States:
- Employers with more than 100 employees.
- Employers with facilities near U.S. borders.
- Employers with large manual labor work forces (such as service jobs, cleaning, landscaping, tree trimming, roofing, etc.).
- Employers with large workforces in agriculture or poultry.
To ensure that employees are authorized to work in the United States, buyer’s counsel and representations and warranties insurers should perform the following in an M&A transaction:
- Conduct thorough employee immigration diligence (for buyers), or ensure thorough diligence was conducted on employee immigration matters (for insurers).
- Confirm whether the employer uses E-Verify.
- Confirm whether employer is required to use E-Verify based on the type of business, whether any employees are working under a federal government contract containing the FAR E-Verify clause, and the states in which employer has employees. At least 20 states require the use of E-Verify for at least some public and/or private employers.
- Confirm that, if the employer is not required to use E-Verify, that all Form I-9s, or a representative sampling of Form I-9s, if the work force is very large, have been reviewed and that the employer has accurate, completed Form I-9s for all current employees.
- Confirm any history of U.S. Department of Homeland Security or U.S. Immigration and Customs Enforcement audits, inspections or raids on the employer.
Consider whether to use a third-party immigration auditor during diligence.
In sum, M&A attorneys and representations and warranties insurers should pay particular attention to immigration compliance matters in mergers and acquisitions in order to lessen the risk of post-closing liabilities, such as those alleged in the Post Holdings case. Thorough diligence should be conducted on an employer’s Form I-9s, and additionally to ensure that any federal contractor or other employer who is required to use E-Verify is, in fact, doing so.
