The Neufeld Memorandum on H-1B Petitions, and its Implications for the Computer Consulting Industry
Over the last few years, computer consulting companies that employ H-1B nonimmigrant workers have been a frequent target of governmental, regulatory and legislative scrutiny. This increased scrutiny has taken various forms, such as burdensome documentary requests at the Department of State's consulates under INA § 221(g), frequent issuances by USCIS of Requests for Evidence (RFEs), Notices of Intent to Deny (NOIDs), and Notices of Intent to Revoke (NOIRs), and port-of-entry turnaways by U.S. Customs and Border Protection (CBP) officers of arriving aliens with valid nonimmigrant visas. Another branch of the Department of Homeland Security, the Office of Fraud Detection and National Security (FDNS), issued a report in September 2008 that alleged the existence of widespread fraud and technical regulatory violations among H-1B employers. The report fueled existing fears of H-1B abuse, and has led to what are now almost routine investigatory "site visits." Since July 22, 2009, FDNS has ordered over 15,000 site visits for H-1B and religious worker petitions. USCIS has confirmed that it currently utilizes only private independent contractors to conduct site visits, and anecdotal evidence suggests that many inspectors have undergone only cursory training in immigration law. To make matters worse, the Congress has recently caved into restrictionists' demands to punish employers that heavily rely on H and L nonimmigrant workers by passing Public Law 111-230, which essentially increases the existing H/L fraud fee by $2000-$2250 if the petitioning company has over 50 employees, of which over 50% are H/L workers.
In short, the current regulatory climate appears to be quite hostile towards companies that heavily rely on H-1B foreign workers. Perhaps the best exemplar of this hostile climate is the Memorandum from Donald Neufeld, Associate Director, USCIS Service Center Operations ("Neufeld Memo") on H-1B employers, which was issued in January 2010. The Neufeld Memo has significantly heightened the documentary and evidentiary requirements applicable to H-1B filings by consulting companies that place their employees at third party worksites. Since the Memo's issuance, many IT companies have been faced with an increased number of petition denials, which are devastating to prospective H-1B nonimmigrants and extremely costly to their petitioning sponsors, both in terms of lost business opportunities as well as expended filing fees. Whereas the typical H-1B petition may have cost a couple of hundred dollars in government filings fees a decade ago, today the same filing can easily cost around $5000. In a difficult economy, overcoming the hurdles presented by the Neufeld Memo has become a business imperative.
The Memo's Controversial Stance on Employer Control in Third Party Placements
In brief, the Memo explicitly requires computer consulting companies to demonstrate that they will maintain control over their H-1B workers, and implies that such control is likely absent in most third-party placement situations. The Memo references the definition of "United States employer"  contained within the immigration regulations in support of the proposition that any H-1B petitioner must not only prove that the offered position qualifies as a specialty occupation, but also that "a valid employer-employee relationship exists between the U.S. employer and the beneficiary throughout the requested H-1B validity period." 
As the term "employer-employee relationship" is undefined in both the Immigration and Nationality Act (INA) as well as the USCIS's implementing regulations at 8 C.F.R., the Memo interprets the term along the lines of the common law and Supreme Court decisions on the matter. Relevant precedent holds that the hallmark of an employer-employee relationship is the "right to control the manner and means"  by which the employee performs the work done on behalf of the employer. Where this "right to control" exists, the worker is an employee and where it does not, the worker is essentially an independent contractor. Obviously, this distinction has significant tax consequences for employers. Indeed, the IRS utilizes a 20-factor test to determine whether a particular worker qualifies as an "employee" and not an "independent contractor," the consequence of the former classification being that the employer would be liable for payroll taxes. The Neufeld Memo promulgates its own 11-factor test as determinative of the "right to control,"  essentially echoing many of the elements of the IRS's 20-factor test. The Memo goes on to list examples of the kind of documentation that would meet various elements of its tests. Indeed, in issuing RFEs to IT companies, the USCIS typically recites the examples stated in the Memo as options that the petitioner has to help show sufficient control. Thus, to pass the Neufeld Memo's gauntlet, an H-1B petitioner must show satisfactory evidence that it actually controls the H-1B worker, especially in situations where that worker is placed on a third party engagement. USCIS adjudicators are required to consider the totality of the circumstances, including all applicable factors regarding control, the nature of the petitioner's business and the type of work done by the beneficiary.
The Memo offers the example of a typical computer analyst working at a computer consulting company, and suggests that this situation is normally not indicative of control by the consulting company. Rather, the worker typically reports to a manager at the third-party company, which, the Memo claims, indicates that the petitioner lacks actual control:
This a controversial conclusion, and the Memo took a bold step in giving this hypothetical example. Across the United States, the vast majority of end-clients that utilize the services of computer consulting companies do so for the explicit purpose of avoiding having to hire their own employees, which would require paying payroll taxes. Such end-clients typically go to great pains in stating in their contracts with consulting companies that the workers shall be independent contractors of the end-client, and not employees. Most end-clients also modify their operational procedures to maintain the appropriate distinction between their regular employees and their independent contractor consultants. One might even say that the entire consulting industry is premised on this distinction between employer and independent contractor, but the Memo blithely (and blindly) ignores this market reality.
In fact, the USCIS may be at odds with other government agencies in reaching this conclusion. As noted elsewhere by Ronald Gotcher, the US Equal Employment Opportunity Commission (EEOC) came to the opposite conclusion on the issue of control in one of its enforcement reports regarding the application of the anti-discrimination statutes to temporary, contract, and other contingent employees:
Example 1: A temporary employment agency
hires a worker and assigns him to serve as a computer
programmer for one of the agency's clients. The agency pays the
worker a salary based on the number of hours worked as reported
by the client. The agency also withholds social security and
taxes and provides workers' compensation coverage. The client
establishes the hours of work and oversees the individual's
work. The individual uses the client's equipment and supplies
and works on the client's premises. The agency reviews the
individual's work based on reports by the client. The agency
can terminate the worker if his or her services are
un-acceptable to the client. Moreover, the worker can terminate
the relationship without incurring a penalty. In these
circumstances, the worker is an "employee."
Ironically, the EEOC's view was cited favorably by the Supreme Court in Clackamas Gastroenterology v. Wells, 538 U.S. 440 (2003), which is one of the cases from which the Neufeld Memo attempts to derive its authority.
Aside from the dubious reasoning utilized by the Memo on the control issue, the manner in which it has effectively changed the legal landscape for H-1B petitions has also drawn criticism. The basic framework for U.S. administrative law is such that Congress passes statutes, and the administrative agencies issue implementing regulations and adopt policies that put the statutes into effect. Generally, a "substantive rule" change can only be implemented after the agency has published a notice of the change in the Federal Register, and given the public an opportunity to comment on the rule change and its impact. In contrast, courts have held that notice and comment does not apply to mere interpretive rules and general policy statements.  As to the latter, courts have accorded government agencies wide latitude and largely unstinting discretion.
Broadgate v. USCIS - An Attempt to Judicially Invalidate The Memo
In July 2010, TechServe Alliance, the American Staffing Association, and three IT consulting firms sued the USCIS in Broadgate v. USCIS, claiming that the Neufeld Memo substantively changed the law, and thereby constituted an impermissible overreaching of the agency's authority.  In its opposition, the government took the position that the Memo was merely "guidance," that it had not substantively changed existing H-1B law, and that adjudicators were still required to consider the "totality of circumstances".
Many H-1B petitioners will confirm that the government's position does not reflect reality. Since the Memo's issuance in January 2010, the adjudication of H-1B petitions filed by IT firms has undergone a seismic shift. Virtually every third-party placement case is at risk of an RFE or outright denial over the employee control issue. Further, and most distressingly, adjudicators do not seem to actually apply the "totality of circumstances" standard cited in the Memo, but instead uniformly require a written attestation from the end-client addressing the control issue and confirming its need for the beneficiary's services for the entire requested H-1B validity period. While the Memo (and RFEs based on the Memo) list numerous types of evidence that could theoretically demonstrate control, such as employment agreements, human resource records and tax filings, experience has shown that the paramount document that adjudicators require is the end-client attestation. In short, despite using vague and purposely broad language (e.g., circumstances, factors, guidance), the Memo can be distilled to a single, substantive new requirement in third-party placement cases: end-client confirmation for the requested H-1B validity period, whether in the form of a letter, contract, signed itinerary, etc. Many consulting firms find it difficult to convince end-clients to produce this documentation (even though issuing such letters is probably in the best interest of end-clients relying on the independent contractor tax designation for their consultants). As a result, H-1B petitions are being denied for lack of end-client documentation, even where the contractor has been engaged at the end-client site for many years and where voluminous evidence addressing the various "factors" of control has been provided.
The Broadgate lawsuit was one of the best opportunities that IT consulting companies had to judicially overturn the Neufeld Memo. Unfortunately, on August 13, 2010 the U.S. District Court of the District of Columbia dismissed the case "with prejudice," which means that the issue of the Memo's jurisdictional transgression cannot be raised again absent some compelling change in facts. In short, the IT industry must learn to live with the Neufeld Memo for the time being.
Options for Petitioning Employers Post-Broadgate
Nevertheless, hope is not lost for petitioners seeking to overcome the vagaries of H-1B adjudication under the Memo. As noted above, employers can provide numerous types of evidence that touch on the various factors of employer control cited in the Memo and specified in RFEs, with the hope that such evidence will sway USCIS adjudicators.
Another useful strategy, which appears to be largely underutilized, is to pit the IRS against the USCIS on the control issue. The IRS allows either an employer or employee to seek a written determination of whether the proposed relationship qualifies as employment or independent contractorship. Determinations are made by the IRS based upon many of the same factors specified in the Memo, including behavioral, financial and relational considerations. Determinations can be sought for a particular worker or an entire class of workers. An H-1B petitioner facing difficult RFEs on the control issue can avail of a determination by the IRS on the issue, and use that determination as objective evidence of sufficient employer control. If USCIS ultimately issues an adverse decision that conflicts with the IRS's determination, the case would be ripe for judicial review because courts will grant an agency broad deference over an adjudicative decision only if that agency has expertise over the question at hand. Strong arguments can be made that the issues of employer control and the distinction between independent contractors and employees fall most appropriately within the purview of the IRS, not the immigration authorities. Thus, the USCIS should not have the authority to ignore the IRS's determination as to employer control.
As noted above, the Neufeld Memo is but the latest in a series of restrictive policies taken by immigration authorities, especially with respect to H-1B workers in the IT industry. Despite these policies, we are confident that consulting companies' entrepreneurial spirit and quest for the American Dream will not diminish. Such companies must continue to utilize all available tools to combat prohibitive interpretations of existing immigration regulations, and import the skilled labor that is required for their growth. These continued efforts will promote the economic interests of sponsoring businesses, in particular, as well as the technology industry in the United States as a whole.
Akshat Tewary is an attorney at the Law Offices of Kamlesh Tewary, P.C., with offices in Edison, NJ and New York, NY. His firm focuses primarily on employment-based immigration, employment law and corporate law issues. Akshat is currently a member of the American Bar Association, the American Immigration Lawyers Association and the New Jersey State Bar Association. He has been admitted to practice in New York, New Jersey, and before the United States Supreme Court.
The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.