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Workplace Identity Fraud and Identity Theft In The Workplace: The Convergence Of Immigration & Nationality Laws And Labor And Employment Laws

by David Nachman, Esq.

The tragic events of 9/11 have caused a dramatic change in the way that the U.S. Immigration and Nationality Laws are interpreted and administered. In March 2003, the Legacy Immigration and Naturalization Service ("INS") was effectively subsumed into the U.S. Department of Homeland Security ("DHS") and the organization was split into three separate sub-agencies. As a result of this split the staff within certain of these sub-agencies gave distinct focus to the "enforcement" function. The issue of identity fraud and identity theft received increased attention in the workplace. Questions about who employees are and where they came from emanate from recent legislation that seeks to track foreign national individuals who enter and reside in the United States. This article focuses upon the need to both properly identify individuals in the workplace and to explain to employers the extent of their potential liability in this process.

The Immigration Reform and Control Act of 1986 ("IRCA") Requires Employers To Verify That Employees Are Authorized to Work - A Historical Perspective

For all employers, the Immigration Reform and Control Act of 1986 ("IRCA") changed the process of hiring new employees. For most employers, the employment eligibility verification (I-9) process has become quite routine but there are still complex legal issues that lurk in this "mundane" part of the hiring process. The enactment of the Immigration Reform and Control Act of 1986 ("IRCA") imposed two requirements upon employers. First, the law makes the "knowing" employment of unauthorized aliens unlawful. The "knowing" hire or employment of unauthorized aliens can be either "actual" or "constructive." Second, IRCA mandates a formal recording system for all employers to document, on U.S. Citizenship and Immigration Service ("CIS") (formerly referred to as the Immigration and Naturalization Service ("INS")) Form I-9, each new employee's identity and authorization to work in the United States.

The employment eligibility verification process requires every employee hired after November 6, 1986 to complete an I-9 Form. Each new employee should be provided with a three page I-9 document. The first page provides the instructions, the second page is the I-9 itself, and the third page provides a list of acceptable documents (which list has been modified to omit certain documents that are susceptible to fraud or tampering) and provides that employees have a choice regarding what documents to provide to the employer. Section 1 of the Form I-9 must be completed by the employee on his or her first day of employment and the employee has three business days within which to present acceptable documents for the employer to complete Section 2 of the Form I-9. The employee's Form I-9 should be kept separate from the employee's personnel file so that an argument cannot be made by a shrewd plaintiff's counsel that the hiring, firing and/or promotion decision of an employee was based upon the employee's national origin or citizenship.

The Form I-9 is not required to be filed with any government agency. The Form I-9, however, must be retained by the employer for all active employees and must be retained for at least three years after the date of hire, or one year after the date of termination, whichever is later, for all terminated employees. DHS has delegated the function of I-9 audits to the Branch of the organization referred to as Immigration and Customs Enforcement ("ICE"). The ICE staff refers to themselves endearingly as ICE-men and ICE-women. ICE has a direct reporting line from the enforcement-side of DHS. The individuals responsible for the enforcement-side of the organization have backgrounds that are uniquely "enforcement" oriented as opposed to "benefits" oriented. In the past, the Legacy INS conducted fewer and fewer audits of employer's Form I-9s annually due, in part, to a decrease in resource allocations. However, given the renewed focus on enforcement and appropriate funding for projects in this area, there is likely to be an increase in workplace enforcement in 2004. We have already seen steps in this direction in late-2003 when ICE made a visit to numerous Wal-Mart Stores throughout the United States and leveled allegations of IRCA violations against the Wal-Mart management.

Identity Fraud - Dressing an old Problem in a New Garb?

Prospective employees who are unable to provide documents required on the Form I-9 may attempt to present counterfeit documents to an employer in order to comply with the employment eligibility process and to obtain employment. Despite the requirement that employers verify an employee's identity and eligibility to work, employers are not expected to be experts who can readily discern what are and what are not counterfeit documents. Employers (or their designee) are expected to use "reasonableness" to distinguish between a real and or false document for employment eligibility verification purposes. A recent report from the Legacy INS states that the use of fraudulent documents by aliens to enter the country and obtain employment is extensive.

In 1991, the Immigration and Naturalization Act ("INA") was amended to make it illegal for individuals or employers to forge, counterfeit, or alter documents used to provide identity and employment eligibility, or to use or accept such documents. It also is unlawful to accept, receive or provide a lawful document issued to someone else for employment verification. These rules are collectively referred to as the "document fraud provisions" of the 1991 Act. Violators of the document fraud provisions of the INA may be subject to both criminal and civil penalties. An employer may be subject to a cease and desist order and fines ranging from $250 to $2,000 for each document accepted for first time violators and up to $5,000 for repeat violators. In 2001, it was reported that INS inspectors intercepted 114,023 fraudulent documents.

Other federal and state laws deter the commission of identity theft. The Federal Identity Theft and Assumption Deterrence Act (enacted in 1998), makes it a federal crime to knowingly transfer or use, without lawful authority, another person's identification with the intent to commit, aid or abet any unlawful activity in a violation of federal law. In addition, the Federal Trade Commission ("FTC") collects complaints about identity theft under the Act, and in 2001, the FTC received 86,168 complaints from victims of identity theft. Additionally, the U.S. Social Security Administration ("SSA") operates a fraud hotline. It is noteworthy that approximately 82% of the telephone calls received on that hotline relate to identity theft.

In addition to the Federal agencies, almost every state has passed laws related to identity theft. Recently, several states have proposed legislation increasing the penalties against identity fraud and by further protecting against identity theft. In July 2002, the State of California passed a law eliminating the use of social security numbers as identifiers by employers.

Recent Developments - The Devil is in the Details

The SSA has been issuing social security mismatch letters to employers for the past several years when the social security number of the employee does match the name of the employee. The social security mismatch process has created a great deal of stir among employers attempting to comply with the contradicting rules and regulations of the SSA, the IRS and ICE. On May 24, 2002, the SSA Commissioner announced that the SSA Inspector General has proposed certain recommendations to curtail the problems associated with social security mismatches. One such proposal is that the SSA will require that, by the end of 2003, the IRS should penalize employers based upon the number of errors submitted on their annual wage reports. It is important and interesting to note that the SSA is not an enforcement agency. Only ICE and the IRS are enforcement agencies. It is likely that DHS will support the SSA's recommendation because ICE is charged with locating and removing illegal aliens.

A recent Supreme Court decision exemplifies how the judiciary has joined the fight to dissuade unauthorized workers from entering the U.S. labor force. The March 27, 2002 decision in Hoffman Plastic Compounds, Inc. v. National Labor Relations Board held that the National Labor Relations Board's award of back pay to an undocumented alien who was never legally authorized to work in the United States is foreclosed by federal immigration policy. The Supreme Court's decision bars an award of back pay to an alien who was not authorized to work in the United States. It is interesting to note that the Hoffman Plastic Coumpounds case comes on the wake of the tragic events of 9/11 and the anti-immigrant sentiment that emanated from those events.

It is important to note, however, that the decision does not affect an illegal alien's protections under discrimination laws. The Equal Employment Opportunity Commission ("EEOC") recently reaffirmed that the Supreme Court's decision in Hoffman Plastic Compounds does not affect the government's ability to root out discrimination against undocumented workers. Federal law makes it illegal to discriminate against any worker in the United States, regardless of immigration status. In response to Hoffman Plastic Compounds, the EEOC directed the Field Offices that claims for all forms of relief, other than reinstatement and back pay for periods after discharge or failure to hire, should be processed according to existing standards, without regard to an individual's immigration status. The EEOC maintains and affirms that it will not inquire into an employee's immigration status when a charge of discrimination is filed.

In addition to the foregoing, the IRS recently announced additional controls over the issuance of Individual Taxpayer Identification Numbers ("ITIN"). The IRS announced that these changes would help ensure that ITINs are issued for their intended tax administration purpose and not for other reasons, such as providing personal identification. New ITIN applicants must use a revised Form W-7, Individual Taxpayer Identification Number Application. ITIN applicants must also provide proof that the ITIN will be used for tax administration purposes. For applicants seeking an ITIN in order to file a tax return, the return must be filed along with the Form W-7.

Federal law requires individuals with U.S. income, regardless of immigration status, to pay U.S. taxes. The ITIN, a nine-digit number that begins with the number 9, was created for use on tax returns for those taxpayers who do not qualify for a Social Security Number. The IRS reports that it issued 7 million ITINs since 1996. The problem is however that most of the ITINs that have been issued did not appear in tax filings or tax reporting documents and may have been procured solely to serve as a form of personal identification. The IRS recently issued letters to all State Governors and State Motor Vehicle Departments advising that the ITIN was not designed to serve as a personal identification number and would not be suitable for determining identification of applicants for driver's licenses. Employers are reminded that the ITIN is not a valid employment authorization document and the acceptance of such document may, at a minimum, result in the issuance of a social security mismatch letter.

Process and Procedure: Getting the Social Security Mismatch Letter . . . What does it mean?

Fraudulent documents, such as counterfeit Alien Registration Cards and Social Security Cards could be and often are regularly used by unauthorized workers to obtain jobs. The use of a fraudulent social security numbers results in confusion for the SSA and the IRS. The duty of employers and employees to report social security numbers arises in several contexts under the Federal Law. Employees are required to give employers a valid social security number or a receipt showing that an application for a social security number has been submitted when they start working. The employer is then required to include the employee's social security number on the W-2 wage report that is filed with the IRS for wages that are paid to the employee. This process is separate and apart from the verification of work authorization conducted by the employer on the CIS Form I-9.

The SSA maintains records of the reported earning of individuals. These reported earnings are used to determine an employee's eligibility for entitlement to retirement, survivors, and disability benefits. The reported earnings that match an individual's name and social security number are posted to the individual's record. The reported earnings that cannot be matched with an individual's name are posted separately into an "Earnings Suspense File." A mismatch could result in the failure by the employee to receive proper credit for wages they worked for and earned. For example, the SSA reports that in 2000, approximately $4.3 trillion in wages was reported, and approximately $58.5 billion was not properly posted as a result of social security mismatches.

SSA sends letters to employers advising them that the SSA cannot post the earnings reported by the employers for certain employees because their social security numbers do not match their names. In the past, the SSA's policy was to issue "mismatch letters" only to employers with a 10% or greater mismatch. SSA's new policy, which became effective this year, changes the criteria to include employers with one or more mismatch. The SSA's change in policy results from the increase in the number of mismatch letters sent and the need for employers to address the discrepancies presented by the SSA mismatch letters.

Avoiding Liability: Fancy Footwork for Employers?

The immediate concern for employers receiving a mismatch letter is that mismatched employees may not be authorized to work in the United States. The letter, however, makes no statement about the employee's immigration status and receipt of a SSA mismatch letter should not be used by an employer to infer that the employee intentionally provided incorrect information. The receipt of an SSA mismatch letter should prompt an employer to conduct "due diligence" to ensure compliance with the SSA, IRCA, and the IRS.

First, an employer should review any documents prepared or provided when the employee, whose social security number appears on the SSA mismatch letter, was hired. The employer should review the employee's Form I-9, a completed employment application (if any) and the IRS W-4 Form to be sure that the data is consistent with other information provided by the employee. If, upon review, the documents appear to be incomplete or incorrect, an employer should continue to investigate to avoid a "knowing" violation of IRCA. An employee should be allowed an opportunity to present acceptable documents and amend his/her Form I-9. If the employee cannot present acceptable documents within three (3) days of the date of hire, the employer may be required to terminate the employee. Failure to terminate under these circumstances may result in a charge against the employer for "knowingly hiring" an unauthorized worker in violation of IRCA.

Second, employers are required to report accurate information to the IRS. Once an employer finds that an employee or an employer has provided an incorrect Social Security number on a Form W-2, the employer should correct the information by preparing and filing a W-2C with the correct information. As long as the incorrect social security number was provided inadvertently on the W-2 then no penalty should be imposed upon the employer.

Third, although the SSA is not an enforcement agency, the employer should take adequate steps to document that it has fully complied with the SSA's request for information. The employer should notify each employee, preferably in writing, of its receipt of a notice from the SSA of a social security mismatch. The employer should advise the employee to correct the problem with the employer or, if necessary, to visit an SSA office to correct the information.

Several weeks ago, a letter from the IRS to the Chair of the Information Reporting Program Advisory Committee outlined the penalties for including incorrect information in a tax filing by employers and also outlined how employers can satisfy their obligations in this regard in social security number no-match situations. The letter explained how employers may take advantage of certain "mitigating circumstances" to alleviate IRS penalties. Once factor for mitigation referenced in the letter was notification to an employee, in writing, that the mismatch was reported to the employer.

Regulations in the Identity Fraud and Identity Theft Arena: Static Problems and Dynamic Solutions

Issues that emerge from the realm of social security mismatch, constructive knowledge and document fraud demonstrate the truly "gray areas" that exist at the precipice where the immigration, the tax and the employment laws converge. In the recent times of strict administrative compliance concerning national security, issues surrounding identity fraud and identity theft are likely to be addressed both from a business and legal standpoint. Employers need to be educated by their counsel to be aware that the receipt of a social security mismatch letter from the SSA is not, in and of itself, "constructive knowledge" that the listed employees are not authorized to work. Concepts of identity fraud and identity theft are likely to call attention to deficiencies in organizational record-keeping processes. House Counsel (and other informed business professionals) can play a valuable role in circumventing liabilities by maintaining an awareness of the unique issues that emerge in this area. As DHS, SSA, IRS and other administrative agencies continue to promulgate additional regulations in this realm it is likely that such guidance will become the cornerstone for future workplace enforcement.

About The Author

David Nachman, Esq. is principal of Nachman & Associates, P.C. Mr. Nachman is a frequent speaker on panels and television. He is also an Adjunct Professor of Paralegal Studies at Bergen Community College and Fairleigh Dickinson University. In addition, he is a member of the Bergen County and New Jersey State Bar Associations; the Court of International Trade; the Third Circuit Court of Appeals; American Immigration Lawyers' Association; and the Northern New Jersey and Rockland County Chapters of the Society of Human Resource Management. David Nachman may be contacted by phone:(201) 236-9998 ext. 100, fax: (201) 236-9997 or email:

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