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Due Diligence Considerations for Companies Contracting With Vendor Service Providers

Due Diligence Considerations for Companies Contracting With Vendor Service Providers

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Published by Cyrus Mehta
This article was originally published in New Jersey Lawyer Magazine, a publication of the New Jersey State Bar Association, and is reprinted here with permission. It advises in house counsel about immigration considerations when contracting with vendor companies who hire skilled foreign nationals. Even though a company does not directly sponsor the foreign national for a work visa, this article guides in house counsel on due diligence issues with respect to immigration matters so as to avoid any liability for the company.
This article was originally published in New Jersey Lawyer Magazine, a publication of the New Jersey State Bar Association, and is reprinted here with permission. It advises in house counsel about immigration considerations when contracting with vendor companies who hire skilled foreign nationals. Even though a company does not directly sponsor the foreign national for a work visa, this article guides in house counsel on due diligence issues with respect to immigration matters so as to avoid any liability for the company.

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Categories:Types, Business/Law
Published by: Cyrus Mehta on Oct 31, 2011
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Due Diligence Considerations for CompaniesContracting With Vendor Service Providers
by Cyrus D. Mehta
M
any corporations in need of special-ized skilled workers who are in shortsupply do not sponsor foreignnationals for their work permits.Instead, these companies contractwith other entities that employskilled workers, who in turn are then assigned to the contract-ing company for a specific project. This is especially true withinformation technology (IT) services, where foreign nationalson temporary visas predominate. Some typical visa categoriescompanies may seek to utilize for employment purposesinclude: H-1B (professional skilled worker), L-1 (intra-compa-ny transferee) and B-1 (business visitor) nonimmigrant visas.While the obligations for a sponsor are onerous, this arti-cle highlights what in-house counsel needs to know when uti-lizing the indirect services of foreign nationals, particularlythose who are employees of vendor service providers. Forexample, it is important to be vigilant to ensure that foreignnational workers assigned to a company are working underthe appropriate visa categories. In the event that in-housecounsel has knowledge or encourages activities not author-ized under these visa categories, there is potential for counseland the company to be ensnared in criminal liability.
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Evenshort of criminal liability, it is important to make sure duediligence has been done to avoid being caught up in anembarrassing investigation against a partner company.
Business Visas: When Does a Business ActivityBecome Employment in the U.S.?
The B-1 visa, which allows business trips to the U.S.,
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hasrecently come under fire over allegations of its misuse.
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B-1entrants have been accused of actually working rather thanengaging in business-related activities. Although the term“business” is not defined in the statute or regulations, theDepartment of State (DOS) defines business as “conventions,conferences, consultations and other legitimate activities of acommercial or professional nature;” but not “local employ-ment or labor for hire,” (
i.e
., gainful employment in the Unit-ed States).
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The Foreign Affairs Manual (FAM), published by the DOS,further provides that a B-1 visa holder must not receive asalary from a U.S. source, but can be reimbursed for expensesin the U.S.
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The FAM sets forth the following examples of per-missible B-1 activities: engaging in commercial transactions,which do not involve gainful employment in the U.S.; nego-tiating contracts; consulting with business associates; litigat-ing; participating in scientific, educational, professional orbusiness conventions, conferences or seminars; or undertak-ing independent research.
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It is often difficult to distinguish between genuine businessactivities permissible under the B-1 visa and activities thatconstitute skilled or unskilled labor that are not appropriateunder the B-1 visa. The most well known decision interpret-ing permissible B-1 activities is the Board of ImmigrationAppeal’s decision in
 Matter of Hira
,
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involving a tailor whotook measurements of customers in the U.S. on behalf of hisbusiness in Hong Kong, where the suits would be manufac-tured and shipped back to the customers in the U.S. This wasconsidered an appropriate B-1 activity, because the principalplace of business and the actual place of accrual of profits, if any, were in the foreign country.Given the close scrutiny the B-1 is receiving these days,especially after a lawsuit by a whistleblower employee of oneof India’s largest IT outsourcing company, it is incumbentupon in-house counsel to ensure that his or her company isnot participating in activities that may be perceived as fraud-ulent.
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A B-1 visa applicant must submit evidence to the U.S.consulate overseas when applying for a visa to justify the pur-pose of his or her visit. This evidence may also be required tobe submitted to a customs and border protection official atthe airport when the foreign national arrives in the U.S.If the company urgently needs software engineers through
 
its IT contracting company for a project,counsel may be requested to write a let-ter as a client of the contracting compa-ny to justify the need for its employeeoverseas to visit the U.S. on a B-1 visa. If this letter indicates that the softwareengineer is required for meetings, or toconduct an analysis of the project to besubsequently worked on overseas (a per-missible B-1 activity), but the actual pur-pose is for the engineer to actually par-ticipate in programming and workingon the solution in the U.S., it may comeback to haunt counsel and the corpora-tion if there is a criminal investigationagainst the IT contracting company.Therefore, when drafting such a letter, itis important to ensure that the proposedactivities discussed in the letter are per-missible B-1 activities, and when theforeign national arrives, he or sheengages in activities that are consistentwith the listed activities.Admittedly, the scope of the B-1 visaremains ambiguous, and there alsoexists the “B-1 in lieu of the H-1B,” visa,which has rigid requirements.
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First,qualified individuals must otherwisequalify for an H-1B visa, meaning theymust be working in a specialty occupa-tion and qualify for the position bymeans of a bachelor’s degree in a specif-ic field required for the occupation. Inaddition, they must show nonimmi-grant intent (established by showingsignificant ties to their home country,including establishing they have a resi-dence abroad they have no intent toabandon), must be regularly employedabroad, and their salary must be paid bytheir employer abroad. They may per-form work in the U.S. only for a limitedtime, and only if they continue to bepaid abroad, and not by the U.S. entityfor which they are performing services.If the scope of the activities fallsunder the B-1 in lieu of H-1B, counselshould ensure that the IT contractingcompany has made full disclosure of theforeign national’s eligibility under theB-1 in lieu of H-1B visa. It is also impor-tant to ensure that the B-1 national con-tinues to remain an employee of theoverseas entity. Remember that the B-1in lieu of H-1B is not granted very read-ily by U.S. consuls, and the norm is forthe foreign national to enter the U.S. onan H-1B visa. Finally, in the wake of accusations against the inappropriateuse of the B-1 in lieu of an H-1B, theState Department is considering modifi-cations to this category.
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H-1B Visa: Is There an Employer-Employee Relationship?
The H-1B visa is the workhorse of allnonimmigrant visas, and imposes oner-ous obligations on the employer whoemploys a foreign national in this non-immigrant visa category. The employermust establish that a bachelor’s or high-er degree in the specific specialty, or itsequivalent, is the minimum require-ment for entry into the occupation.
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Recently, the United States Citizenshipand Immigration Service (USCIS) hasinsisted that the employer establish avalid employer-employee relationship,especially with respect to H-1B employ-ees assigned to third-party worksites. Ina memo by Donald Neufeld, associatedirector of service center operations,dated Jan. 8, 2010,
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the employer mustdemonstrate the right of control overthe employee through the following cri-teria, even though the employee is onits payroll and the employer withholdstaxes on his or her behalf:1.Does the petitioner supervise thebeneficiary, and is such supervisionoff site or on site?2.If the supervision is off site, howdoes the petitioner maintain suchsupervision, (
i.e
., weekly calls,reporting back to main office rou-tinely, or site visits by the petition-er)?3.Does the petitioner have the rightto control the work of the benefici-ary on a day-to-day basis if suchcontrol is required?4.Does the petitioner provide thetools or instrumentalitiesneededfor the beneficiary to perform theduties of employment?5.Does the petitioner hire, pay, andhave the ability to fire the benefici-ary?6.Does the petitioner evaluate thework product of the beneficiary (
i.e
.,progress/performance reviews)?7.Does the petitioner claim the bene-ficiary for tax purposes?8.Does the petitioner provide the ben-eficiary any employee benefits?9.Does the beneficiary use proprietaryinformation of the petitioner inorder to perform the duties of employment?10.Does the beneficiary produce anend product that is directly linkedto the petitioner’s line of business?11.Does the petitioner have the abilityto control the manner and means inwhich the work product of the ben-eficiary is accomplished?In order to win an H-1B approval, thepetitioning employer generally requestsconfirmation from its client companyabout the H-1B worker’s assignment,and that it is the employer who actuallyexercises control over the employment.In-house counsel, as the contractor of the H-1B employee, often through lay-ers of middlemen vendors, must takecare that the letter accurately describesthe arrangement. On the one hand, theissuance of such a letter confirms thatthe company is not the employer, thuseliminating a situation where it may beheld liable as an employer for wages andbenefits. On the other hand, there maybe situations where the petitioning enti-ty exercises no control over the H-1Bworker’s employment, and the personreports directly to a manager with theclient rather than the petitioner.Indeed, the Neufeld memo contem-
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plates a scenario where the petitioner isa staffing computer consulting compa-ny, and once the H-1B worker is placedat the client site, it no longer reports tothe petitioner for assignments and allassignments are determined by a man-ager at the third-party company. Careshould, therefore, be taken not to mis-represent the nature of the assignmentat the company. Moreover, the petition-er must demonstrate that the positionbeing filled by the H-1B worker at thecompany requires a bachelor’s degree orhigher in a specialty. Here too, counselmust take the utmost precautions to notmisrepresent the minimum require-ments of the position.The USCIS’s fraud detection nationalsecurity division may also pay a visit toensure that the worksites have beenaccurately identified, and these site vis-its may lead to the company. Moreover,the letter counsel provided may also beverified with a surprise call from theState Department when the H-1B work-er applies for a visa at the U.S. consulate.The petitioner must also separatelyattest to the Department of Labor,
inter alia
, on the labor condition application(LCA) that it is paying at least the pre-vailing wage, and that it has postednotice in two conspicuous places at thephysical location for 10 days where thework is actually performed. The noticemust note that H-1B workers aresought, the occupational classification,the wages offered, the period of employment and the work location.The notice must also invite complaintsfor misrepresentation in the LCA or forother violations.
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While the petitioner is solely respon-sible for posting the notice at the physi-cal location, it would behoove counselto cooperate with the posting at thecompany’s site to ensure the contractoris fully compliant with the attestationrequirements.Finally, certain employers who havea large percentage of H-1B workers inthe workforce, known as dependentemployers, must make an additionalattestation that a U.S. worker has notbeen displaced, or there is no intentionto displace one, if the H-1B worker isplaced at a client’s site within 90 daysbefore and 90 days after the placementof the worker at the other employer.
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Here too, while the petitioning employ-er is solely responsible for this ‘sec-ondary’ displacement attestation, coun-sel at the client company must ensurethat he or she has provided accurateinformation about any displacement of U.S. workers to the contracting compa-ny. If there has been a displacement, thecontractor, if H-1B dependent, and if the worker is not exempt,
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cannotassign the H-1B worker to the project.
Is the Worker SpecializedUnder the L-1B Visa?
The L-1 visa, which allows foreignnational intracompany transferees towork in the U.S. as managers or execu-tives under the L-1A visa, or as special-ized knowledge employees under the L-1B visa, is also worth a passing mention.
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L-1B “specialized knowledge” employeeshave also come under close scrutiny inrecent times for alleged misrepresenta-tions of whether they are truly engagingin specialized knowledge activities.If a specialized knowledge employeeis placed at a client company, careshould be taken that the individual iscontinuing to serve is such a capacity.Specialized knowledge includes a personwho has special knowledge of the com-pany product, service, research, equip-ment, techniques, management orother interests and its application ininternational markets, or has anadvanced level of knowledge of process-es and procedures of the company.
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While the definition of the term hasgone through varying interpretationsover many years, the rule of thumb isthat if the person is implementing aproduct or application of the contractingcompany, or deploying a methodologythat is unique to that company, the indi-vidual may be involved in appropriateactivities consistent with the L-1B visa. If,on the other hand, this so-called special-ized knowledge employee is involved inroutine coding or software developmentnot pertinent to the product or processesof the contracting company, this shouldbe sounding alarm bells for counsel.Moreover, if the L-1B employee is placedat a third-party worksite, he or she mustbe under the “control and supervision”of the petitioning entity and not the con-tracting company.
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Conclusion: The Wal-Mart Example ofIndependent Contractor Liability
The author is cognizant of the factthat an independent contractor shouldnot be liable for the civil or criminalwrongdoing of an independent contrac-tor. At the same time, if counselattempts to be willfully ignorant, orworse still, encourages inappropriate orfraudulent activities, it will not be ashield if the contractor breaks the law.The enforcement action against Wal-Mart, albeit in a different context, pro-vides a sobering example of independentcontractor liability. The Form I-9 employ-ment verification requirement applies todirect employees of an employer.
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Onthe other hand, an employer cannot cir-cumvent its obligations by classifying anemployee as an independent contractor.Moreover, even if an individual is trulyan independent contractor, INA Section274A(a)(4) provides that a person orother entity who uses a contract, subcon-tract or similar arrangement to obtainthe labor of an alien in the U.S. knowingthat this person is unauthorized to work,can be sanctioned.Wal-Mart received substantial gov-ernment scrutiny because of janitorialsubcontractor employees working at itslocations, although the enforcementaction culminated in a consent decreeand order in 2005.
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