ANALYSIS OF THE UNINTENDED CONSEQUENCES OF SENATE'S IMMIGRATION REFORM BILL (S. 744)

Immigrant entrepreneurs sparked the Silicon Valley boom in the 1990s, credited with founding some of America’s leading science and technology companies like Sun Microsystems, Google, Yahoo, and eBay. Immigrant founders account for nearly half of the U.S.’s top 50 venture-backed companies and one-quarter of U.S. science and technology companies founded between 1995 and 2005 had a CEO or Technical Lead that was an immigrant. Needless to say, the U.S.’s immigration policies aimed at attracting and welcoming the world’s best and brightest talents has played a critical role in the United State’s competitive edge in innovation and industry. In the early 1990s, right at the start of the Dot Com Bubble, programmers and software engineers from all over the world flocked to the Silicon Valley, and the U.S. immigration system was ready for them. The U.S. soon took the lead in high tech industry and innovation as it gave high tech workers a quick avenue to stay and work in the U.S. and eventually immigrate as permanent residents.

Today, the H-1B program allows the U.S. to maintain its competitive edge in the high tech field by providing highly-skilled software and hardware engineers and programmers with an avenue to work and reside in the United States. The comprehensive reform bill drafted by the Senate “Gang of Eight” seeks to make sweeping changes across all aspects of U.S. immigration law, including some progressive reforms for family-based immigration and a pathway to citizenship for illegal immigrants. S. 744 also proposes some drastic structural and procedural changes for employment-based immigration and the H-1B program. Although the reform bill would reduce the employment-based green-card backlog and help employers seeking to sponsor foreign-born graduates from U.S. universities in science and engineering, it also includes heightened restrictions and other bureaucratic measures for H-1B employers that will likely encourage U.S. companies to outsource jobs and resources abroad, rather than in the United States. The proposed changes to the H-1B program seek to address criticisms regarding H-1B workers and their role in the U.S. economy. A closer look, however, reveals these criticisms are generally based on ill-founded assumptions and would represent a significant policy mistake that would harm the ability of U.S. companies to compete in the global economy.

The proposed changes to the H-1B program are in response to the ongoing myth that foreign workers in the U.S. take jobs away from American workers. U.S. companies, however, have complained about the shortage qualified U.S. workers. Last month, Microsoft’s general counsel, Brad Smith testified that the company was not able to fill the jobs they were creating. This myth also ignores the enormous benefit to the U.S. economy provided by immigrant entrepreneurs. A recent study by Microsoft reported that for every H-1B employee hired by Microsoft, an additional four employee positions are created to support the H-1B worker in various capacities. Moreover, according to the Kaufman Foundation, U.S. science and technology companies founded by immigrants between 1995 and 2005 have generated $52 billion and employed $450,000 workers. In addition, the National Foundation for American Policy reported in a policy brief that in 2006, foreigners residing in the U.S. were named inventors or co-inventors in 25.6% of all US patent applications.

The numerous legal obstacles and costs employers have to bear in order to hire an H-1B worker under current U.S. immigration law is testament to the truth that no reasonable practical alternative exists: there are not enough sufficiently qualified U.S. workers to fill the shortage. Under current law, H-1B employers have to go through the uncertainty and legal risks of obtaining an H-1B visa:

• It is expensive: H-1B fees range from $2757 to $20,710, according to a May 2013 National Foundation for American Policy brief. The costs to sponsor a green card are even higher.
• There is uncertainty in when the H-1B worker can begin employment: U.S. employer must prepare for filing the H-1B petition in the preceding fiscal year with no certainty that the petition will even be selected for processing if the H-1B cap is filled in the first week.[1]
• There is a possibility of denial of the H-1B petition: Even if the H-1B petition is selected for processing, there is the possibility that it will be denied or delayed in adjudication due to a Request for Evidence. The adjudication process is inherently subjective and it is possible, even after paying the legal fees, costs, and filing fees, that an adjudicating officer will decide the employee or the employer, or the position does not qualify for an H-1B petition.

Critics of the H-1B program also contend that the proposed increase in the number of H-1B visas available for a fiscal year will mean that U.S. employees will race to offer jobs to foreigners, rather than U.S. workers. However, as demonstrated in the below chart showing dates the H-1B cap has been reached from 2002 to the present, the market has always determined the use of H-1B visas. When the economy was strong, then the number of H-1B petitions filed was high, in response to the market and the demand. However, during times of economic recession, the number of H-1B petitions significantly dropped as U.S. employers did not seek to hire H-1B workers. For instance, in 2002 and 2003, Congress temporarily raised the cap limit to 195,000 per year. However, after the Dot Com Bubble burst, fewer than half that number was issued for those two years. The following year, the cap was not reached until well over ten (10) months into the fiscal year. As the recession eased and the economy recovered, the H-1B cap was reached closer and closer to April 1st, which is the earliest date a petition can be filed for the following fiscal year.

This consistency between H-1B cap reach dates and the economy can be seen with regard to the most recent economic recession. Whereas the H-1B cap was reached in the first week of April for FY2008 and FY2009 when the US economy was strong, it was not reached until December the following year as the US economy took a sharp downward turn in September 2008. Again, the cap reach date only began to move towards the April 1st deadline as the recession eased and the economy recovered.

Table showing H-1B cap reach dates since 2002

In addition, H-1B workers are not indentured to their U.S. employers and actually have the freedom to either go back to their home country or switch employers. H-1B transfers happen all the time, and the H-1B worker can begin working for the new employer as soon as the H-1B transfer petition is filed. The proposed reforms further expel this notion of indentured servitude by allowing H-1B workers a 60-day grace period of legal status following termination of employment with its H-1B employer. Moreover, the H-1B Beneficiary would be granted lawful status under H-1B as soon as a new petition to extend, change, or adjust their status is filed during the grace period.

The proposed changes are also in response to contentions that there are not enough safeguards against fraud, which can lead to abuse of the H-1B program. Granted, with any program in which immigration benefits are available, there are sure to be some bad apples ready and willing to abuse the system. However, these instances are few and far between. In FY2010, more than 14,0000 H-1B petitions were audited, while only one (1) percent of these were actually referred for a fraud investigation.

Critics of the H-1B Program contend that Indian IT consulting firms stockpile H-1B visas. IT consulting is a business model that benefits U.S. companies and consumers alike. They serve a very important niche in the IT industry by providing project-specific specialized IT services so that companies can focus on their core central business functions. IT firms respond to the needs of the market, and provide qualified high skilled workers to fulfill the shortage. These companies often already have a parent or subsidiary branch in India or China and are able to recruit from that pool of talent. Most big firms run their core computing platforms and business-process technologies using services firms that employ H1B visa holders. Restricting the growth of skilled immigrant workers in the U.S. to fulfill the needs of bigger U.S. companies means shipping those operations overseas, including jobs currently held by U.S. workers.

Although the reform bill provides a great advantage in that it increases the number of available H-1B visas available per fiscal year from 85,000 to 110,000, all the way up to 180,000 for subsequent years, it comes with a price of burdensome bureaucratic procedures and costly recruitment hurdles.

In order to file a Labor Condition Application, an employer must first advertise the position on the Department of Labor website for 30 days. The employer is also required to offer the position first to any “equally or more qualified U.S. worker” that applies for the position. In addition, the current four-tier structure of the prevailing wage system would change to three levels and H-1B dependent employers will have to pay the H-1B worker at least the level two wage:

• The first level would be a mean of the lowest 2/3 of wages surveyed, but not less than 80% of the means of all wages surveyed.
• The second level would be a mean of the wages surveyed.
• The third level would be a mean of the highest 2/3 of wages surveyed

In addition, any H-1B employer will generally not be allowed to displace a U.S. worker for the 90 days before and after the filing of the LCA. For H-1B dependent employers, this period is 180 days before and after the filing of the LCA.

Proponents of this new regulation allege that H-1B employers are crying foul because they do not want to have to pay their H-1B employers the competitive wage, nor have to offer employment to US workers. However, H-1B workers are already paid the higher of the prevailing wage or the actual wage offered. So, it would depend on the position and the location of the job whether the new prevailing wage structure actually means an increased wage or not. The crux of the opposition lies in the inherently subjective nature of the new requirements. Who determines if an employee is “equally or more qualified”? According to the new regulations, it will be the Department of Labor officer, rather than the actual employer. Moreover, a number of factors go in to an employer’s decision-making with regard to recruiting. What if the equally qualified U.S. worker is not necessarily the “best fit” for the job? How does one compare a top foreign-born Bachelor’s degree graduate of a prestigious engineering program at a top ranked U.S. school with a U.S. citizen master’s degree graduate from a local “Podunk” school? Are both “equally qualified”? Which would you, as an employer, prefer to hire?

In addition, the new reform bill creates additional barriers for employers seeking to hire engineers from India and China by setting a limit for any employers that are heavily reliant on H-1B workers. Under the reform bill, employers other than non-profit and research organizations, that employ 50 or more employees in the U.S. may not have more than:

• 75% of total number of employees in H-1B or L-1B status in 2015
• 65% of total number of employees in H-1B or L-1B status in 2016
• 50% of total number of employees in H-1B or L-1B status in 2017

Moreover, between 2015 and 2024, H-1B dependent employers who employ 50 or more employees in the U.S. and have 30-50% in H-1B or L-1B status will have to pay an additional $5,000 fee. For H-1B dependent employers who employ 50 or more employees in the US and have 50-75% in H-1B or L-1B status, this fee will be $10,000 for 2015 to 2017. H-1B dependent employers are defined as any employer who:

• Is not a nonprofit institution of higher education, a nonprofit research organization, a healthcare company, or a government entity;
• Employs 25 or fewer full-time employees (FTE) in the U.S. and more than 7 are H-1B;
• Employs 26 to 50 FTE in the U.S. and more than 12 are H-1B; or
• Employs 51 or more FTE in the U.S. and more than 15% are H-1B

Even More Investigations by the Department of Labor and Increased Penalties

The Department of Labor’s authority in monitoring wages and compliance with DOL rules would increase. DOL would be able to initiate an investigation without the current requirements for reasonable cause to initiate or certification of reasonable cause. The Secretary of Labor will no longer need to first know the identity of the tipster before initiating an investigation, and would be able to investigate any LCA compliance issue. The timeframe in which DOL is required to certify an LCA would increase from 7 days to 14 days.

In addition, all employers with more than 100 employees in the U.S. or who have more than 15% of its employees as H-1B non-immigrants will have to undergo an annual compliance audit. The reform bill also increases non-compliance fees for any employers found to be in violation of the new regulations, not just violations that are “willful” or “substantive.”

One final provision, if not the most drastic, is targeted at IT consulting/staffing firms. The proposed reform bill would prohibit all H-1B dependent employers from outsourcing an H-1B employee. For non-H-1B dependent employers, an H-1B employee may be outsourced only upon paying an additional $500 fee. As mentioned above, IT consulting firms fill a very specialized and critical niche for U.S. tech companies, and to eliminate that entire section of industry would mean moving those operations, and U.S. jobs and resources, abroad.

This section of the bill provides “Intending Immigrant” language, in which an H-1B beneficiary whose employer has begun the green card process for him or her will not be counted towards the numbers above as an H-1B employee. Although the language of the bill may change, the current bill defines an “Intending Immigrant” as an alien who intends to work and reside permanently in the United States who has a) an approved labor certification application or an application that has been pending for more than one (1) year, or b) a pending or approved immigrant petition. The first option above (a) only applies to “covered employers,” who are employers that have filed immigrant petitions for not less than 90% for whom it has filed a labor certification application during the previous year (under this provision, labor certification applications pending for more than one year may be treated as if the employer filed an immigrant petition). This provision provides a possibility for H-1B employers with a large number of H-1B employees to continue outsourcing H-1B workers in the IT services industry, but even this language may be eliminated after the bill goes through mark-ups and amendments this week.

Unintended Consequences: Outsourcing U.S. Resources, Jobs, and Talent Abroad

The added provisions may make the H-1B program essentially unworkable. Take for instance, the H-2A visa for agricultural workers. This visa category has no numerical limitation, however, it is almost never utilized. Despite data showing that more than half of the workers for certain crops are working illegally, employers are not applying for the H-2A visa because of the tedious and burdensome procedures employers must get through for the H-2A visa. The proposed changes would essentially make the H-1B and L-1B programs much like the H-2A visa with unworkable terms and conditions for the employer. Businesses may be more willing to outsource jobs abroad in order to hire the Indian or Chinese or foreign-born engineer with the qualifications and skills needed for the position, rather than risk the legal ramifications of potentially violating a new regulation based on overly broad terms and inherently subjective conditions.

The proposed increase in requirements and conditions for H-1B employers may potentially do more harm than good for the U.S. economy and the job market. The new provisions potentially hinder American competitiveness in the global market, as well as encourage U.S. companies to hire skilled foreign workers abroad in countries like India and China, rather than in the United States. Moreover, many of the provisions, including changes to the H-1B wage rules, the 180-day non-displacement requirement, the H-1B ban for employers with more than 50% of their employees in H-1B status, and the H-1B fee increases, potentially violate international trade treaties such as the General Agreement on Trade in Services (GATS). Although the proposed changes to employment-based green cards are an improvement to employment-based immigration, they are not a practical alternative to the H-1B visa, which allows foreigners to stay and work in the U.S. in a much quicker timeframe.

[2] The National Foundation for American Policy released a Policy Brief citing to GAO statistics