Is there a $100K+ “Form I-9” Audit Liability Hiding In That Dealership you’re Acquiring?

By Ross Henderson, COO, Emptech

Whether you are purchasing an automobile dealership through a stock or asset acquisition, it is very likely that the proper due-diligence and treatment of the Employment Eligibility “Form I-9” component of the transition will be missed and or mishandled.

In working with dealers over many years, we find that there is a high level of “out of compliance” reporting with a majority of the dealerships. The individual, paper-based I-9 systems used by many dealers typically have over a 50% error rate. Those mistakes can be a costly.

Since 1986, employers have been required to complete and retain Forms I-9 for current and former employees. The U.S. Immigration and Customs Enforcement (ICE) charged with enforcement and the current I-9 audit climate for employers is unprecedented in terms of volume and severity. The typical penalty for a single “technical” Form I-9 violation often approaches $1000 and dealership-sized employers often run into total potential or actual fines in the $10,000 to $100,000+ range (* see examples below). A “technical” violation can be something as innocent as missing filling out a field, or using the incorrect date.

As such, as a dealership Buyer, you need to be aware of how to minimize your potential liability surrounding the transaction event.

Stock Deal

In a stock deal, the Buyer is given the lucrative option of being able to redo the Form I-9 for all the acquired employees. In this instance it is important during the due diligence process to closely evaluate the Seller’s existing Form I-9s to see if they are compliant. Typically, doing a random sampling of the existing I-9s will quickly give you an understanding of the “health” of the overall I-9 Forms. In most cases, the Seller’s Form I-9s will have considerable problems and the Buyer will be well served to redo the Form I-9 process.

However, in redoing the Form I-9 process, the Buyer needs to first affirm that their existing I-9 processes will insure a 100% compliant reporting event. If your organization is using “paper” Form I-9 and/or does not have the internal HR I-9 expertise (that can handle a mass hiring event with time sensitive I-9 reporting), then it may be a very good investment to bring in outside expertise and/or electronic onboarding system to guide the Buyer to the best transition, as well as help provide overall improvement in go-forward I-9 practices. Electronic I-9 systems can greatly help improve compliance as well as record retention / administration.

Asset Deal

In an asset deal, the Buyer needs to redo the Form I-9 for all the acquired employees. Similar to the stock deal, the Buyer has the opportunity to bring over the mass of newly hired employees in a fully compliant manner. This represents a great opportunity for the Buyer to evaluate the existing Form I-9 processes to bring in improved practices where needed. The Buyer can also avoid onboarding a mass of employees that will create greater potential penalty.

In either case, one critical thing to understand is that the “non-compliance” activities at issue (for ICE) are not about whether workers are actually “legal” or “illegal”….only that they were hired correctly. Many employers mistakenly believe if all of their workers are “legal” they are complying with the spirit of the law, but the enforcement of the law is focused on ensuring rules are followed correctly.

Consider These Numbers:

In recent years, over 10,000 employers of all sizes have been audited, and ICE has levied over $100 million in fines (WSJ “US Begins New Crackdown Illegal Workers” 9/12/13)
The average amount of penalties for a sanctioned company is $110,000.
Initial infractions on the form can result in fines of $110 to $1,100 per employee.
Do the math. For acquiring or onboarding 150 employees, at a conservative 50% error rate, with a conservative average of $700 in fines per form, (150 X 50%) X ($700) = $52,500 in potential fines.
Other examples of recent ICE penalties assessed on businesses:
- $108,000 for Occupational Resource Management
- $41,400 for Fowler Equipment Co.
- $14,500 for Silverado Stages, Inc.
- $7,400 for Metropolitan Warehouse
- $33,275 for Modern Disposal, Inc.
- $228,000 for M&D Masonry
- $400,000 for a McDonald’s franchisee

Penalties Extend Beyond Fines:

Owners, managers and executives can face criminal and civil charges, including prison time.
Other penalties include asset forfeiture, debarment, and loss of business license.
Other expenses may include attorney’s fees, cost of public relations, lost productivity costs, and potential shareholder lawsuits. (American Apparel lost 40% of its workforce, causing financial losses and a stock drop of 41% after a Form I-9 inspection in 2009).
Get full penalty information from ICE here.

What to Do With I-9s If Your Transaction Already Happened

Have you already closed your deal? You may have missed an opportunity to avoid taking on significant exposure, but you can still take action to address any outstanding compliance issues that may be buried. More often than not, there are serious problems that — if addressed in advance of an audit — can lead to huge reduction in exposure. It is never too late to do an internal I-9 audit and remediate potential violations. In fact, that is just as true even if you’ve never had M&A. Check your I-9s now. Thank me later.

Need some help getting started? Download Emptech’s Tips for Compliant I-9 / E-Verify Administration. Engaging an I-9 compliance professional is always advisable when handling I-9s, to ensure reduced rather than increased liability.

Ross E. Henderson is Chief Operating Officer at Emptech, a human resources software and consultative service company. He can be reached at r.henderson@emptech.com or 1-203-738-0545.

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