Employing undocumented labor requires the employer to understand the full scope of potential risks.
Editor’s note this is part three of a series find the first two parts here: part one: Restaurant Start-Ups: The Lease Part 1, part two Restaurant Start-Ups: The Lease Part 2 and part three Restaurant Start-ups Part III- Hour and Wage Requirements.
U.S. employers are not supposed to hire undocumented aliens. Notwithstanding this, restaurants often use undocumented workers as bussers, dishwashers, and line chefs—unsung positions in which many documented Americans have often shown a lack of interest. Indeed, the reality of the industry is that without access to undocumented labor many restaurant corporations would simply close.
But, the decision to keep undocumented workers off payroll can expose employers potentially to significant liability, separate and apart from the liability that could be imposed on them by the immigration authorities.
Specifically, not accounting for undocumented workers in connection with state and Federal labor law reporting requirements can entrap employers: By keeping undocumented employees off payroll, in an effort to avoid being penalized by the immigration authorities, employers risk state and Federal law penalties that can be imposed in connection with hours and wages laws, unemployment insurance, workers compensation, and wage withholding rules.
Thus, employers who analyze their risk solely with regard to their exposure to the enforcement provisions of U.S. immigration laws are materially underestimating the full range of liabilities they could face.
They are as follows:
1. Hours and Wages
Undocumented employees must be treated the same way as documented workers in terms of being paid wages and overtime.
The problem, however, is that by paying undocumented workers off the books (oftentimes in the form of cash), employers may not have sufficient documentation of paid wages to counter a claim that there was underpayment. At least in New York, the State Department of Labor takes the position that there is a presumption that a claim for underpayment is valid unless the employer can come up with counter evidence in the form of payroll records showing the wage that was actually paid.
But even if an employer could prove that it properly paid its undocumented workers, it could still face penalties for failing accurately to report the number of workers it employs, and their wages as required by State and Federal payroll filings.
2. Unemployment Insurance
If it is determined as part of a State Labor Department audit that certain employees have not been counted in connection with the employer’s obligations to make contributions to its state’s unemployment insurance fund, the employer could end up having to pay the difference between its current contribution level and what it should have contributed if it had reported accurately the wages of undocumented employees.
Unemployment insurance contribution rules can vary from state to state but are always based on an employer’s accurately reporting the number of workers it employs and their wages. Where an employer understates the number of its employees because it is employing undocumented workers off the books, the employer could hazard personal liability for the payment of penalties associated with the under-reporting.
Under-reporting the wages and benefits of employees can also end up raising an employer’s Unemployment Insurance rates.
3. Workers Compensation
As in the case of unemployment insurance, the level of Workers Compensation coverage depends on accurately reporting the number of workers employed and their wages:
Understating the number of employees can result in an employer’s having inadequate Workers Compensation coverage in violation of state law, resulting in the imposition of penalties and interest. Owners can be held personally liable for the failure to maintain adequate Workers Compensation coverage. The failure accurately to report the number of employees and wages, leading to insufficient Workers Compensation coverage, can also lead to ongoing accumulating fines and, potentially, criminal prosecution.
4. Wage Withholding Rules
All employers are mandated under the Federal law to withhold from taxes and employee contributions to Social Security and Medicare, so called FICA taxes, from their employees.
These taxes are then held in trust by the employer until they are deposited with the U.S. Government. The failure to pay over Trust Fund Taxes can result in the imposition of significant penalties, including having to pay-in the appropriate withholding amounts retroactively. This obviously could really add up in connection with employees for whom no wage withholding has occurred for years. It is also important to consider that Trust Fund Liability can be imposed on, so called, “Responsible Persons” of the business. This means that the active owners of a business can be held personally liable for Trust Fund Tax violations.
Finally, in egregious cases, the Internal Revenue Service can criminally prosecute “Responsible Persons” for violating wage withholding rules.
5. The Take Away
Employing undocumented labor requires the employer to understand the full scope of potential risks beyond just the penalties that can be imposed by the immigration authorities.
Such additional risks could involve having to face expensive audits and hazarding the imposition of significant penalties, including the requirement to reimburse agencies for contribution shortfalls. Ironically, violations of state labor reporting requirements, not violations of the federal Immigration laws, can pose the more palpable and immediate threat to the financial integrity of employers who are employing undocumented labor.