This entry resumes yesterday’s discussion of problems that can arise for a business dealing with a temporary staffing service, or “TSS,” that is violating the law; the discussion continues to draw on the case of Mr. Victor Thach, described in yesterday’s post, who was convicted and sentenced for criminal tax violations associated with his labor leasing agency. This blog discussed civil tax issues yesterday; today it addresses criminal tax and immigration law issues, and how the legal problems of a TSS can become the problems of its clients. This is part of the broader discussion regarding employment tax crime that will occur during a panel at the White Collar Practice Seminar of the Pennsylvania Association of Criminal Defense Attorneys (PACDL) this Thursday, November 12, at the Union League in Philadelphia.
Criminal Tax Issues.
Mr. Thach and his colleagues were prosecuted and convicted. Under different facts, it is possible to imagine how a company using the services of a third-party can get embroiled in the criminal issues of an unscrupulous employee leasing agency. Even if no charges ultimately are brought or proven, no one enjoys the process of a federal criminal investigation. This is a potentially very complicated topic, so simply bear in mind the following general principles: 1) the law of criminal conspiracy is very flexible and broad; 2) ditto as to the law of aiding and abetting; 3) to simplify greatly, a company can be held criminally liable on the basis on criminal conduct committed by its agent or employee, so long as the conduct occurred during the course of the agent or employee’s general corporate duties. As a legal matter, and again to simplify greatly, liability typically comes down to proof of knowledge. As a practical matter, it often turns on what mid-level supervisors knew, when, and what they did in response. The doctrine of “willful blindness,” which allows the government to obtain a conviction based on evidence that a defendant purposefully took action to avoid learning relevant facts that would have produced guilty knowledge, can be critical; the doctrine often is used to ensnare professionals and executives who did not commit the alleged crimes directly.
Thus, if any of Mr. Thach’s clients had known that he was paying the employees in cash and not reporting those wages as required, and if they had facilitated that scheme in any way, the clients themselves could have faced related criminal tax exposures. Although people in “the real world” often dismiss the known legal violations of others as “not my problem,” the law itself – or enforcement authorities – do not always make such distinctions. Indeed, there are potential scenarios in which, even though TSS agencies run by defendants such as Mr. Thach represent the statutory employer and therefore are solely responsible under the civil law for the withholding and payment of employment taxes, the TSS’s clients nonetheless face potential criminal exposure because they facilitated the TSS’s scheme.
Labor violations and cash payroll schemes often also involve the use of unauthorized foreign workers – as alleged in the description of Mr. Thach’s case. If so, then there is a whole new set of potentially serious legal headaches for the companies involved.
The Immigration and Nationality Act (“the Act”), and its amendments, including the Immigration Reform and Control Act of 1986 (“IRCA”), are the source of current federal immigration law. The Act authorizes civil and criminal fines, and even imprisonment for employers found to have hired, employed or harbored unauthorized workers. Again, the following should be considered in light of the fact that the law of conspiracy can be very broad.
Section 1324a of the Act prohibits an employer from knowingly hiring an unauthorized worker, and makes it illegal for an employer to hire an individual without verifying identity and work eligibility, and completing and retaining a Form I-9 “Employment Eligibility Verification.” An employer that employs an unauthorized worker potentially is liable for fines, subject to an affirmative defense of the good-faith pursuit of an employment verification system, and these penalties increase for repeat offenders. An offending employer also can be debarred from obtaining contracts with the federal government, which can be devastating for certain businesses.
The Act also creates criminal exposures. An employer who engages in a “pattern or practice” of the Section 1324a violations described above risks up to six months’ imprisonment, as well as a criminal fine of up to $3000 per unauthorized employee. More significantly, the Act has separate felony criminal provisions for those who “harbor” or “transport” unauthorized workers, which can result in up to ten years’ imprisonment per violation, plus fines. The government also may seek forfeiture of the employer’s “gross proceeds” derived from a Section 1324 “harboring” violation, as well as any vehicles or property used to facilitate the violation.
These criminal offenses do not have a demanding mental state requirement – mere “reckless indifference” by the employer to the true status of a worker is sufficient. Given that unauthorized workers may use stolen identities and related false documents to obtain employment and generally pass themselves off as U.S. citizens, this low mental state requirement exacerbates the risks facing unwary employers. Further, the government has applied the Act’s “harboring” provision to seemingly mundane, rather than truly clandestine, conduct. For example, a Texas company and its field operations supervisor were convicted in Pennsylvania for “harboring” unauthorized employees that the employer housed in leased apartments during a project. The government also has interpreted the Act’s “transporting” provision to include merely shuttling workers back and forth to job sites. Thus, a criminal prosecution can involve everyday situations; it does not have to rely on a fact pattern of trucks smuggling immigrants across the U.S. border under abusive and dangerous circumstances.
Again, the TSS’s problems of may be visited upon the company where the workers actually perform, depending upon the actual facts regarding knowledge and conduct: People at job sites talk; rumors circulate; supervisors may raise issues with their own upper management, or they may turn a blind eye to perceived problems. Regardless, the presence of a significant employment tax issue may suggest that immigration-related issues are lurking as well.