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After almost a year since the last decision concerning the amount of I-9 penalties, OCAHO (the federal administrative agency that issues decisions involving I-9 violations) issued a decision in United States v. Psychosomatic Fitness, LLC, and Psychosomatic Fitness Phoenix, LLC, d/b/a Psychosomatic Transformation Center, (PFL) 14 OCAHO no. 1387a (May 27, 2021), reducing the employer’s I-9 penalties by 35% mainly due to OCAHO’s continued refusal to use ICE’s formula to calculate penalties. Within this decision, there were a couple of important points to remember.

Facts

The matter started on November 29, 2018, when ICE (Immigration and Customs Enforcement agency) served a Notice of Inspection (NOI)/subpoena on PFL. Eleven months later, on October 29, 2019, ICE served a Notice of Intent to Fine (NIF) on the company. Thereafter, ICE issued a Complaint with two counts – (1) PFL failed to ensure its employees properly completed Sections 1, 2 and/or 3 of their I-9 forms for 22 employees and (2) PFL failed to prepare or present I-9 forms for 88 employees. Based on 110 of 119 Form I-9s having substantive violations, the Complaint sought $1,901 per violation or a total of $209,110.

Concerning the five statutory factors, the Complaint sought 5% aggravating factors for lack of good faith because PFL failed to register for E-Verify under Arizona law and failed to produce many Forms I-9 as well as the seriousness of the violations based upon a 92% failure rate.

Although PFL admitted liability, it proposed the appropriate penalty as $234.00, the statutory minimum, for the 22 violations in Count I and a penalty of $400.00 for the 88 violations in Count II because of “the general public policy of leniency toward small entities.”  Further, it asserted since it had good faith, the penalties should be mitigated because it is a small employer, the absence of undocumented workers, and it was unable to pay the asserted penalties.

Defense – General Public Policy of Leniency toward Small Entities

Concerning “the general public policy of leniency toward small entities”, OCAHO found in footnote 4:

Congress has already required her to consider “the general public policy of leniency toward small entities” with the statutory factor of “size of business.” See generally Pegasus Family Rest., 12 OCAHO no. 1293 at 13 (citations omitted) (“[I]t is well-settled that prior OCAHO ALJ decisions do not necessarily bind a different ALJ in a future case.”). Therefore, the undersigned will give weight to the small size of Respondents only as a statutory factor.

Psychosomatic Transformation Center, 14 OCAHO at 12, fn. 4.

Previously, OCAHO has considered the “general public policy of leniency toward small entities”, as set out in the Regulatory Flexibility Act, as a non-statutory factor. See United States v. Keegan Variety, LLC, 11 OCAHO no. 1238 at 6 (2014).

This is a major change by OCAHO because the mitigating factor of small employer is only worth 5% while historically OCAHO has used “the general public policy of leniency toward small entities” to reduce penalties by more than 5%.

Statutory Defenses

Concerning bad faith, OCAHO stated:

“A low compliance rate, alone, does not warrant a finding of bad faith.” United States v. Eriksmoen Cottages, Ltd., 14 OCAHO no. 1355a, 5 (2020).

E-Verify is voluntary under current federal immigration law; Arizona state law makes E-Verify mandatory. (Citations omitted) An employer’s requirements under Arizona law are independent of requirements imposed by the INA at § 1324a….  Because § 1324a does not require registration with E-Verify, Respondent’s lack of registration (even though required by Arizona law) is not relevant to the penalty assessment.

[C]omplainant has not met its burden to establish bad faith or a factor in aggravation. E-Verify registration is irrelevant, and low compliance rates alone do not demonstrate bad faith.

Psychosomatic Transformation Center, 14 OCAHO at 12-13.

Concerning the seriousness of the violations, OCAHO found the violations in Count I are significant and serious, and the violations in Count II are more serious. Thus, this met the burden of proof relative to the aggravating nature of the seriousness of the offense on both counts. Further, OCAHO found compliance with the law is “the expectation”; thus, the lack of undocumented workers is a neutral factor in the evaluation of the appropriate penalty.

Defense – Inability to Pay

Concerning its inability to pay defense, PFL asserted it was impacted by the COVID-19 pandemic due to the Governor of Arizona issuing several orders requiring businesses to “shut down” and orders which required businesses to institute additional measures to keep patrons safe. PFL explained it had “no employees” after the start of the pandemic and it moved to a revenue stream involving online fitness coaching.

OCAHO was not persuaded by PFL’s inability to pay defense. OCAHO noted PFL was comprised of two business entities, but it only submitted detailed information for PFL but not for PFPL, which permanently closed in 2019. OCAHO concluded:

From an equity standpoint, however, mitigation based on inability to pay is not warranted in this case.

[R]espondents did not retain its staff on payroll during the pandemic, rather they “reduced” the staff to zero at the outset of the pandemic. The Respondent should not and will not now be permitted to seek mitigation under the auspices of safeguarding employment opportunities for those who work at an impacted business.

[R]espondents provided a distribution in 2019, knowing they were in violation of § 1324a and knowing they would be responsible for a civil penalty. Additionally, in 2020, Respondents issued member draws of over $150,000 while Complainant’s investigation and this litigation were both pending. Draining funds from a business just before a civil penalty is imposed should not be rewarded with a mitigated civil penalty, in fact, equity considerations demand the opposite.

Psychosomatic Transformation Center, 14 OCAHO at 15.

Calculation of Penalties

The government’s proposed penalty of $1,901 per violation for both Counts I and II is approximately 85% of the maximum of the range of $2,236. In deciding the penalties, OCAHO stated it was unhappy with using the percentage of violations as the primary basis of the penalties. OCAHO stated the proposed penalty is approaching the maximum level of the range because of the formula it uses. OCAHO found:

Complainant’s “calculation gives the strongest weight to a factor that is not explicitly set out in the statute, and relegates the statutory factors to relatively small five percent adjustments. As a consequence, the most aggravated cases are those with the highest percentage of violations, regardless of the other factors.” The rate of violations, much like the ability to pay, is a factor considered by previous ALJs, and it is not expressly enumerated in the statute.

Psychosomatic Transformation Center, 14 OCAHO at 16.

OCAHO stated it weighed the seriousness of the offenses most heavily, the weight of which can be lessened but not completely offset by the size of the business. Thus, it concluded the penalties levied for Count II should be higher per violation, $1,300, than the penalties levied for Count I, $1,000, as the Count II violations are among the most egregious types of violations. The total penalties accessed were $136,400.

Takeaways

Hopefully, this decision is a sign that OCAHO will be issuing more I-9 related decisions in the future. From an employer’s perspective, OCAHO’s criticism of the government’s methodology to calculate penalties is good news. But it’s bad news on how the leniency to small employers will be applied. Finally, PFL’s failure to establish its inability to pay proves that the underlying facts to this defense are vitally important.

If you want to know more information on I-9 compliance, I recommend you read The I-9 and E-Verify Handbook, a book I co-authored with Greg Siskind, and available at Amazon.