Can Business Solve the Immigration Mess?

After the federal government failed to pass immigration reform, states and cities are looking to companies to address the issue

Michael Francis is getting worried. At this time of year, the 56-year-old Arizona farmer is usually gearing up for his busiest season, culminating between December and February when workers harvest the potatoes, barley, alfalfa, and other crops he plants. But this year, he's concerned that some $4 million worth of crops could rot under the sun because of a lack of workers. Earlier this month, Arizona approved one of the toughest anti-illegal immigration laws in the country and he fears it will send workers fleeing from the state. "My whole life savings is in the fields, and I may not be able to harvest it," he says.

There are similar laments being heard around the country. Arizona is one of more than 100 states and cities that have passed their own immigration rules, even as the federal government has failed in its efforts at immigration reform. Most of the state and city initiatives are aimed at stemming the influx of illegal immigrants, now estimated at 12 million in the U.S.

One common theme among the initiatives is the increasingly prominent role of business. Politicians are asking companies such as Francis' to take on the task of determining who is a legal resident and who is not, particularly as they hire new employees. The idea is that most illegal immigrants come to the U.S. for work and they won't be motivated to enter the country if they can't get jobs. "The flow of illegal immigration into our state is due to the constant demand of some employers for cheap, undocumented labor," said Arizona Governor Janet Napolitano when she signed the state's new law.

In some cases, municipalities are going even further than asking companies to verify the status of new employees. The city of Hazleton, Pa., passed an ordinance that would have required landlords to prove that people staying in their housing were legal U.S. residents. The legislation was ruled unconstitutional by a federal court judge on July 26, but Hazleton Mayor Louis Barletta has vowed to appeal (see, 7/26/07, "Small-Town Quarrel, Big Implications").

Employer Backlash

In Arizona, Francis and other businessmen say that expecting them to solve the problem that Congress couldn't is simply unfair. They say that government should bear responsibility for stopping illegals from entering the country, and they should be able to concentrate on operating their companies. "Instead of the government stepping up and dealing with [the immigration issue], they are expecting businessmen to become document specialists and to be their enforcement tool," says Kevin Rogers, president of the Arizona Farm Bureau and a farmer of cotton and alfalfa. "It's not fair to punish businesses."

Now, a legal battle is breaking out. A collection of Arizona business leaders are seeking a preliminary injunction to block the state's bill before it goes into affect on Jan. 1. In the suit, the Arizona Contractors Assn. and the Arizona Employers for Immigration Reform, a coalition of local businesses, argue that the law violates the U.S. Constitution, the state constitution, and the right to due process.

Arizona's law may be the toughest in the country for businesses. Under the new Employers Sanctions Bill, companies that hire illegal immigrants would see their license to operate suspended after the first offense. A second offense would result in what Napolitano calls the "business death penalty"—permanent revocation of a company's license to operate in Arizona.

Business owners say the measure is far too extreme for what they consider a relatively minor infraction. "It's like getting a death penalty for running through a stoplight," says Doug Pruitt, chairman and chief executive of Sundt Cos.

Fuzzy Legislation

What makes business people like Francis so nervous is the severity of the penalties coupled with the uncertainty of the criteria. For example, Arizona wants state employers to use a federal government pilot program that has a 4% error rate for checking Social Security numbers. Francis wonders what would happen if an employee he hired was approved by the federal government under its pilot program, but state investigators later found out that the computers had made a mistake and the worker was illegal. Would he still be penalized?

Alternatively, he could err on the side of turning down Hispanic applicants, but then face discrimination charges. He and others think the law puts them in an untenable position. "Businesses have to walk a tightrope between immigration law and discrimination law," says David Selden, the attorney representing the business groups seeking an injunction against the law.

Napolitano, in an interview, acknowledges that more clarity in the legislation is needed. Some measures in the law "are unclear and need to be made more clear so that everybody knows what the laws are," she says.

Worker Exodus?

Arizona's top employers include Wal-Mart (WMT), Intel (INTC), Raytheon (RTN), Target (TGT), and Wells Fargo (WFC). Still, the challenges of immigration laws fall most heavily on labor-intensive businesses, in industries such as agriculture and construction. Francis, whose family has been in the farming business since the Great Depression, has about 20 full-time employees and ramps up to about 300 during the peak harvest season. His wages are not rock-bottom. He says that his workers make $10 to $15 an hour, well above Arizona's minimum wage of $6.75. But he's skeptical that people will leave office jobs to pick alfalfa and cotton, whatever the pay.

He's hardly alone. Sundt's Pruitt says that even though his workers earn a minimum of $18 an hour with benefits, he thinks it may be difficult to find enough people. "We are not looking for cheap labor," says Pruitt. "I just need skilled craft workers."

One broader concern is that workers will leave the state if they think jobs will be harder to come by because of the new legislation. That could cause an already tight labor market to become tighter. Judith Gains, an economist at Arizona State University, estimates that an exodus of immigrant workers, both legal and illegal, could trim Arizona's workforce by as much as 10%. Arizona Farm Bureau's Rogers warns of a ripple effect through the state's economy. He says that farmers may plant fewer acres if they fear a lack of labor.

Pilot Program

Arizona business owners say they don't want to hire illegal workers but that it's unrealistic to hold them responsible for doing so without a reliable system for determining which workers are legal and which aren't.

The federal government program that the Arizona law would require all local businesses to use is known as the Basic Pilot program. Now voluntary, the program uses Social Security numbers to verify the legal status of workers. While there are ongoing improvements, the program has attracted numerous critics. A congressional audit uncovered the 4% error rate in 2006. And executives from Swift & Co., the third-largest meat processor in the U.S. and a participant in the program since 1997, testified before Congress in April that the program fails to detect duplicate active records in its database and is vulnerable to workers who use stolen documents.

Another major concern is the speed of the pilot system. The program typically responds to verification requests within two or three days. But Pruitt points out that, in the construction business, some workers are only hired for a day or two. He worries that his company will be violating the law while waiting for the results of verification. "I want a foolproof way to know that when I hire someone that they are legal," he says.

For now, businessmen like Pruitt and Francis will have to wait and hope. Their lawsuit is wending its way through the courts and they hope for a preliminary injunction later this year. In the meantime, Francis has put most of his crops in the ground. He hopes that he'll be able to hire enough workers to harvest them in the months ahead. "It's nerve-racking," he says.

For more on U.S. immigration, see BusinessWeek's slide show.

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