The Death of the H-1B Entrepreneur

With a swift strike of the federal pen and in their typical rulemaking-without-notice-and-comment fashion of late, USCIS has singlehandedly and without warning eviscerated decades of pragmatic policies and court decisions relating to entrepreneurs who enter the United States in H-1B status.

In a memo dated January 8, 2010, and just posted on AILA, Donald Neufeld, Associate Director for Service Center Opearations, published a series of changes to the Officer's Field Manuel (AFM), the USCIS adjudicator's reference manual which provides instructions on the proper evalution of visa petitions.  The 19 page memo is not as big as it seems in that the first half spells out the changes while the second half repeats them by citing the numbered rule changes. 

The memo is obviously designed to address the problem of fraudulent H-1B petitions, off-site placement, and a host of other issues which come up in adjudication.  Tragically, however, USCIS continues its pattern of modifying existing regulatory policy NOT by surgically correcting what needs to be corrected but simply by throwing the proverbial baby out with the bath water.

The policy towards the determination of whether or not an employer-employee relationship existed has long been governed by both common law [read: common SENSE] and several Supreme Court decisions, most notably NATIONWIDE MUTUAL INSURANCE COMPANY, et al., PETITIONERS v. ROBERT T. DARDEN   and CLACKAMAS , which delve deeply into the minutiae of what defines an employer/employee relationship.  While the policy changes address legitimate abuses, the troubling language of the memorandum totally eliminates the possibility of an investor forming a corporation – clearly a juridical "person" within all concepts of both civil and common legal systems – and utilizing said corporation as the petitioning entity for his or her H-1B employment in the United States.

Why, you might ask, does anyone ever use the H-1B visa for self-employed entrepreneurship?  Lots of reasons, but here are the main two:

  • Because the entrepreneur is not from a country with a treaty of trade and commerce with the U.S. and E-1 and E-2 Treaty Visas are not possible.
  • Because the entrepreneur is not a principal in or employee of a foreign enterprise through which a qualifying intracompany relationaship can be formed with a new U.S. enterprise, so the L-1 visa is not possible.

I've done DOZENS of these over the last decade and a half and I can think of at least two which evolved into 10+ U.S. jobs which, but for the H-1B entrepreneur, would never have been created. But here's the really crazy part of this: everyone agrees (except for the CSC in certain bizarre decisions rendered in the past month) that an entrepreneur with a foreign company can start a brand new company in the U.S., structure share ownership in a qualifying way, and, if he qualifies for the balance of intracompany criteria, his relationship with the petitioning company is that of "employer-employee".  Furthermore, no one questions that the E-2 Treaty Trader visa procured by the sole owner of a U.S. based enterprise profitably exporting to her home country manifests an "employer-employee" relationship.

So what's the difference between L-1, E-1, and E-2 entrepreneurs with new ventures and an H-1B with a new venture. Absolutely NADA, folks, as far as the law is concerned.  There is no legal basis whatsoever to distinguish a self-employed H-1B situation (i.e., where the beneficiary is the sole shareholder of the U.S. petitioning company) from identical folks in L or E status.  Let's take a look at the one critical paragraph in the memo:

"The following scenarios would not present a valid employer-employee relationship:

Self-Employed Beneficiaries

The petitioner is a fashion merchandising company that is owned by the beneficiary. The beneficiary is a fashion analyst. The beneficiary is the sole operator, manager, and employee of the petitioning company. The beneficiary cannot be fired by the petitioning company. There is no outside entity which can exercise control over the beneficiary.9 The petitioner has not provided evidence that that the corporation, and not the beneficiary herself, will be controlling her work.

[No Separation between Individual and Employing Entity; No Independent Control

Exercised and No Right to Control Exists]"

Based upon this new rule, the USCIS:

  1. Is chucking existing federal decisions and common law and replacing them with its own subjective law.
  2. Has created its own threshold definition of what is and is not an "employer-employee" relationship with language which patently prohibits not ONLY new enterprise self-employed H-1Bs but effectively ALL new enterprise petitions where the beneficiary – be they L, E-1 or E-2 – is the sole shareholder/"controller" of the new U.S. enterprise.
  3. Totally disregards fundamental legal concepts which define what a corporation is and IS FOR, i.e., to create a legal entity which has the operational and legal rights of an individual (e.g., enter into contracts, trade, engage in financial transactions, etc.) — what is called in Spanish civil law countries "persona juridica" while
  4. Simultaneously rewriting the Internal Revenue Code as far as what constitutes a valid "employer-employee" relationship.

I called a friend who is a former IRS attorney to tell him about this and he found it all rather quite funny (needless to say, he's a tax lawyer and not an immigration attorney.)  He said it was "nonsense" and used the word "silly".

I say it's more of the same: an ill-conceived knee-jerk reaction which, yet again, keeps America's shores safe from foreign dollars, vital entrepreneurship and desperately needed job creation.

If I was a litigator, I'd be all over this, but I can't litigate my way out of a parking ticket.

Ira…inspired??? (-: