H1B Memo on Employer-Employee Relationships and 3rd-Party Placements  Posted 22.Jan.2010
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The U.S. Citizenship and Immigration Services (USCIS) issued a memorandum (PDF 2.18MB) dated January 8, 2010 that has great significance for the IT consulting industry. This memo specifies how USCIS personnel should determine the existence of the required employer-employee relationship when adjudicating H1B petitions. The memo, issued by Associate Director of Service Center Operations, Donald Neufeld, provides guidance regarding the type of evidence that sufficiently confirms the existence of an employer-employee relationship between an H1B-petitioning employer and the beneficiary when the employee's work is performed off site.
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The memo outlines factors to consider when an H1B beneficiary / employee performs work at a third-party (end-client) worksite. MurthyDotCom and MurthyBulletin readers may recall a discussion related to the end-client dilemma in our July 3, 2009 article, Difficult H1B RFEs - Considerations and Possible Strategies. The January 8th memo acknowledges that some companies, including those in IT-related fields, require placement of employees at third-party worksite locations.
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Legal Relationship of Employer-Employee Required
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The long-standing H1B regulations require, in most H1B cases, an employer-employee relationship between the petitioner and the beneficiary. (H1Bs filed by agents are outside the scope of this article.) The need for this relationship is not new, and the USCIS has historically required proof of the relationship. The nature of the evidence or proof required was not previously addressed in detail, however. The USCIS utilized certain case law interpretations of the employer-employee concept. The memo mentions that it is intended to provide clarity on this matter and is directed specifically at adjudication of the employer-employee requirement, if the beneficiary is placed at a third-party worksite.
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Employer's Right of Control Required

The dispositive issue in the employer-employee relationship is that of the petitioner's right of control over the beneficiary. The petitioner does not need to show actual control over the beneficiary's work, but the petitioner must provide evidence that it has the right to exert such control. The memo makes it clear that it is not sufficient to simply engage the individual to work, and then pay the wage.
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Factors to Establish Employer-Employee Relationship
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The USCIS examiners are directed to weigh various factors when making the determination as to whether there is an employer-employee relationship. There are eleven enumerated factors, with no single factor being determinative. They must review whether the petitioner supervises the beneficiary, and whether this supervision is performed on site or off site. If the work is offsite, then the method and frequency of such supervision is assessed. One of the factors is whether the petitioner has the right to control the beneficiary's daily work, if such control is required.
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Also included in the eleven factors is whether the petitioner provides the tools needed to perform the tasks required of the position. The USCIS will review whether the petitioner hires, pays, and can fire the beneficiary, as well as whether the petitioner evaluates the beneficiary's work product. Other factors include whether the petitioner provides employee benefits to the beneficiary and claims the beneficiary for tax purposes. There are questions related to the nature of the work, including whether the beneficiary uses proprietary information regarding the petitioner in order to perform the work, and whether the beneficiary's end work product is directly linked to the petitioner's business.
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This is not an all-inclusive list and USCIS personnel will evaluate the totality of the evidence provided to make their determination. However, the memo is clear that the USCIS must be "mindful of the nature of the petitioner's business and the type of work of the beneficiary" when adjudicating the H1B petition. The petitioner must be able to establish that it will have the right of control for the duration of the employment.
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Evidence to Establish Employment Relationship
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The memo also lists evidence that typically establishes the employer-employee relationship when the USCIS issues a request for evidence (RFE) for an initial, new H1B petition. Examples mentioned in the memo include an itinerary (if there is more than one worksite location during the requested validity period), employment contracts and offer letters, end-client and mid-vendor contracts and/or letters, work orders, and similar documentation. There must be labor condition applications (LCAs) approved for the location/s of employment.
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Additionally, the memo provides a list of evidence for H1B extension requests that must continue to establish the employer-employee relationship. The evidence needed also includes documentation that the petitioner previously had the required relationship as an employer. This includes such items as: timesheets, payroll records, performance reviews, work schedules, and examples of the beneficiary's work product.
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Examples of Valid Employer-Employee Relationship
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The memo provides examples of what constitutes an employer-employee relationship. The easiest examples are those in which there is traditional, onsite employment. This direct employment typically involves daily contact, work at the employer's facilities, and use of the employer's equipment.
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Accountant Traveling to Client Sites - Allowed
Another fairly straightforward example is traditional employment, with temporary or occasional offsite employment. The example given is that of an accountant traveling to client sites for auditing purposes.
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Architect Working on Building Project for a Client - Allowed
The memo confirms that an employer-employee relationship exists when there is long-term, offsite employment. The example given is an architect working on a building project for a client. The contract specifies that the employer manages and supervises the onsite employees. The tools and equipment are provided by the employer and the employee reports directly to the employer. The work is controlled by the employer.
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Third-Party Worksite in IT Context - Allowed
The final example of a confirmed employer-employee relationship involves long-term placement at a third-party worksite in the IT context. The example given involves a contract to develop an in-house computer program for a client, using the petitioner's proprietary software and expertise. The beneficiary performs that work at the client site, but reports weekly to a manager employed by the petitioner. The beneficiary also is paid and receives employee benefits from the petitioner. The USCIS considers this sufficient to demonstrate that control is specified and exercised.
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No Valid Employer-Employee Relationship
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Also provided in the memo are examples that the USCIS considers to be illustrations of situations without a valid employer-employee relationship.
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Self Employment - Problematic
Among the examples of problem areas is self-employment, as there is no outside exercise of control over the work. There is no separation between the individual and the employer, and thus no independent control.
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Independent Contractor - Problematic
The same basic analysis is set out for independent contractors, such as independent sales representatives.
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Job Shop Arrangements - Problematic
The most important example for IT consulting situations is the example of third-party placement or "job-shop" arrangements. The USCIS does not consider that there is a valid employer-employee relationship if the petitioner contracts with outside companies to fill their staffing needs. The positions are filled on an as-needed basis, rather than specifically being outlined in a contract between the petitioner and the third party. The beneficiary reports to a manager who is an employee of the third-party company. The beneficiary does not get work assignments from the petitioner; rather, the third-party company issues the assignments. The petitioner does not control the work, and there is no proprietary information regarding the petitioner that is used in the process. The end product is not related to the petitioner's business of IT consulting, and reviews are completed by the end client. The petitioner does not have the right of control and does not exercise control. Accordingly, there is no employer-employee relationship in this example.
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USCIS Q&A of Jan 13, 2010 Clarifies the Memo
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To allay concerns that the memo creates new obligations for H1B petitioners, the USCIS issued a USCIS update on January 13, 2010 that indicates the memorandum does not change any H1B law or requirements, but instead clarifies obligations under the H1B program. The update also states that, if the petitioner can only establish the employer-employee relationship for a portion of the validity period, then the USCIS may still approve the petition, but only for the period of qualified employment established by the evidence.
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Conclusion
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Employers whose business model may be viewed by the USCIS as within the third-party placement are likely to face RFEs in their H1B petitions. Such employers need to review the factors set forth in the memo as indicators of control, and anticipate the need to prove control over their employees or modify their practice to incorporate the factors to establish a direct employer-employee relationship. This memo is significant to the IT consulting industry, and could disrupt many other business sectors. Absent this source of workers, the end clients would be forced to change their business models with regard to how they meet their short- and mid-term IT needs. The impact would not be limited to IT consulting companies, but would also be felt by their clients, which include many of the largest U.S. companies and even the U.S. federal government.
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The Murthy Law Firm recently has responded successfully to RFEs on the employer-employee issue. To the extent appropriate, we will utilize the new memo and USCIS update as additional guidance on acceptable evidence in such matters. The memo appears to change prior, established practice and law. It is inconsistent with other federal statutes in defining the terms "employer" and "employee." A challenge by H1B employers may be required, unless the USCIS reconsiders or modifies its position. We at the Murthy Law Firm remain available to assist our clients in connection with H1B cases, including issues that will arise as the result of this memo.