How to apply the "Successor-in-Interest" rules to assess H-1B Status in the event of corporate restructuring

A routine corporate restructuring process, whether it includes the merger of two or more companies or the spin-off of a division from within a company, contains a myriad of highly complex issues. Unfortunately, maintaining the valid statuses of the company's (or companies') H-1B employees is often overlooked. For those unfamiliar with the specific rules concerning corporate restructurings and H-1B employees, this area of practice can be a legal minefield. Often human resource personnel (and the H-1B employees) realize too late that a corporate restructuring has generated H-1B related issues that must be addressed. Failure to take into account the H-1B ramifications of a corporate restructuring could result in the company's H-1B employees losing their status and could even render an employer subject to government sanctions.

For H-1B employees in restructuring companies, the most important issue to consider is whether the new firm is legally a "successor-in-interest" to the original H-1B sponsoring company. If the new firm is a "successor-in-interest", then there is no need to file an amended H-1B for each H-1B employee. However, if the new firm is not considered a successor-in-interest, failure to submit an amended H-1B can have serious ramifications.

The legal authority related to this issue can be found in Section 214(c) of the Immigration and Nationality Act (8 U.S.C. 1184(c)), which reads: "An amended H-1B petition shall not be required where the petitioning employer is involved in a corporate restructuring, including but not limited to a merger, acquisition, or consolidation, where a new corporate entity succeeds to the interests and obligations of the original petitioning employer and where the terms and conditions of employment remain the same but for the identity of the petitioner." (See INA § 214 (c) (10)). The law outlines a key set of criteria used to determine whether a new or amended H-1B petition should be filed or not.

"Successor-In-Interest"

As prescribed by law, in order to be a "successor-in-interest," the new firm must "succeed to the interests and obligations of the original petitioning employer." In terms of H-1B employees, the obligations and liabilities refer to those related to Labor Condition Applications (LCAs) filed with the US Department of Labor as part of their H-1B Petitions and other obligations prescribed by immigration rules and regulations. (An LCA is a document that contains a series of attestations including, among others, an agreement to pay H-1B employees at least the "prevailing wage" for the offered position.)
To establish a successor-in-interest, the successor entity must demonstrate that it has substantially assumed the interests, obligations, assets and liabilities of the original employer, and continues to operate the same type of business as the original employer. Determinations concerning whether a company has assumed the required interests, obligations, assets and liabilities are best performed on a case-by-case basis. However, in economic terms, assets include but are not limited to: 1) Current Assets, such as cash, short-term investments, receivables, inventories, prepaid expenses; 2) Long-term Investments, such as securities, sinking funds, pension funds; 3) Property, Plant, and Equipment; 4) Intangible Assets, such as patents, licenses, trademarks, and software development costs. Liabilities include but are not limited to: 1) Current Liabilities, such as notes and accounts payable, short-term debts, advances from customers on contracts, accrued compensation and benefits, income tax payable; 2) Long-term Liabilities, arising from specific financing situations, such as the issuance of bonds, long-term lease obligations, deferred income tax liabilities, service or product warranties and other contingencies.

If some assets or liabilities are not assumed by the successor employer after the corporate restructuring, then the "successor-in-interest" may not exist. As a result, the H-1B employees from the predecessor company may need to have the new company file new or amended H-1B petitions for them.

Two "Successor-in-Interest" Examples

In the business world, there are numerous forms of corporate reorganizations, including mergers, acquisitions, consolidations and spin-offs. As noted above, whether a specific corporate restructuring creates a "successor-in-interest" for H-1B purposes is best determined on a case-by-case basis. However, the following are two relatively simple scenarios designed to illustrate successful "successor-in-interest" corporate restructurings.

Please be aware, however, that the optimal "successor-in-interest" scenario is one in which the final corporate documents include an explicit statement concerning the assumption of all H-1B obligations by the new corporation. Technically, Department of Labor regulations require the maintenance of a sworn statement by the new company concerning the assumption of the LCA-related obligations, but failure to do so will not trigger the need to file a new H-1B Petition.

Scenario One: One large company purchased two consulting firms (A, B) in the information technology (IT) sector, each of which has H-1B workers on staff. The acquiring company plans to consolidate the two IT firms into a single subsidiary. In their grand restructuring plan, the new subsidiary would operate under the name of firm A but would operate using the managerial structure of firm B. The acquiring company plans to keep B's Employer Identification Number (EIN) once the two firms had been consolidated. The question is whether the employees from the two firms need to file new or amended H-1B petitions.

No, there is no need to file amended H-1B petitions. No matter what name or EIN the final consolidated firms take, it is still the "successor-in-interest" to the two predecessor firms due to the fact that the final consolidated firm substantially succeeds to the assets, liabilities, rights, and obligations of the predecessor firms.

Scenario Two: A small software company (A) plans to merge with big software company (B). After the merger, company A will cease to exist. Company A presently employs many H-1B workers. Will those foreign workers need to file amended H-1B petitions?

No, in this instance there is no need to file an amended H-1B petition. Even if the predecessor company A will not exist, its employees are still hired by company B under the same conditions. The fact that company B "eats up" company A means that company B will not only take over all of the company A's assets (software programmers, patents, trade secrets, etc.) but also its liabilities (software development costs, debts, account payables, etc.). In theory, company B becomes "successor-in-interest," and substantially succeeds to the interests and obligations, assets and liabilities of predecessor company A. Therefore, those H-1B employees from company A need not obtain a new or amended H-1B status.

Conclusion

As discussed above, the change of a corporation’s name, its ownership, or its corporate structure do not automatically determine the need for new or amended H-1B petitions. It is whether the new firm is legally a "successor-in-interest" that determines whether a new H-1B petition must be filed. As these issues are quite complex, it is best to consult with either an immigration lawyer with a corporate law background or a corporate law attorney.

(Updated 10/4/2012 by AD)