Broad and Blunt, the Trump Administration’s H-1B Changes Miss the Opportunity for Real Reform

The Trump administration recently introduced the most significant changes to the H-1B visa program since it was last overhauled in 1990, promising to end the practice of replacing U.S. workers with highly skilled immigrants.

While the problems the administration has identified and the interest in protecting U.S. workers are legitimate ones, its approach may cripple the H-1B program itself, which, regardless of its flaws, is the primary route through which employment-based immigrants enter the United States. The regulations put forward earlier this month will curtail the ability of U.S. businesses across the board to access needed high-skilled talent.

Undoubtedly, the outdated H-1B visa program has long failed businesses and workers, U.S.- and foreign-born alike. It has become increasingly dominated by IT companies that outsource their foreign workers to clients. Never anticipated to be used in an industry dependent on project-based, contract labor, the program has resulted in abuses—and in many cases the displacement—of U.S. workers.

Yet there are smart, implementable fixes that can be made to prevent such abuses and repoint the H-1B program in ways that would go much further toward advancing U.S. economic and competitiveness interests—to the benefit of U.S. workers—than the broad and blunt reforms advanced by the administration.

At a time when businesses and U.S. workers are struggling to regain their footing during an unprecedented public-health and economic crisis, disrupting the country’s ability to tap into international talent—as other countries intensify their searches for the highly skilled—could prove harmful for the U.S. economy.

Effects of the New H-1B Regulations

The administration’s long-anticipated changes were introduced on October 8 in two interim final regulations—which forgo the normal notice and comment procedures—from the Labor Department and Department of Homeland Security (DHS).

The Labor Department regulation, which took effect the day it was introduced, will significantly increase the minimum required wages for H-1B visa holders, as well as certain employment-based immigrant visas and some other temporary visas. Labor advocates have long criticized the H-1B minimum required wages as being too low and thus undercutting American workers, though some have raised concerns that this rule raises wages higher than even the Labor Department’s estimates.

The DHS regulation—which is not due to go into effect until December 7—would narrow the range of jobs open to H-1B workers, increase the scrutiny adjudicators apply to decide whether the petitioning company exercises sufficient control over the foreign workers to qualify as their employer, and slash the time limit for H-1Bs who are subcontracted by their employer to other companies from a maximum three years to one.

The DHS regulation would, at least initially, decrease approval rates program-wide, while particularly restricting H-1Bs for those working at their employer’s client sites. The one-year limit in particular would make it far more costly and burdensome to place H-1B workers at client sites. This alone could have far-reaching impacts: currently, more than one-third of new H-1B visa holders work at client sites. Thousands of U.S. companies benefit from this contracted labor but would likely find it too onerous and expensive to hire these workers on their own, especially for short-term projects.

In addition, the mandated wage hike may reduce employers’ use of the H-1B program to fill entry-level positions. Each year, a significant number of new H-1B visas are granted to workers who had entered as foreign students—73 percent of new H-1B visas granted to foreign nationals already in the United States went to students in 2017, suggesting many new H-1B visa holders are entry level. In addition, a number of the 583,000 H-1B recipients working in the United States may not be able to renew their visas if their employers are not willing to give them a significant pay hike.

In all, these regulations could disrupt the U.S. employment-based immigration stream, which is dependent on the H-1B visa as a feeder. Today, about 80 percent of those obtaining employment-based green cards adjust from another status, usually H-1B.

Replacement of U.S. Workers

President Donald Trump made the H-1B visa one of the themes of his 2016 campaign. In the years leading up to the campaign, Toys “R” Us and Southern California Edison were among a number of high-profile cases of companies that laid off their U.S.-born IT staff to outsource the work to companies that employed H-1B visa holders. Adding insult to injury, in some cases the American workers losing their jobs had to train their replacements. One such case occurred in October 2014, when approximately 250 Disney employees were told that they would be laid off, and some were required to train foreign replacements brought in by an Indian outsourcing firm, HCL America. Candidate Trump featured some of the laid-off U.S. workers at his campaign rallies.

While there have been several lawsuits and government investigations into this practice, employers have been insulated by the contracting structure and regulatory exemptions. In October 2016, a federal judge in Florida dismissed lawsuits by two former Disney workers, finding among other things that H-1B regulations only restrict the replacement of U.S. nationals with H-1B workers if both groups are employed by the same company. Thus the contracting scheme in which American workers were laid off by Disney and replaced by foreign subcontractors working for HCL America insulated the companies against liability.

From Campaign to Governing

Once in office, the president and his administration kept the issue of H-1B workers at contracted sites in mind. But rather than address the specific problem of the replacement of U.S. workers, the administration took a restrictive approach to H-1B visas across the board—increasing scrutiny and more than doubling the application denial rate between 2016 and 2019. The administration especially took aim at any companies that contract out their H-1B employees. For example, the biggest H-1B employer in recent years, Cognizant, a company that contracts out IT services, saw its approval rate for initial H-1B applicants plunge from 95 percent in 2016 to 44 percent in 2019. Concerns about such companies may be valid, but by failing to tailor its approach, the administration also is targeting contracting companies that supplement rather than replace staff at U.S. firms, including those too small to have their own full-time IT staff.

Deeper Issues with H-1B

The administration’s broad attack on the H-1B program fails to recognize the evolution of the use of the visa in the absence of much-needed congressional reform to employment-based immigration overall. Leading up to the year 2000, there was a large demand for “Y2K” programs to ensure computer systems would smoothly roll over into the new millennium. These programs were labor- and time-intensive, meaning it made more sense for companies to outsource the work to outside vendors. This accelerated a larger IT industry trend towards a flexible, project-based labor force, incentivizing employers to outsource their IT work and encouraging the pursuit of a cheaper and more adaptable labor force.

This movement, however, ran counter to the structure of the H-1B program, which requires workers be hired as employees, not contractors. The limitation spurred the creation of companies formed for the primary purpose of recruiting and employing H-1B workers to be placed as project-based labor at client sites. Accessing this outside talent allows U.S. companies to tap IT expertise when needed for specific projects and is not always used to replace American workers.

As this cottage industry developed around the IT industry’s needs, employment-based immigrant visa backlogs grew, ballooning the size of the temporary worker population over time. Depending on the applicant’s nationality, the wait for an employment-based green card today could be more than 150 years. This has resulted in a growing population of H-1B workers who renew their visas far past the initially envisioned six-year limit (see Figure 1). The H-1B visa was not designed to serve as a primary pathway to employment-based immigration, nor was it designed for such long-term use. While waiting for green cards that may never become available, visa holders find their right to stay in the country is tied to their sponsoring employer, incentivizing workers to endure wages and working conditions they might not otherwise accept.

Figure 1. Approved H-1B Petitions for Initial and Continuing Employment, FY 2000-18

Note: Some of the increase in continuing employment petitions can be associated with a 2015 change that required foreign nationals to more frequently file amended petitions for changes in working conditions and location.
Source: Department of Homeland Security (DHS), “Characteristics of Specialty Occupation Workers (H-1B),” various years, available online.

Instead of addressing the clear need for deeper H-1B reform, U.S. economic dependence on this employment-based stream, and the IT industry’s reliance on a contract-based H-1B workforce, the administration has instead remained focused on bluntly eliminating all use of H-1B workers at client sites.

Yet the data and information on the nature of this practice remain inadequate. Only in 2018 did the administration begin collecting related data, including requiring employers to name any companies where the H-1B visa holder would perform work on contract.

As a result, we now know that an average of 36 percent of H-1B workers approved in 2018 and 2019 were placed at client sites.

Table 1. Petitions Approved for H-1B Workers Placed at Offsite Locations, FY 2018-19

Source: U.S. Citizenship and Immigration Services (USCIS), “Strengthening the H-1B Nonimmigrant Visa Classification Program,” Federal Register 85, no. 196 (October 8, 2020), available online.

Yet more data and analysis are needed to understand the number of companies per year that host H-1B workers at their sites, the economic value of this workforce and practice, and the frequency with which such foreign nationals are displacing U.S. workers. The findings today on the displacement of U.S. workers are almost entirely anecdotal.

An Alternate Solution

While the administration’s response to these reports of U.S. workers’ displacement has been to restrict the H-1B program in its entirety, a more surgical approach would achieve better outcomes.

One such approach was introduced in 2017, when Rep. Darrell Issa (R-CA) put forth a bill that would have, among other things, made employers liable if their H-1B workers replace U.S. nationals at client sites, eliminating the protection provided by the contracting scheme. Had a similar regulatory change been made before Disney laid off its IT staff, Disney workers could have successfully sued HCL America for placing foreign nationals at a site where they were replacing U.S. workers.

While there is no doubt that broader reforms are needed to address the many mismatches between U.S. labor market needs and the H-1B program, the use of the U.S. temporary immigration system to patch badly needed reforms of the permanent employment-based system, and the needs of American workers and businesses, cutting off the main driver of new employment-based immigration goes against long-term U.S. economic interests.