The incredible shrinking H-1B visa: What it means for tech companies

Prior to the 2016 U.S. presidential election, then-candidate Donald Trump promised to shake up the H-1B visa program if he were elected. Citing examples of American tech workers at Disney and elsewhere being forced to train their lower-paid foreign replacements, Trump vowed to curtail "rampant" H-1B abuse and "end forever the use of the H-1B as a cheap labor program."  

Fast forward to today. It's clear that President Trump is serious about reforming the H-1B program: His administration has already taken concrete steps to change the way federal authorities implement it. This sudden shift has throttled the Indian outsourcing firms that once dominated the annual H-1B visa lottery and will have a major impact on large U.S. companies that seek to hire foreign tech workers.

History of the H-1B visa program

The H-1B visa came into existence as part of the Immigration Act of 1990, which reformed parts of the older Immigration and Nationality Act of 1965. Worried about a looming skills gap, Congress expanded the H1 visa program for educated immigrants to include tech-oriented occupations such as computer programmers and IT support.

Congress restricted the number of H-1B visas at 65,000 visas per year, although it was later amended to include 20,000 additional visas for foreign graduates of U.S. graduate programs (the so-called master's cap). The visas are awarded via a lottery system and allow foreign nationals to stay in the U.S. for up to three years (or longer with extensions) while working for sponsoring companies.

The program became extremely popular in corporate America, with hundreds of thousands of H-1B applications submitted every year. It also prompted some companies to exploit loopholes in the program. While the lawmakers who drafted and approved the 1990 act never intended for companies to use the H-1B program to replace American workers with lower-paid replacements, that's exactly what happened. Indian outsourcing companies as well as U.S.-based companies specializing in recruiting Indian IT workers became particularly skilled at negotiating the system, with firms like Tata Consultancy Services, Cognizant, and Infosys each importing thousands of IT workers through the H-1B program every year.

80 percent of H-1B applicants paid below market wages

According to estimates by the Washington, D.C.-based Economic Policy Institute, nearly half a million H-1B workers are employed in the U.S.

Ronil Hira, an associate professor at Howard University who has testified multiple times on Capitol Hill about work visas and labor policy, notes that some 80 percent of employers' applications to the U.S. Department of Labor for foreign labor certifications (a prerequisite for applying for an H-1B visa) have been for lower-paid Level I or Level II positions, which are below the mean wage for specific occupations in geographic areas across the U.S.

Level I positions give employers an approximate 40 percent discount over average wages, while Level II positions give about a 20 percent discount. Level III positions, which account for only 10 percent of certifications, represent the mean wage for a particular occupation and geographic area. Only 5 percent of certifications are for Level IV positions, which represent about a 20 percent premium over average wages. (The remaining certifications are blank.) 

The discount (or premium) varies depending on the location. For example, in Tennessee's Anderson County, which includes the Knoxville area, Level I wages for computer programmers are just $8.26 per hour, or $17,181 per year, while the mean Level III wage is $26.13 per hour, or $54,350 a year. By comparison, the same Level I designation in Santa Clara, Calif., (part of the San Jose/Sunnyvale metro area) is $25.11 per hour, or $52,229 per year, while the mean Level III wage is $45.16 per hour, or $93,933 a year. 

New H-1B rules emphasize skilled labor

Before the election, more than 100 high-tech luminaries wrote an open letter stating that Trump would be a “disaster for innovation.” A specific concern of many in Silicon Valley and other tech hubs was that cutting off the supply of computer scientists, big data experts, artificial intelligence (AI) specialists, and other highly skilled foreign workers would have a damaging effect on their businesses and the U.S. economy as a whole.

The administration seems to have listened to such warnings, judging from the initial batch of changes announced in April by the U.S. Citizenship and Immigration Services (USCIS), the branch of the Department of Homeland Security responsible for managing the H-1B lottery. U.S. companies seeking to hire highly specialized technology experts from abroad can still take part in the program but will find it much harder to recruit foreign employees with generic technology skills. The changes include:

• Entry-level computer programmers, including those who have received a degree and/or are employed as programmers overseas, will no longer be considered a "specialty occupation" under H-1B rules.
• H-1B petitioners must submit additional evidence that the open positions at U.S. companies require advanced or highly specialized knowledge.
• The USCIS will step up spot checks of employers with H-1B workers, to crack down on abuse of the program and determine "whether H-1B dependent employers are evading their obligation to make a good faith effort to recruit U.S. workers."
• Premium processing of H-1B visas has been temporarily suspended.

While the USCIS says it is not changing any policies, there is little doubt the new guidance is substantial.

"This new guidance returns the H1-B evaluation criteria to the original intent of the legislation. H1-B visas were only supposed to be granted to individuals with unique skills," says Bart Perkins, managing partner of Leverage Partners and former CIO of Dole Food Co. "We have a lot of entry-level people in the United States who are struggling to get jobs."

Through the use of U.S. subsidiaries and loopholes in immigration law, outsourcing firms headquartered in India and elsewhere have made billions bringing foreign workers to the U.S. under the H-1B program, Perkins notes. "While I believe that the United States has to compete in a world economy, we have allowed the H-1B program to be twisted, thereby taking it away from its original intent."

While the administration has pledged to enforce the new H-1B rules vigorously, it remains to be seen what will happen. “There is some utility there, because there are some companies that abuse the system beyond the boundaries of the law," Hira says. He notes the changes further include a review process of what government agencies can do to prioritize the best and brightest.

However, one prominent critic believes that the Trump administration is taking the wrong approach. "I am surprised at these restrictions being imposed on the H-1B," says Anup Srivastava, an assistant professor at Tuck School of Business at Dartmouth University who has studied the impact of the H-1B program on American workers. "Who will be evaluating the applications? Who is the USCIS worker or clerk and what is his or her training level to decide whether someone is sufficiently skilled in C++ or Unix, or whether the latest technology that industry needs is C++ or Unix? Why not let the market determine that decision?"

He continues, "Let's compare the number of H-1B recipients with the 1.1 million green cards that are issued every year. Why are we quibbling over 65,000 people that corporations are trying to recruit? And the government is trying to micromanage this? It makes no sense."

Srivastava believes that the system for granting work visas needs to be reformed to keep pace with changes in the economy since 1990 and keep the U.S. competitive on the world stage. "You can't stop globalization,” he says. "Bring the expertise here and continue to retain the U.S. as the pioneer in technology or research, or else production will shift wholesale to other countries."

The end of H-1B salary arbitrage?

Meanwhile, Indian IT service providers are reeling from the changes. Decrying the "radical shift in policies" brought about by the Trump administration, an official with Tech Mahindra predicted the Indian IT sector would suffer. The company's stock plunged in late May after it warned fourth-quarter earnings would be far lower than analysts had predicted. Fewer Indian and American companies are petitioning for H-1B visas, as evidenced by the 16 percent drop in applications this year. One Indian company, Infosys, says it plans to open four technology centers in the U.S. and hire 10,000 American workers to serve its U.S. clients in manufacturing and biotech.

U.S. companies will also feel the impact of the changes. Hira believes that companies attempting to use the lower-paid Level I certification in H-1B visa applications for foreign IT workers will get more scrutiny. “American companies will have to pay market wages, or what the U.S. wages are, which is what should happen,” Hira says.

Perkins predicts a shift in how American companies use outsourced labor. "Salary arbitrage is no longer going to be the only reason to outsource," he says. "[The H-1B changes] will encourage home-shoring. As I read the directive, in order to get an H-1B, you have to have some specialized skill that is difficult to find, such as advanced data analytics, specialized security expertise, or an uncommon language such as Mandarin or Urdu. Companies will not be able to bring in entry-level workers as easily as they have in the past.”

In addition to the recent changes to the H-1B program, Perkins believes American companies will outsource for different reasons going forward, whether they hire American workers or import foreign ones. These reasons include:

• Specialized skills. Companies will increasingly need outsourced part-time help. As an example, Perkins posits a midsize company that doesn't have enough work for a full-time security professional.  "The company might outsource that role because a full-time worker would be a waste of money and it would be difficult to hire someone part time," he explains.
• Demand swings. Organizations that experience large swings in demand are typically reluctant to staff for peak capacity. A nonprofit responding to a disaster might need to double network capacity for three or four weeks. For them, Perkins notes, “it's more efficient to outsource the surge capacity. Candy and other manufacturers with highly seasonal businesses often outsource their service centers for the same reason.”
• Variable rather than fixed costs. Organizations that don’t want to encumber the balance sheet (or are unable to do so) often prefer to cover IT and other services as operating costs rather than capital expenses.

Perkins believes that AI, robotics, and other technologies will eliminate the need for a number of jobs in the next few years. "With a Siri, Google Now, or other virtual assistants, I can run a more efficient call center with fewer people than a few years ago," he says.

These advances will impact many other professions, including law and medicine. "Some law firms are already using AI for legal discovery, which reduces the need for first- and second-year associates," Perkins notes, adding that medical practices are starting to use similar tools for diagnosis.

Future H-1B reform

As for the long-term impact of changes to work visa policies, Srivastava is hopeful bipartisan political support will enable reforms that both address concerns about the loss of American jobs and have a long-lasting, positive impact on the United States’ role as a leader in tech innovation. For the H-1B program, he suggests one option is that companies that want to bring in cheap foreign workers could pay to help a laid-off American worker take programming or other career classes necessary to be re-hired.

Hira says the minimum wages currently paid to low-level foreign IT workers should be raised to the average (Level III) wage. “Trump could raise [the minimum wage] through regulation, or Congress could raise it through legislation,” Hira says. However, he believes such legislation would be opposed by the technology industry.

Srivastava also argues that the U.S. should end the practice of sending foreign graduates of U.S. universities back to their home countries. "U.S. universities select the best talent from the world and then educate and train them," he says. "American corporations need them desperately. But our visa system sends them home.”

H-1B visa program: Lessons for leaders

• Don't look to the H-1B program as a source for cheap IT labor, such as IT admin or entry-level programmers—unless you are willing to pay the price in time and legal costs for the extra scrutiny.
• Use the shift in H-1B policies to hire top-level foreign engineers with specific skills in AI, big data, robotics, or other advanced fields. There will be more opportunities to bring such talent to the U.S. assuming petitions for low-level workers drop off and the annual 65,000 H-1B visa cap remains unchanged.
• USCIS agents are increasing spot checks of employers. If you currently employ H-1B workers, have your HR and legal teams review their status and working conditions to make sure their assignments do not violate the terms of their visas.
• It's a great opportunity to explore partnerships with local colleges, regional job centers, and industrial training agencies to help expand the local talent pool and recruit the next generation of American workers.