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E-Verify mandate: 'Pain in the neck' for Main Street

Blend Images | Hill Street Studios | Gifford Sun | Getty Images

As President Barack Obama called this week for the House to pass a comprehensive immigration bill, which includes expanded employment verification rules, you could have heard an audible groan from some small-business owners.

An immigration measure passed by the Senate last month would have far-reaching effects on all Americans looking for work, as well as on employers seeking to hire them.

Some smaller companies say that meeting employment verification requirements would be costly and further add to their uncertainty, which has hampered job creation. The bipartisan bill that cleared the Senate says that within five years all employers must use the system called E-Verify to check the legal work eligibility of every job candidate, including U.S. citizens.

"We expect it to be a significant fixed cost," said J. Kelly Conklin, president of an architectural woodworking firm in Bloomfield, N.J. "It's going to be a complete pain in the neck."

Poor timing

But other small-business owners argue E-Verify would create a much-needed level playing field among employers.

"I am tired of losing work to people who cheat the system and under cut my prices because they don't have the same overhead as I have because I follow the rules," said Charlie Arnold, who has been running a power-washing business in Lewes, Delaware for 13 years. "I am for it simply because in the long run it will help my business," Arnold said.

The discussions about such a sweeping immigrtion mandate spooks Main Street, a traditional driver of economic recoveries. Faced with issues that include mandatory federal spending cuts and looming expenses associated with Obamacare, smaller employers have largely postponed big-ticket decisions such as taking on more workers.

Small businesses account for roughly half of private sector jobs, and though hiring plans rose slightly, according to the latest June reading from the National Federation of Independent Business (NFIB), the incremental upticks haven't been overwhelming.

Delays to the Affordable Care Act have exacerbated the uncertainty. The Obama administration recently announced a one-year delay, until 2015, in implementation of its mandate that larger employers provide health coverage for workers or face penalties.

(Read more: Delay in Obamacare could save jobs—for now)

How such revisions might affect smaller employers remains to be seen.

"You're just guessing," NFIB Chief Economist Bill Dunkelberg told CNBC last week. "As many as 40 percent of the small businesses out there say ... they've put all their growth plans on hold. About as many, about 38 percent or so, said we just have a freeze on hiring until we find what's really happening in this market. And that's certainly not conducive to job growth."

(Read more: Customers remain 'scarce and cautious': NFIB)

E-Verify criticism and costs

Launched as a pilot program in 1997, E-Verify is used by about 7 percent of employers. It's largely voluntary nationally but is mandatory in some states. It lets employers electronically submit prospective workers' Social Security numbers or other information to be checked against government databases.

In his weekly Internet and radio address, the president said that overhauling the immigration process could boost the economic recovery. Citing former President George W. Bush's support for a comprehensive solution, Obama called on the House of Representatives to act. Republican leaders, meanwhile, have said they will focus on much narrower legislation.

E-Verify is not error-proof, however. The system and its technology are broadly designed to validate employee documents against government databases rather than catch someone using fraudulent data, such as a phony Social Security number, said Jeff Vining, an analyst at tech research firm Gartner. The legislation may require a visual inspection to reduce potential fraud, he said.

Citizenship and Immigration Services, which helps administer E-Verify, says the program has become progressively easier to use and is more accurate, according to the Associated Press. The agency is part of of the Department of Homeland Security.

A small business will likely pay about $3,000 or less to meet E-Verify rules, according to an estimate from Vining, who has deployed emerging technologies for law enforcement applications. His ballpark estimate includes dedicated equipment, software and payroll system modifications.

Costs can rise further in the case of a dispute, as well as the lost time and negative impact when a valid employee is forced onto the sidelines, said Conklin, whose 35-year-old business, Foley-Waite Associates, employs 11 people. Such hiccups can have a major effect on a small employer.

"Ugh—this sounds like much less of an immigration challenge now and much more of an on-boarding HR issue, especially since most of my hires do tend to be residents or citizens," said Alex Salazar, co-founder and CEO of Stormpath, a Silicon Valley start-up.

With California hiring rules already cumbersome, he said, he bit the bullet and outsourced human resources. "It was becoming a full-time job for me," he said. But not all small employers can afford that.

E-Verify "is unfair," Conklin said. "Legitimate businesses, who do the right thing, are punished for the few who don't follow the rules. And the people who are hired under the table aren't going to follow the law."

(Read more: Best and worst US cities for small-business workers)

Lack of immigration reform hurts start-ups

While verification rules could be costly and annoying for smaller employers, the sweeping immigration measure may benefit them in other ways.

Tech start-ups, for example, have had a tough time securing highly skilled foreign workers, especially engineers. The immigration bill the Senate passed would let tech companies bring in more foreign-born specialists on temporary work visas.

"I've been blown away by how much the immigration policy has been kicking us in the teeth," Salazar said previously. "In Silicon Valley it's a war for talent—an all-out knuckle-drag war."

(Read more: How lack of immigration reform harms start-ups, US economy)

Stormpath's exposure to the immigration bill—with all its pluses and minuses—illustrates the complexity of immigration reform, and the challenge of trying to keep multiple constituents happy. Employers including small businesses want to do the right thing when it comes to hiring.

The challenge is striking the balance between stopping unauthorized employment and a verification process, which makes economic sense for businesses including smaller employers.

"It's highly perplexing that many of the same politicians who like to complain loudly about 'burdensome regulations' on small business are the same politicians who are pushing for mandatory E-Verify, which will add new administrative burdens for every small employer in the country," said Sam Blair, network director for the Main Street Alliance, which represents small businesses.

"We're looking for a legitimate solution," said architectural woodworking firm owner Conklin, "and E-Verify is not it."

By CNBC's Heesun Wee. Follow her on Twitter @heesunwee

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