President Donald Trump's views on illegal immigration have been widely circulated and commented upon, and the Muslim ban led to protests. But it's his position on highly skilled foreigners working in the U.S. that has a few companies and their investors concerned.

The Trump administration has been gradually updating policies to align them with the Presidential Executive Order on Buy American and Hire American. Earlier this year, the United States Citizenship and Immigration Services (USCIS), a component of the Department of Homeland Security, announced tighter restrictions for third-party consulting firms, which are some of the visa program's biggest users.

"Based on the agency’s experience in administering the H-1B program, USCIS recognizes that significant employer violations—such as paying less than the required wage, benching employees (not paying workers the required wage while they wait for projects or work) and having employees perform non-specialty occupation jobs—may be more likely to occur when petitioners place employees at third-party worksites," said the memorandum.

The DHS also has a proposed rule related to the visa that could cause some upheaval on its Fall 2018 agenda. If this rule, titled "Strengthening the H-1B Nonimmigrant Visa Classification Program," is enforced, it will mean that the definition of specialty occupation, a key factor on which visa decisions hinge, is revised. The rule also includes a proposal to increase oversight so that employers pay appropriate wages to visa holders. 

Employees, employers and investors are braced for more announcements in the coming months, and the impact of this crackdown is already visible. The number of H-1B petitions received during the filing period in 2018 fell to 190,098 from 2017's 199,000 and 2016's 236,000. 

The Trump administration appears to be making slow but steady progress, but it has a delicate balancing act to perform so as to not adversely affect industries that rely on these visas.

Buy American, Hire American

Trump has called the temporary nonimmigrant H-1B visa program, which allows foreigners with advanced degrees to be employed here, "a cheap labor program." Critics of the program say companies are replacing Americans with people hired from abroad, mainly young Indians with computer skills willing to do monotonous work for less pay than their American counterparts. 

The president has promised to protect American trade and bring back jobs, but he also wants to make sure American jobs are not being stolen with the nation's own visa program. But the solution isn't as simple as canceling it altogether. 

Many tech giants rely on foreign talent. According to the Bureau of Labor Statistics, employment in the computer and information technology field is projected to grow 12% from 2014 to 2024, faster than the average for all occupations. That amounts to 488,500 new jobs. What's more, researchers from the University of California, Davis and Colgate University found that temporary workers on these visas actually end up creating more jobs for American-born workers. Facebook (FB) CEO Mark Zuckerberg and Apple (AAPL) co-founder Steve Jobs both argued that the U.S. needs to be able to increase its supply of tech workers to Silicon Valley.

The issue came up during Trump's meeting with tech leaders in December 2016 at the Trump Tower in New York City. According to Recode, Microsoft (MSFT) CEO Satya Nadella, who moved to the U.S. from India for grad school and was most likely on the H-1B visa program himself, stressed the need to bring in and keep talent in the U.S.. Trump responded: "Let's fix that."

According to author Michael Wolff's latest book, when asked about the meeting, Trump told Rupert Murdoch the tech giants “really need these H-1B visas." Murdoch reportedly pointed out that Trump's willingness to grant more visas wasn't compatible with his hardline position on immigration, and Trump said, "We'll figure it out."

Employee Shortage or Untamed Capitalism? 

The H-1B visa program was launched in 1990, when President George H.W. Bush signed the "Immigration Act of 1990."  It is intended to help American firms deal with labor shortages in rapidly growing fields that demand specialized skills, such as research, engineering and computer programming. Each application or "petition" is submitted by a sponsoring company that foots the bill on behalf of a candidate it seeks to employ. The program has an annual cap of 65,000, and an additional 20,000 visas are granted to employees with master's degrees from American universities. If the number of applications exceeds the cap, the government conducts a "lottery" to decide who gets to stay. Every year 6,800 visas are reserved for workers from Chile and Singapore in accordance with free trade agreements those countries have signed with the U.S.

In 2018, the government said it received 190,098 petitions in April when the filing period began. This was despite a fee hike of $4,000 for certain petitioners a few years earlier. Either this demand for H-1B visas is a sign of a desperate shortage of eligible workers in the U.S. – or alarm bells should be going off since companies could be abusing the system.

There are provisions in place to make sure employers are paying their workers the prevailing wage and not replacing American workers. However, a giant loophole makes companies paying $60,000 and above per employee – or hiring employees with master's degrees – exempt from this rule. An author of the 1990 Act that created the H-1B program, Bruce Morrison, told The Atlantic it was "a dastardly deed," and he blamed lobbyists for the caveat. The caveat is greatly relevant since more than half the approved petitions in 2014 had master's degrees or higher making it perfectly legal for them to be paid less than an American worker they were replacing.

Prominent companies such as Walt Disney (DIS) and Southern California Edison have been accused of replacing American workers with cheaper foreign labor. A New York Times report showed that outsourcing companies were "gaming the visa system." A study from the Economic Policy Institute showed that H-1B workers were underpaid at Indian IT firms providing outsourcing services in the U.S. for American companies. These companies saved more than $20,000 a year per worker when they hired Indians instead of Americans.

Companies that may be seeking visas for employees on a more legitimate basis are also cheated out of them because of the lottery system. Large outsourcing firms are able to flood the system with applications every year. For the fiscal year of 2016, the top 10 employers that received visas accounted for 41% of the total granted, according to the Department of Labor. More than 75% of H-1B petitions approved for the fiscal year 2017 were for candidates from India, and the majority of the petitions were for computer-related occupations, according to USCIS data.

Tech Industry Most Affected

According to the most recent annual report from the DOL, the top three occupations for which H-1B visas are certified, Computer Systems Analyst, Software Developer and Computer Programmer, account for 52% of all occupations. For fiscal year 2016, almost half of all applications certified were from companies in five states, namely California, Texas, New York, New Jersey and Illinois.

Satya Nadella's concerns are reflected in his company's lobbying activities in Washington. According to OpenSecrets.org, Microsoft is one of 605 organizations that lobbied the government on the issue of immigration this year, along with others like Alphabet Inc. (GOOG), Cognizant Technology Solutions (CTSH), and Facebook Inc. (FB).

Amazon Inc. (AMZN), which has been doing significant hiring in Canada, also lobbied the House and Senate on "issues related to high-skilled immigration." 

Companies apply for green cards for employees on temporary visas they wish to retain. According to the DOL's data for the fiscal year 2016, the employers with highest green card applications certified were Cognizant Technology Solutions, Microsoft, Intel Corp. (INTC), Google and Amazon. If the stream of H-1B visas are cut, it directly affects the number of long-term employees from abroad these companies can employ. If H-1B visa holders aren't allowed to receive extensions while they wait to be approved for green cards, they will no longer be allowed to stay and work in the U.S..

The current discourse is making Indian IT firms 8,000 miles away nervous as well. Top employers in recent years include Infosys (INFY), Tata Consultancy Services, and Wipro Limited (WIT). Companies like these provide outsourcing services to American firms for which they employ thousands of H-1B workers. Infosys CEO Vishal Sikka told the Press Trust of India: "We have quite a bit of H-1Bs and we also have a lot of local hires. We had articulated that we have to become much more local and locally-oriented in our strategy in the market and globally. So ultimately, regardless of the visa policies or so forth, the right thing to do for innovation is to have a lot of rich local talent." The chief executive of another Indian outsourcing firm, Tech Mahindra's CP Gurnani, told CNBC, "The Trump administration is against displacing low-skilled workers, but I hope and pray that Tech Mahindra is able to prevail and able to convey that what we bring to the table is high-skilled technology entrepreneurs, technology-skilled workers and we invest in the local economies."

Other Recent Developments

Last year the Department of Homeland Security announced that it is adopting a targeted approach to prevent fraud and abuse. The USCIS also made it so that extension applications aren't a done deal and officers have to apply the same level of scrutiny to extension applications as they do to new visa applications. 

In the first week of 2018, an internal memo circulated in the Department of Homeland Security (DHS) sparked worries about stricter H-1B visa regulations once again. According to McClatchyDC, the Trump administration was considering disallowing H-1B visa extensions after the first three-year extension. Extensions are requested by employers on behalf of immigrant employees with pending green card applications. In response, the U.S. Chamber of Commerce said such a policy "would harm American business, our economy, and the country. Further, it is inconsistent with the goals of a more merit-based immigration system." 

The USCIS later released a statement saying it is not considering such a policy change, and even if it were, "employers could request extensions in one-year increments under section 106(a)-(b) of AC21 instead." Multiple sources speaking with McClatchyDC claim that the administration was in fact considering such a proposal and changed its position due to the harsh and negative reaction from the business community.

The Trump administration also wants to revoke work permits granted to the spouses of H-1B visa holders.

The Way Forward

Ensuring companies aren't able to bring cheap labor on American soil is the crux of the matter. Trump's executive order did not offer any solutions, but asked U.S. government departments to come up with a replacement for the current lottery system and ensure strict enforcement of laws.

Various bills in Congress also present different ways forward. Congress Attorney General Jeff Sessions made headlines when he told a Senate Committee, “It’s simply wrong to think that we’re in a totally open world and that any American with a job can be replaced if somebody in the world is willing to take a job for less pay." In 2016, he had co-sponsored a bill with Senator Ted Cruz that would require companies to pay H-1B employees an annual wage of $110,000 or the average paid to an American in a similar position, whichever is higher.

Another bill called Protect and Grow American Jobs Act introduced in Congress last January proposes to amend the original Act that created the H-1B program. It will close a loophole by raising the minimum salary requirement for H-1B workers to $100,000 a year, up from $60,000, and remove the master's degree exemption that allowed the replacing of American workers with foreign workers with master's degrees. The House Judiciary Committee approved it last November.

Last January, two more bills to fix the H-1B problem were also introduced. The bipartisan H-1B and L-1 Visa Reform Act of 2015 was reintroduced by Senator Chuck Grassley and aims to overhaul the system in many ways, including eliminating the lottery system and making sure the USCIS favors foreigners with U.S. degrees. The High-Skilled Integrity and Fairness Act of 2017 introduced by Representative Zoe Lofgren looks to eliminate loophole mentioned earlier by getting rid of the master's degree exemption and raising the minimum wage from $60,000.

The Immigration Innovation Act of 2018 introduced in the House in September proposes using fees collected for H-1B visas to promote domestic STEM education and worker training, including financial aid and research initiatives, besides giving H-1B visa holders more flexibility. "These expanded investments in advanced training for the domestic workforce, thanks to the Immigration Innovation Act would ultimately reduce demand for foreign workers while helping the American economy grow," said the press release.

The Bottom Line

It's extremely unlikely the H-1B visa program will ever be scrapped completely. Aside from being the only way for firms to attract the best talent in the world, the H-1B visa is also treated as a pathway to citizenship for qualified employees who contribute to the American workforce in a positive way. 

It's also worth noting what Indian IT firms operating here bring. Indian tech companies in the U.S. paid $22 billion in taxes from 2011 to 2015, according to a report by India's software and services trade association Nasscom. Indian temporary workers on the H-1B and L1 visas alone contribute $3 billion in social security funds annually, even though many don't stay long enough to benefit from it. There's also the question of those 488,500 new jobs created by 2024 and if the U.S. education system is capable of filling them.