Homeland Security Secretary Janet Napolitano announced yesterday, in so many words, that she intends to shake, rattle and roil the still-swooning economy by endorsing a Bush Administration initiative that would make the online employment-eligibility-confirmation system known as E-Verify mandatory for federal contractors and subcontractors.

Despite the Secretary’s announcement, a counter-intuitive alliance of business and pro-worker immigration advocates is challenging mandatory E-Verify on legal and practical grounds. Critics maintain that its mandatory use exceeds Presidential authority (since the 1996 legislation authorizing the system – then known as Basic Pilot – provided that participation would only be voluntary). Opponents also assert that the system is still too error-prone to risk the chance that large numbers of U.S. citizens and other authorized workers will be unjustly denied employment.

What’s less well known is the pernicious effect of the Federal Acquisition Regulation (FAR) which goes far beyond the Federales’ already unwarranted voluntary E-Verify system that relies on distorted principles of contract law for its enforcement teeth.

The proposed FAR rule, as Batya Schwartz Ehrens and I have noted, requires that federal contractors and subs down the line (with modest exceptions) use E-Verify to test the employment eligibility of both new hires and all current employees who are assigned in direct support of a federal contract. Until the FAR rule was proposed, existing employees have been legally off limits for E-Verify testing because of the substantial risk that employers will discriminate against workers who look or sound foreign. The FAR proposal upends that long-settled distinction between current employees and new hires.

So, how exactly does a federal contractor eager to get in on the stimulus dollars available under the 2009 American Recovery and Reinvestment Act satisfy the FAR E-Verify mandate? The prime contractor is required to make sure that all of its own workers and all current and prospective employees of its subcontractors and sub-subcontractors assigned to the federal contract have the right to work, as confirmed by an E-Verify printout.

What happens if, after the contract is awarded, E-Verify rejects so many workers that the contractor and the subs cannot perform and are in breach of the agreement?

Enter the age of government-stoked officious intermeddling. What’s likely to happen will be that federal contractors will take a lesson from large employers who increasingly are using their bargaining clout in a down economy to insert immigration-compliance cram-down provisions in their contracts with vendors and service providers. As Ted Chiappari and I discussed in a recent New York Law Journal article, “Minimizing Immigration Risks from Service Providers” (provided courtesy of IncisiveMedia, the copyright holder), the trend now is to require vendors and subs to allow the corporate customer to demand random immigration-compliance audits of the provider’s workforce conducted by an immigration lawyer or consultant with I-9 expertise.

What happens next is all too foreseeable. Unauthorized workers will be outed. Contractors and subs will therefore fail to fulfill their federal contracts. The intended effects of the stimulus will be diminished or delayed. The economy will remain in the doldrums. Americans will suffer.

The better approach is to put FAR E-Verify ON ICE, and instead enact comprehensive immigration reform. Unauthorized workers with otherwise clean records will then be screened, required to pay fines and back taxes, given work permission and placed on a path to legal status. Federal contractors will perform without breach. And America’s economy will rebound, far sooner than if the Secretary’s Nanny-State proposal becomes the law of the land.