A federal judge in San Francisco has struck down a government initiative that would make businesses criminally liable for not proving, within 90 days of receiving a “no-match” letter from the Social Security Administration, that an employee has legal authorization to work in the United States.

U.S. District Judge Charles Breyer granted a preliminary injunction in the case, which was brought in August by a plaintiff group that includes the AFL-CIO, American Civil Liberties Union, and U.S. Chamber of Commerce.

The SSA sends employers a no-match letter when they submit a W-2 form containing a name and social security number that do not match. Under the proposed government initiative, in such cases employers would also receive a letter from the Department of Homeland Security advising that they could face civil and criminal penalties if they knowingly hired an unauthorized worker and did not resolve the issue within 90 days of receiving the letter.

The initiative was proposed in August 2006, but after Congress failed to pass a comprehensive immigration bill this summer, Homeland Security chief Michael Chertoff announced that the new letters would be sent out starting September 14. They were not sent, however, because the judge issued a temporary restraining order preventing it.

In his 22-page opinion issued Wednesday, Breyer wrote that the proposal would cause “irreparable harm to innocent workers and employers,” the latter by burdening them with compliance costs. In addition, he wrote, there are “numerous reasons unrelated to illegality that a mismatch might exist, including name change or typographical error.”

Elena Park, head of the immigration practice at Philadelphia-based law firm Cozen O’Connor, told CFO.com that the thousands of employees who would be the subject of such errors outweigh the impact of the relatively few unlawfully employed workers who would be caught through the initiative.

Further, employers receiving the letters would find themselves in a lose-lose situation, according to Lynda Zengerle, partner and head of immigration practices at law firm Steptoe & Johnson LLP. “It’s a very draconian measure and puts employers in a difficult position because they risk either being sued for discrimination or being taken to court by the DHS,” says Zengerle. “Another part of the irreparable harm is that some people who are authorized to work in the U.S. will be terminated anyway.”

The injunction is only preliminary, and Park says it’s hard to determine what will take place next. The DHS could rewrite the letters to the court’s liking; the government could decide not to pursue sending out the letters; or the court could issue a permanent injunction, which immigration lawyers say the DHS would likely appeal. In a statement, Chertoff said the DHS and the Justice Department are reviewing the decision and all legal options, including appeal.

The case highlights the frustrations of the government and businesses with the past failures to reform immigration law.

“The government isn’t going to walk away from this,” says Zengerle. “This change was drafted over a year ago, but they held onto it because Congress was debating comprehensive immigration reform. When that didn’t go through it was resuscitated, but immigration law has become so politicized that Congress isn’t even able to do anything, so the Bush Administration has to try something.”