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PHOENIX — Companies that don't check the legal status of new workers could not get government contracts or assistance under legislation approved Tuesday by the Senate Appropriations Committee.

The move, part of a comprehensive rewrite of the state's new employer-sanctions law, is designed to provide incentives for the approximately 150,000 firms that do business here to actually use the federal government's E-Verify system.

While the 2007 law mandates companies sign up to use the database, there is no penalty for failure to comply. Instead, the law, which took effect Jan. 1, provides some legal protection for employers against being prosecuted for knowingly hiring undocumented workers.

The result is that fewer than 25,000 companies have signed up.

Rep. Russell Pearce, R-Mesa, said he originally wanted to force the issue by denying companies the right to deduct their employee payroll expenses from their state income taxes.

But forcing companies to pay higher taxes ran into a potential conflict with federal law, which generally precludes states from imposing certain kinds of penalties on firms that violate immigration laws, he said.

Pearce said he expects the new version of the bill to be challenged, just as companies already are trying to get a federal judge to void the existing law.

"I'm not going to give them an open door," he said.

This plan, he said, conditions getting public money on compliance.

Under the terms of SB 1374, companies that don't use the federal database to ensure all new workers are in this country legally would be ineligible for any public contracts — state, local or school district. The same condition applies to subcontractors.

They also would be ineligible for government grants, loans or any economic development incentives.

The 2007 law says firms that knowingly hire undocumented workers can have all licenses to do business suspended for up to 10 days; a second violation within three years results in permanent loss of licenses.

While SB 1374 is designed to force more firms to check whether new workers are here legally, other parts of the bill actually ease provisions of the original law in an effort to blunt employer opposition.

One key provision says companies cannot be prosecuted for having undocumented workers on their payroll if they were hired before the beginning of this year, when the original law took effect, and when employers were supposed to start using that E-Verify system to check out new workers.

It also spells out that firms which hire independent contractors can't be punished if the contractor had undocumented workers on the payroll. Companies with multiple sites found guilty would lose their licenses only at the location where the violation occurred.

And it provides virtual immunity to companies that participate in a voluntary "enhanced compliance program," who not only use E-Verify or a Social Security number to check legal status, but also provide certain information to prosecutors.

One big issue that remains is the law allows anonymous complaints. Sen. Amanda Aguirre, D-Yuma, said that sets the stage for people to try to get prosecutors to investigate companies solely because employees look and sound like her.

Sen. Bob Burns, R-Peoria, said he shares that concern.

"It's a method that can be used to retaliate," he said, allowing people "to use government to beat up on people they don't like."

Todd Sanders, lobbyist for the Greater Phoenix Chamber of Commerce, said his organization will never support a state program dealing with illegal immigration, which is a federal responsibility. But Sanders said this bill, with some changes, might be enough to keep his client from trying to kill it.