A recent article in the New York Times, “Workers Find Winning a Wage Judgment Can Be an Empty Victory” (April 13, 2017), discusses a proposed new law that would allow a lien against a business accused of improperly withholding wages from its workers. The law is known as a sweat law or securing wages earned against theft law.
The problem: the theft is merely alleged, not proven. If the law is passed, employees with grievances against their employers – – irrespective of whether the grievances are valid or frivolous, retaliatory or vexatious, and before any finding of wrongdoing – – will be able to tie up the employers financially. This would be crippling for the employers and could lead to significant cash flow and credit issues. Such consequences could happen on the basis of a mere claim against the employer, however flimsy or unfounded. As the New York Times stated, the proposed law “would essentially enable employees who accuse an employer of wage theft to have a lien placed on the employer’s assets while the outcome is being determined.”
Existing law is hesitant to allow for such crippling consequences before a court or government agency finds any wrongdoing. Such a “pre-judgment remedy” is very rare. Pre-judgment remedies are allowed in limited circumstances, such as when a litigant can demonstrate that his adversary may flee the court’s jurisdiction and take assets with him.
In the U.S. Supreme Court case Grupo Mexicano v. Alliance Bond Fund (1999), the highest Court held that the law does not allow for a preliminary injunction preventing defendants from disposing of their assets pending a court deciding the creditor’s claim. For a court to grant creditors such preliminary injunctions “could radically alter the balance between debtors’ and creditors’ rights,” the late Justice Scalia wrote, and “might induce creditors to engage in a race to the courthouse . . . which might prove financially fatal to the struggling debtor.” In other words, the creditor had to first obtain a judgment from the court in order to prevent the defendant from doing something with his assets. The proposed “sweat” law seems to run directly counter to the Grupo Mexicano opinion by the U.S. Supreme Court.
The New York Times article does point out that certain business owners have lost employment litigations and then have undertaken questionable actions, such as “selling off houses and businesses – sometimes for a nominal sum, and frequently to a relative – and declaring bankruptcy . . . to avoid paying back wages, overtime or damages, usually as a result of a court order.” However, the law already has remedies for such actions. For one thing, such sales to insiders, without fair market consideration, can be reversed by a court as a “fraudulent conveyance”. In addition, the Bankruptcy Code allows a bankruptcy trustee to void any such transfer within ten years of the bankruptcy filing. The NYT article also notes that when one business, say a restaurant, is sued and loses, that business then changes its name but carries on business as usual. However, the law also does allow for “successor liability” for the “new” business when the new business is substantially the same as the old.
Irrespective of whether the proposed “sweat” law is passed, the threats to business owners are clear and immediate. An entire industry of lawyers has arisen to bring litigations against business owners based on alleged labor and wage violations under the Fair Labor Standards Act (FLSA). Business owners and investors are personally liable for labor law violations, which means that even if the business is owned in an LLC or corporation, the owner’s personal assets are vulnerable.
The lesson is that business owners should protect their personal and business assets BEFORE a claim is filed. AFTER may soon be too late. Proper asset protection, in conjunction with compliance with labor and wage laws, is the best pre-emptive defense, and often discourages the predatory lawsuits in the first place. Proper asset protection strategies offer business owners peace of mind and provide the protection their assets need to withstand the inevitable attacks.
Please contact us with any questions or to schedule a consultation on how to protect assets from labor and wage claims.