Labor and Wage Lawsuits are the Latest Threat to Business Owners, Who Respond by Protecting Assets
By Asher Rubinstein, Esq
We have, for many years, counseled professionals in high liability fields (e.g., medicine, finance, real estate) on how to protect their assets from future litigation and creditor threats. We have also observed how new threats of litigation arise, and how to properly guide a new class of clients on how to protect from such new threats. Over the last two years, we have witnessed a new target of litigation: owners of small businesses such as restaurants and construction companies, whose employees are now incentivized and encouraged to sue the business owners for alleged violations of the federal Fair Labor Standards Act (FLSA). Aggressive lawyers entice workers to file lawsuits on a contingency basis – - no cost to workers at all; the lawyer will receive one-third of the award if they win, nothing if they lose. Many millions of dollars have been awarded by courts for failure to pay overtime and properly collect and distribute tips. Business owners are the latest class of litigation targets who must proactively protect their assets from such potential lawsuits and other challenges.
Within the last two years, we have counseled the following actual clients:
Stephen was a minority investor in a bar/restaurant on the Upper West Side of Manhattan. The restaurant had been in business for decades and was popular. After retiring at 65, Stephen, who lived nearby, would assist by opening the restaurant, ordering supplies, seating customers and closing up at the end of the night. The restaurant and all its owners, including minority owner Stephen, were named in a lawsuit by the bartenders, waiters and busboys, alleging that the restaurant did not properly pay them for overtime nor distribute tips left by customers.
Jim was a respected architect who designed the interior of a sushi restaurant in New Jersey. He was also an investor in the restaurant, although he held a minority share and never actively participated in any aspect of managing the restaurant. When all the owners were sued by the employees, Jim was also named as a defendant. Sadly, every other owner simply disappeared; perhaps back to their native countries. Jim, who was a successful architect with roots in the community, was left alone to face the lawsuit and the prospect that any award of damages, would be his alone to pay.
David and some partners put together a dining concept for a “theme” restaurant. The idea took off, and within a few years, the partners opened satellite restaurants throughout Manhattan and Brooklyn. The restaurant was trendy and popular, which also made it a target for litigation. The employees sued under the FLSA and the business that David and his partners worked so hard to build was suddenly threatened with closure.
Luca owned a successful construction company that was able to withstand the recession and decline in real estate activity. An equal challenge came from the lawsuit filed by his construction staff. The unskilled laborers were enticed by a contingency attorney to file a “wages and hours” lawsuit based on alleged uncompensated overtime.
Ravi came to the U.S. in 1980 from India and found employment as a busboy in a Manhattan steakhouse. By 2010, he was the owner of twenty Indian restaurants throughout New York City, as well as the real estate that housed many of the restaurants. His success resulted in a lawsuit against him, encouraged by plaintiffs lawyers who convinced busboys at his restaurants to bring an FLSA suit alleging improper overtime and non-payment of tips. Whereas Ravi made his money from his own labor and ability, a new generation of immigrant busboys is attempting to get rich via litigation, assisted by willing attorneys. Ravi informs us that his friends and colleagues in the restaurant industry, and other industries, are all facing similar lawsuits, as workers share information with other workers that such lawsuits are a means of getting quick settlement payments.
We advised these clients on how to protect their assets. The asset protection acted as a preventative, discouraged the plaintiffs from proceeding with expensive litigation and provided our clients with tremendous leverage to force a settlement on favorable terms.
The threat from FLSA litigation is not particular to the restaurant industry. Similar bases of liability apply to any business with employees, but especially to businesses with high concentration of immigrant or unskilled workers. In 2007, the title of a cover story in Bloomberg Business Week announced “Workers – from truck drivers to stockbrokers – Are Winning Huge Overtime Lawsuits”. Lawsuits have been filed on behalf of computer workers, mortgage loan officers, supermarket workers, accounting firm staff, salespeople, call center staff and even exotic dancers, all based on claims for improper wage practices.
Owners of businesses that employ people should be on guard. They should understand the labor and employment issues, and how FLSA can be used a basis for lawsuits within the context of their own business. They should understand how their own internal practices and procedures could be the subject of legal challenges. They should “button up” their employment, wages and labor practices so as to minimize the possibility of FLSA lawsuits. Owners of businesses should be cognizant of the following possible issues:
- Is the business subject to the FLSA?
- Are workers “exempt” from the FLSA?
- Is the business correct in classifying workers as independent contractors versus employees?
- Could the business have misclassified employees and failed to pay overtime?
- Could the business have failed to properly compensate for “off the clock” work?
- Is the business in compliance on both the state and federal levels?
- Are there any overtime issues?
- Has overtime been properly calculated?
- Are there issues with proper distributions of tips?
- Does the business have a correct and complete labor policy manual?
- Is the business prepared for a Department of Labor audit?
On this last issue, it should be noted that the Department of Labor’s Wage and Hour Division has added 250 new field investigators to examine businesses for noncompliance on wage and hour labor issues.
Note also that a new New York law, the Wage Theft Prevention Act (WTPA) took effect on January 1, 2012 and imposes additional requirements on employers.
We work with experienced labor attorneys on these issues, who can assist you in complying with the FLSA and defending against employment litigation.
At the same time as business owners examine their own employment practices and compliance with labor laws, they should also consider whether their personal and business assets are exposed to such potential litigation and to creditors. Compliance with labor laws is prudent, but court cases are filed every day, whether or not the plaintiffs’ claims have merit. Even if you “win” in the litigation, you will have spent a great deal of time and money on legal fees. And if you are not successful in the litigation, you may be held personally liable. A judgment against you would endanger your personal assets, e.g., your home, savings, etc. Our client, Jim, the architect and passive investor in the sushi restaurant, was exposed to a million dollar judgment based on other people not paying overtime, and once those people left the country, the judgment in its entirety would have applied toward his personal assets.
Business owners should be aware that in the event of a judgment against them, they may lose their personal assets, as well as real estate and business assets. A judgment can be the result of any adverse lawsuit, whether based on employment claims or otherwise, such as injury, negligence or routine business disputes. Insurance may offer limited protection. It is critical for business owners to protect their assets, including their real estate and their personal property, from any potential legal claim.
Solution: Asset Protection
The best way to fend off a plaintiff is to discourage the lawsuit in the first place. Typical contingency fee lawyers, including lawyers who routinely bring FLSA claims, start out with the expectation that they are bringing an action against a wealthy, deep pocket business owner. The sooner they learn that the target has no attachable assets, the sooner the strategy will change and the lawyers will take whatever they might get from an insurance settlement. After all, “one third of zero is zero”. Domestic asset protection (for example, a family limited partnership, or FLP) will, if properly established and maintained, be 100% effective against all future claims. Such asset protection should discourage future lawsuits and give defendants significant leverage to force favorable settlements within the parameters of their insurance coverage. One caveat: it is imperative that business owners protect themselves before knowledge of a claim against them and certainly before the commencement of a lawsuit.
Separate and Contain Potential Liabilities
The Revised Uniform Limited Partnership Act (RULPA), which has been adopted as statutory law in all fifty states, provides that the assets owned by a limited partnership are not owned by the individual partners. Therefore, those assets cannot be attached by the personal creditors of a partner. If a business owner contributes assets to an FLP, the properties are no longer owned by him (although, he may still control those assets as General Partner). Thereafter, his creditors may not attach those assets merely because they have a personal judgment against him.
“Equity Strip” Real Estate and Protect the Proceeds
Domestic asset protection via FLP’s is extremely effective against future claimants, but may not be as effective with respect to pre-existing claimants. In such cases, a business owner may not be completely protected by domestic asset protection and may have to utilize international asset protection strategies. International asset protection strategies are effective primarily because they involve the physical transfer of an asset to a safe and secure foreign locale where the asset is beyond the jurisdiction of U.S. courts. Money, for example, may be wired offshore in order to be completely protected from U.S. creditors. Real estate, however, cannot be moved offshore.
Although it is physically impossible to transfer real estate to a foreign jurisdiction, the real estate may be protected by turning it into cash and then protecting that cash by transferring it offshore. This can be done by either selling or mortgaging the property. The equity is thus separated from the property, i.e., “equity stripping”, and then protected. The proceeds of the sale or mortgage can be protected offshore through a number of effective strategies, such as offshore asset protection trusts or investment in foreign annuities and life insurance policies.
If the real estate is mortgaged and the proceeds are protected offshore, a claimant will be frustrated because any judgment it may receive would be subordinate to the security interest of the mortgage bank. As with other effective asset protection strategies, the claimant will be more inclined to settle upon terms favorable to the defendant, rather than receive nothing.
Creative plaintiffs lawyers have succeeded in expanding new theories of liability, and applying laws against new classes of defendants. Business owners from restaurateurs to construction contractors are the latest targets, as plaintiff lawyers convince workers to commence lawsuits based on allegations of improper wages. Yet, as the lawsuits evolve, so too do the defenses against the lawsuits. 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.