The New York State Assembly and Senate recently passed the Securing Wages Earned Against Theft (“SWEAT”) bill to enable alleged employee-victims of wage theft to recoup unpaid wages by placing a temporary lien on the real or personal property of their employer(s). The union-backed bill is currently awaiting Governor Andrew Cuomo’s signature in order to become law. SWEAT amends five sections of New York State law for the purpose of increasing the likelihood that victims of wage theft can secure payment of unpaid wages for work already performed. The justification for the bill is to eliminate exploitative employers from dissipating their assets or dissolving their businesses in a systematic effort to avoid paying wages they owe to their employees during a pending court action. Thus, SWEAT was passed to provide wage theft victims with a legal remedy – a lien to freeze an employer’s assets – lest being unable to enforce and collect on a judgment for unpaid wages.

Some critics argue that the bill’s well-meaning purpose is obscured by its overreaching sweep. While the bill makes it easier for actual victims of wage theft to recover unpaid wages by encumbering an employers’ assets, it permits ostensible victims to file such liens based purely on unproven and unsubstantiated allegations. New York employers should review and understand the potential ramifications of the bill, and be mindful of potential exposure of personal assets during the dissolution of their business.

Substance and Scope of SWEAT

First, the bill creates an ’employee lien’ for employees with an alleged wage claim. Both ’employee’ and ‘wage claim’ are defined broadly and embrace the same language as the terms defined under the New York Labor Law and the Fair Labor Standards Act. However, government agencies are exempt from the definition of ’employer.’

The Employee Lien

Employees will be permitted to file a lien based purely on an allegation of unpaid wages. Once the lien is filed, the employer bears the onus of removing it via bond or seeking court intervention to prevent forfeiture of its property. The wage lien extends to both real and personal property of an employer so long as the property is located in New York State (unlike a mechanics lien that can only be filed to encumber real property). Employees can file the lien on behalf of themselves, but employee wage liens cannot be filed on behalf of a putative class of similarly situated employees. A representative of the employee may also file a lien, along with the New York Department of Labor or the New York Attorney General.

The lien must be filed within three years of the employee’s employment with an applicable employer and must be filed with the county clerk where the property is located. The lien lasts for one year and it is valued at the amount of the wage claim, including liquidated damages. The employee has one year to foreclose on the lien, if there is no pending wage claim action. The lien will automatically extinguish if the employee neglects to foreclose within one year. If there is an underlying wage claim action filed within one year after the lien is filed, then the lien automatically extends until final resolution of the action. The employer may discharge the lien by purchasing a bond at any time or by proving that the employee willfully exaggerated the lien.

Attachment Revisions

Second, SWEAT amends the New York Civil Practice Law and Rules by creating a new ground for attachment. Plaintiffs will now be able to obtain prejudgment attachment of the employer’s assets during the pendency of a court action. To do so, the plaintiff must satisfy a relatively low burden and prove that an employer is hiding or transferring assets. However, if a plaintiff seeks an attachment then the plaintiff must post a bond. The bond cannot exceed $500 for unpaid wage claims and can be waived by the court. If a plaintiff’s attachment motion is denied, the employer may not recover attorneys’ fees and costs. In any event, a court must hold a hearing within 10 days of an employer’s opposition whenever a plaintiff seeks an attachment during a wage claim.

Amendments to Business Corporations and LLCs

The bill also expands the likelihood of personal liability. Specifically, the bill streamlines procedures to hold either the largest shareholders of a non-publically traded corporation or the 10 members with the largest ownership interest personally liable for wage theft. Under current law, such individuals are personally liable for any unpaid wages if the business entity cannot pay. However, SWEAT expands personal liability by putting these individuals on the hook for liquidated damages, penalties, interests, attorneys’ fees and costs included in a judgment for wage/hour and retaliation claims.

Concerns for Employers

At a time when small businesses are facing an increased volume of wage and hour claims, entrepreneurs are concerned that SWEAT will further increase the cost of doing business in New York. Business owners oppose the bill to the extent that it will allow disgruntled employees to exaggerate unpaid wage claims and freeze an employer’s assets based on unsubstantiated allegations of wrongdoing. It could cause employers to bear a heavy cost to remove the lien even if they prevail in the underlying wage dispute. Employers are concerned that the bill will deter investors from supporting New York businesses for fear of risking their assets or a lien based on unsubstantiated allegations that wages were improperly paid.

Risk Management Recommendations

SWEAT must still be signed by Gov. Andrew Coumo before it can become law. Until then, employers can initiate preemptive measures to mitigate the risks associated with the new bill, including conducting periodic audits to confirm that they are compliant wage and hour laws; paying any unpaid wages alleged by an employee if there is a reasonable belief to support the allegations; and reviewing their employment practices liability policies to confirm that the carrier will advance bonds that will enable the employer to discharge any liens.