Law Firms Can Now Be Criminally Liable for Wage Theft. Is Yours?

When Governor Kathy Hochul signed an amendment to the New York Penal Law this past fall, designating “wage theft” as a form of criminal larceny, she and the State Legislature targeted “bad faith” employers who violate New York’s Labor Law by improperly withholding timely payment of their employees’ earned wages.

The most recent amendment to this statute—adding “wage theft” as a form of larceny under the criminal code–was signed into law by Governor Kathy Hochul on September 6, 2023 (Senate Bill S2832A).  It became effective immediately. The new law does not include any carve-out provisions or exemptions for particular positions or industries and as such, covers the legal profession.

Wage Theft As a Civil and Criminal Issue in New York

On December 13, 2010, Governor David Patterson signed into law the Wage Theft Prevention Act (Assembly Bill A11726). The Act became effective on April 9, 2011. It was aimed at addressing the problem of employers who fail to pay their employees what is owed them by requiring new notifications to employees, imposing heavy penalties on employers for non-compliance, and strengthening whistleblower protections. One such notification requirement provides that employers who violate the wage provisions in the statute must post a notice explaining their violations in an area visible to employees for up to one year.

Prior to passage of the new amendment, Section 155.05 of New York’s Penal Law provided that a person commits the crime of larceny  “when, with intent to deprive another of property or to appropriate the same to himself or to a third person, he wrongfully takes, obtains, or withholds such property from the owner thereof.” Such larceny may be a felony or misdemeanor depending on the amount in question.

Interestingly, in 1989, the New York State Court of Appeals dealt with a very similar situation in its landmark decision in Cohen v. Lord, Day & Day (75 N.Y.2d 95). In that seminal case, the High Court ruled that financial penalties imposed on a departing attorney violate both public policy and the New York Code of Professional Conduct.

In recognition of the adage that the law abhors the forfeiture of earned, but unpaid, revenues, the High Court stated:

While a law firm has a legitimate interest in its own survival and economic well-being and in maintaining its clients, it cannot protect those interests by contracting for the forfeiture of earned revenues during the withdrawing partner’s active tenure and participation and by, in effect, restricting the choices of the clients to retain and continue the withdrawing member as counsel.

In addition to the foregoing case law, Section 198 (1-a) of New York’s Labor Law imposes civil penalties on employers who engage in wage theft. The statutory remedy available to victims of wage theft is set forth below:

In any action instituted in the courts upon a wage claim by an employee or the commissioner in which the employee prevails, the court shall allow such employee to recover the full amount of any underpayment, all reasonable attorney’s fees, prejudgment interest [at the rate of 9% per annum], and, unless the employer proves a good faith basis to believe that its underpayment of wages was in compliance with the law, an additional amount as liquidated damages equal to one hundred percent of the total amount of the wages found to be due, except such liquidated damages may be up to three hundred percent of the total amount of the wages found to be due for a willful violation of section one hundred ninety-four of this article [which makes it unlawful for employers to pay employees of the opposite sex differently for equal work].

Expanding Liability for Wage Theft

The new amendment adds “compensation for labor or services” to the definition of “property”, thereby establishing “wage theft” as another way in which an employer can commit the crime of larceny. Notably, the new wage theft larceny law is in addition to, and does not replace, existing criminal wage theft offenses in New York that apply to employers and their officers and agents for “failing to pay the wages of any of [their] employees.”

This legislative action followed a 2023 announcement by the Manhattan District Attorney’s Office that it had partnered with the New York State Department of Labor to create the Office’s first-ever “Worker Protection Unit” to investigate and criminally prosecute wage theft charges against companies and executives that “steal” wages.

The Act, which passed with near unanimous majorities in both chambers of the Legislature, is the latest in an ongoing effort to combat wage theft in New York.

According to a co-sponsor of the new law, Assemblymember Catalina Cruz, wage theft “accounts for almost $3.2 billion in lost wages each year—affecting over 2 million New Yorkers….” The new law will allow prosecutors to seek stronger penalties against employers who steal wages from workers.

In recent years, a number of out-of-state law firms with satellite offices in New York have been accused of wage theft when they failed to pay accrued wages owed to a former employee under his productivity-based compensation formula. The employers claimed that upon the attorney’s termination of employment, he automatically forfeited his percentage share of all post-termination collections—even those which were attributable to his pre-termination services on the employer’s behalf.

Such a financial penalty is intended to discourage employed attorneys from leaving the law firm.

For those employed attorneys who choose to leave nonetheless, the scheme enables the law firm to unjustly enrich its profit-sharing partners by allowing them to share among themselves the money that their law firm should have paid instead to their former employee as W-2 salary.

Conclusion

Law firms should review their payroll practices to make sure that their employees (and former employees) receive the compensation they are promised in a timely manner in order to avoid the significant penalties associated with wage theft in New York. Employers should also examine their wage payment practices to ensure: (1) that employees are paid the correct amount and on time; (2)  that all statutorily-mandated notifications from the employer to its employees are adhered to; and (3) that accurate payroll records are maintained which establish that their employees have been paid properly.

Reprinted with permission by the Nassau County Bar Association.