BILL ANALYSIS Ó AB 2517 Page A Date of Hearing: April 18, 2012 ASSEMBLY COMMITTEE ON LABOR AND EMPLOYMENT Sandre Swanson, Chair AB 2517 (Eng) - As Amended: April 16, 2012 SUBJECT : Employment: payment of wages: liens. SUMMARY : Authorizes "wage liens" in the car wash industry against the real and personal property of an employer for unpaid wages, and makes changes to existing mechanics lien law, as specified. Specifically, this bill : 1)Provides that the following provisions related to "wage liens" apply only to employees and employers in the "car washing and polishing" industry as that term is defined. 2)Provides that an employee, employee representative, or the Labor Commissioner (LC) may file a lien for the amount of unpaid wages, other compensation and related penalties and damages owed on all of the following: a) Real or personal property owned by the employer that is located within the state. b) Real or personal property that is located within the state upon which the employee performed work or for which the employee furnished materials, as specified. 3)Provides that a lien upon real property shall be recorded with the county recorder where the property is located, as specified. 4)Provides that a lien upon personal property shall be recorded with the Secretary of State, as specified. 5)Specifies that the lien attaches to all personal property owned by the employer or subsequently acquired by the employer, whether tangible or intangible. 6)Specifies that a lien may be filed at any time before the expiration of the statute of limitations for the wage claim the lien would enforce. 7)Provides that an action to enforce a lien may be brought by AB 2517 Page B the employee, employee representative, or the LC, who may recover court costs and reasonable attorney's fees in a successful action to enforce the lien. 8)Requires an employee, in order to enforce a lien, to demonstrate that he or she is owed wages or other compensation and any related penalties damages. This determination may be made by a court or by the LC in an administrative hearing (known as a "Berman" hearing). 9)Specifies that if a lien is recorded and an action to recover wages has already been filed, that action shall also be deemed an action to enforce the lien upon any property subject to the recorded lien. If there is a judgment, the court may order the sale at a public auction, or the transfer to the plaintiff of title or possession, of any property subject to the lien. 10)Specifies that if judgment is entered in favor of the employer or if the case is dismissed with prejudice, any applicable lien shall be extinguished upon expiration of the appeals period if no appeal is filed. If an appeal is filed, the lien shall continue in force until all issues have been decided. 11)Specifies that if the lien is extinguished, upon demand and 15 days' notice by any affected party, the lienholder shall file a release of the lien in the manner set forth under current law. 12)Provides that to enforce the lien, an action shall be brought within one year of the recording of the lien. 13)Provides that the lien established by this bill takes precedence over all other debts, judgments, decrees, liens or mortgages perfected on or after January 1, 2013 except a tax lien. 14)Provides that an employee's lien is effective against the employer, the estate of the employer, or a subsequent bona fide purchaser of the project subject to the employee's lien. 15)Makes other related and conforming changes. 16)Makes the following changes to existing law related to mechanic lien law generally: AB 2517 Page C a) Provides that a "laborer" (as that term is defined under current law) may file a lien before the earlier of (1) one year after completion of the work of improvement, or (2) one hundred eighty days after the owner records a notice of completion or cessation. b) Provides that lien on behalf of a "laborer" shall be preferred to any lien, mortgage, deed of trust, or other encumbrance upon the work of improvement or the site, regardless of whether it attached prior to or subsequent to the laborer's lien. However, the lien shall not take precedent over a pre-existing lien, mortgage, deed of trust, or other encumbrance that was recorded prior to commencement of the labor or services if the laborer is shown to have had actual knowledge of it prior to providing labor or services. c) Provides that a "laborer" shall be entitled to court costs and attorneys' fees incurred as a result of recording and foreclosing on a lien. Upon award, these amounts shall be considered part of the lien and shall relate back to the date of recording of the lien. FISCAL EFFECT : Unknown COMMENTS : This bill attempts to address an issue that the Legislature has struggled with for many years, if not decades - how to ensure that workers (particularly low-wage workers) have a meaningful opportunity collect on judgments issued in their favor for unpaid wages. Over the years, the Legislature and state enforcement agencies have enacted a number of tools and approaches intended to assist workers in collecting on such judgments. However, by their very nature, such tools and approaches are generally limited to post-judgment relief (once a final order has been issued and there is no opportunity to appeal). The unfortunate reality for many workers is that unscrupulous employers are able to hide their assets or declare bankruptcy well before any final judgment is issued - denying the aggrieved worker any ability to collect on their judgments for unpaid wages. The situation has been described by many advocates as a worker having a piece of paper that represents a judgment in their favor that is in fact not worth the paper upon which it is printed. AB 2517 Page D Brief Background on Wage Claims and Collections Various recent studies have highlighted concerns about alleged widespread "theft of wages" in the United States and in California, particularly in the underground economy. For example, in 2009 the Ford Foundation sponsored a study<1> that surveyed 4,387 workers in low-wage industries in the three largest U.S. cities - Chicago, Los Angeles and New York City. The study revealed that 26 percent of workers in the sample were paid less than the legally required minimum wage, and 60 percent of these workers were underpaid by more than $1 per hour. In addition, 76 percent of the respondents who worked overtime in the previous week were not paid the legally required overtime rate by their employers. Another study<2> focused on a survey of 1,815 workers in Los Angeles County. The survey found that low-wage workers in Los Angeles regularly experience violations of basic laws that mandate a minimum wage and overtime pay and are frequently forced to work off the clock or during their breaks. Other violations documented in the survey include lack of required payroll documentation, being paid late, tip stealing and employer retaliation. The survey also revealed that the various forms of nonpayment and underpayment of wages take a heavy monetary toll on workers and their families. Respondents who experienced a pay-based violation in the previous work week lost an average of $39.81 out of average weekly earnings of $318.00 (or 12.5 percent). Assuming a full-year work schedule, these workers lost an average of $2,070.00 annually out of total earnings of $16,536.00<3>. The survey estimated that, in a given week, 654,914 workers in Los Angeles County suffer at least one pay-based violation. --------------------------- <1> "Broken Laws, Unprotected Workers: Violations of Employment and Labor Laws in America's Cities." Center for Urban Economic Development, National Employment Law Project, UCLA Institute for Research on Labor and Employment (2009). <2> Milkman, Ruth, Ana Luz Gonzalez and Victor Narro. "Wage Theft and Workplace Violation in Los Angeles: The Failure of Employment and Labor Law for Low-Wage Workers." UCLA Institute for Research on Labor and Employment (2010). <3> Id . at 4. AB 2517 Page E Extrapolating from this figure, front-line workers in low-wage industries lose more than $26.2 million per week as a result of employment and labor law violations<4>. The authors of the report underscored the economic impact of these violations as follows: "Wage theft not only depresses the already meager earnings of low-wage workers, it also adversely impacts their communities and the local economies of which they are part. Low-income families spend the bulk of their earnings on basic necessities like food, clothing and housing. Their expenditures circulate through local economies, supporting businesses and jobs. Wage theft robs local communities of this spending and ultimately limits economic growth<5>." This problem is exacerbated by the fact that many workers, even if they file a claim and obtain a judgment, are unable to collect against their employer or former employer - particularly if the employer is "savvy" enough to move or hide their assets to avoid collection. In a 2005 case, former California Supreme Court Justice Moreno perhaps accurately summarized the situation when he observed, "Ŭe]mployers faced with large wage judgments often play the 'shell game'-that is, they close down one corporation and start up another."<6> The new accounts then become unreachable under the judgment "because of the legal fiction that the predecessor and successor are separate legal entities."<7> For many years, the Franchise Tax Board (FTB) was charged with pursuing wage claims that had been adjudicated against employers by the Division of Labor Standards Enforcement (DLSE). In 2004, the Bureau of State Audits audited the FTB collection activities and found that they resulted in full or partial payments on only 20 percent of wage judgments issued after a Labor Commissioner hearing. Moreover, the audit found that FTB took more than a year to process claims on average. --------------------------- <4> Id . at 53. <5> Id . at 54. <6> Reynolds v. Bement, 36 Cal. 4th 1075, 1093-94 (2005) (Moreno, J., concurring) (internal quotations omitted). <7> Id. AB 2517 Page F Subsequently, the Department of Industrial Relations (DIR) established its own internal collections unit to pursue collections of unpaid wage judgments. Worker advocates have alleged that with limited resources, the DIR collections unit has not significantly improved the prospects for workers to collect unpaid wages. Solution Proposed by This Bill - The "Wage Lien" Current California law provides a prejudgment "lien" as a tool for certain classes of employees to recover unpaid wages in certain limited circumstances. However, the sponsors of this bill contend that, under current California law, only construction workers and farmer workers are entitled to prejudgment liens for unpaid wages. Moreover, the current liens have unreasonably short time frames: 90 days after the work stops to file the lien and 90 subsequent days to file an action to enforce it. The sponsors contend that liens are a proven and longstanding remedy. Liens are commonly used by banks loaning money to businesses to ensure the loans get paid back. They are also used by lawyers to secure their fees, doctors who treat patients without upfront payment (e.g., for treatment that is to be paid from workers' compensation insurance), hospitals, construction contractors, architects, dry cleaners, hotels, landlords, storage facilities, tax authorities and many others seeking to ensure payment. The sponsors therefore argue that workers should have the same access to liens. Although wage earners lack the bargaining power to demand voluntary liens as a condition of accepting a job, the legal system can and should level the playing field by giving wage earners the same protection as others who provide services. Finally, the sponsors state that wage liens are well-established. Wage liens were a common remedy in the nineteenth and early twentieth century, and many states in fact have numerous wage liens on the books (these liens are typically too out-of-date to be useful to modern workers). California is an exception. It has very few wage liens on its books -- only those for construction workers and agricultural workers. AB 2517 Page G Recent Amendments Narrowing the Bill to the Car Wash Industry As introduced, this bill would have afforded workers in any industry in California the ability to pursue a "wage lien." As discussed below, that language generated widespread opposition from employer groups - for a number of reasons. The author recently amended the bill to limit these wage lien provisions to the "car washing and polishing" industry. California leads the nation in both the number of car washes and number of employees employed by car washes. There are more than 1600 car washes and more than 22,000 employees respectively. This industry is one that has been plagued by allegations of worker exploitation in recent years. In March 2008 the Los Angeles Times reported the results of an investigation of the carwash industry finding that many owners pay less than half of the required minimum wage and that two-thirds of those inspected by the state since 2003 were out of compliance with one or more labor laws. Some violations included underpaying workers, hiring minors, operating without workers' compensation insurance and denying workers their meal and rest breaks. As a result of these and earlier reports, the Legislature responded with attempts to regulate the industry in an attempt to protect workers. In 1999, SB 1097 (Hayden) (which sought to regulate the car wash industry) was vetoed by Governor Davis. In his veto message the Governor said, in part: "I am vetoing this bill I do not believe that the need to register car washes with the Labor Commissioner has been demonstrated. I am however asking the Director of Industrial Relations (DIR) to review the activities of the car washing industry and make any and all appropriate recommendation to me by June 30, 2001." In response to the Governor's veto directive, DIR filed an internal report about labor law violations in the industry and possible remedies, considering limited resources and widespread violations that affect other industries in the state. Additionally, in early 2003, DIR conducted a coordinated enforcement sweep of the car washing and polishing industry in the Los Angeles area finding numerous labor law violations, collecting back wages and penalties due, totaling over $250,000. As a result of proven violations in this industry AB 1688 (Goldberg) "The Car Wash Worker Bill" was signed into law and AB 2517 Page H took effect on January 1, 2004. AB 1688 contained a sunset date of January 1, 2007. The final car wash regulations were promulgated by DIR and finally adopted by The Office of Administrative Law December 2005. SB 1468 (Alarcon) of 2006 extended the sunset date relating to the regulation of the car washing and polishing industry to January 1, 2010. AB 236 (Swanson) of 2010 extended the sunset date to January 1, 2014. As stated above, the recent amendments to this bill limit the "wage lien" provisions to the car washing and polishing industry. Mechanics Lien Law and Changes Proposed By This Bill This bill also proposes some changes related to California's general mechanics lien law. The California Constitution grants laborers and materials suppliers a mechanics lien on any property improved by their labor or material. The mechanics lien law in the Civil Code generally specifies the obligations, rights, and remedies of those involved in a construction project. Mechanics liens are not available on public works of improvement. However, the mechanics lien law in the Civil Code provides claimants on public works projects with other statutory remedies, including stop notices and claims against payment bonds. This bill proposes three changes that would apply to mechanics liens filed by "laborers" as that term is defined under current law. Civil Code Section 8024(a) defines a "laborer" as a person who, acting as an employee, performs labor upon, or bestows skill or other necessary services on, a work of improvement. "Laborer" also includes a person or entity to which a portion of compensation is paid by agreement with the laborer or the collective bargaining agreement of that laborer. Civil Code Section 8024(b). First, current law generally requires a mechanic lien to be recorded before the earlier of either (1) 90 days after completion of the work of improvement, or (2) 30 days after the owner records a notice of completion or cessation. This bill would provide that a "laborer" may file a lien before the AB 2517 Page I earlier of (1) one year after completion of the work of improvement, or (2) one hundred eighty days after the owner records a notice of completion or cessation. Supporters contend that, unlike contractors, "laborers are typically unaware of their right to file a mechanics lien and are taken advantage of by subcontractors who purposely string them along until it is too late to do anything. Day laborers often wait several months to seek legal help because they hope that the subcontractor that hired them will eventually pay. The subcontractor makes promises to pay the back wages, plus more, if the laborer will just wait one more week, month, etc. The subcontractor claims that he is about to get a big job and will hire the laborers on the new job, it they just wait. Ninety days is an extremely short time period for someone who is unsophisticated about the legal system and the business world." Second, this bill provides that a "laborer" shall be entitled to the court costs and attorney's fees incurred as a result of recording and foreclosing on the lien. Upon award of these amounts, they shall be deemed part of the lien and shall relate back to the date of the recording of the lien. Again, the supporters of this bill contend that, unlike contractors, laborers claims are often relatively small, and thus, it is impossible for them to find legal assistance to enforce the lien. A contractor can and will hire an attorney to collect on a significant job. However, they contend that a laborer cannot afford an attorney when, on average, their claims may amount to only several hundred dollars at the most. Finally, this bill provides that the lien of a "laborer," preferred to any lien, mortgage, deed of trust, or other encumbrance upon the work of improvement or the site, regardless of whether it attached prior to or subsequent to the laborer's lien. However, the lien shall not take precedent over a pre-existing lien, mortgage, deed of trust, or other encumbrance that was recorded prior to commencement of the labor or services if the laborer is shown to have had actual knowledge of it prior to providing labor or services. Supporters argue that this final provision is needed because laborers, unlike contractors, are not in a position to assess the financial viability of a construction project or the encumbrances on the property prior to accepting a job. Moreover, the amount of wages claimed is typically quite small relative to other encumbrances and claims, so other creditors will not be completely denied their rights to payment by giving laborers priority. If, on the other hand, AB 2517 Page J banks take priority, there is often nothing left to pay laborers after the bank recoups hundreds of thousands of dollars pursuant to its lien. As a result, workers end up with nothing. Supporters contend that California law already recognizes this and allows for super-priority for liens for agriculture workers (Civil Code Section 3061.5(b)) and loggers (Civil Code Section 3065). COMMITTEE STAFF COMMENT : Mechanics lien law is a complex area of the law that has been subject to significant legislative activity in recent years. This area of the law is traditionally under the jurisdiction of the Assembly Judiciary Committee. This bill has been double-referred to the Assembly Judiciary Committee, so a more thorough discussion of the changes related to mechanics lien law (and any potential ramifications therefrom) may be more appropriate to discuss before that committee. ARGUMENTS IN SUPPORT : According to the author: "California has one of the highest rates of wage theft in the country. For example, 30 percent of low wage workers in Los Angeles are paid less than minimum wage; nearly 80 percent are not paid proper overtime. A worker filing a claim for unpaid wages at the Labor Commissioner's office typically must wait more than a year for a decision. Likewise, workers filing claims in the state civil court must typically wait at least a year to get a trial. This time lag means that unscrupulous employers can dissolve the old business entity and create new corporate forms under a different name, often while still operating the same type of business at the same address. Further, under current law, if a business files for bankruptcy while a wage claim is pending, the workers' claim will typically be lost. Even after winning a judgment, California workers cannot collect their wages, because the state lacks an effective mechanism for enforcing wage judgments. California's Bureau of State Auditors found in 2004 that collections by the state's primary collections agency (the Franchise Tax Board), result in payments on only 20 percent of wage judgments issued after a Labor Commissioner hearing. These are cases that the workers won, proving he or she was owed AB 2517 Page K wages. Nonetheless, 80% of the claims went uncollected. Uncollected wage judgments hurt the state budget, because they constitute lost opportunities to collect fines and penalties that would go into the state's General Fund. Liens are a proven and longstanding remedy to address wage theft. For example, California's longstanding mechanics' lien, which is currently available only to construction workers and contractors, is a proven, cost-effective, and widely used remedy for building contractors. Similar liens are also commonly used by banks loaning money to businesses, lawyers seeking to secure payment of their fees, architects, storage facilities, tax authorities and many others seeking to ensure payment." Similarly, other supporters argue that the wage lien is a proven, simple legal tool that costs the state nothing. It creates no new bureaucracies and no new agencies with complicated enforcement procedures. Instead, workers simply file with the County Recorder or Secretary of State and pay a $10 to $30 filing fee. The worker can foreclose (through a legal process that provides protections for the accused employer) on a delinquent employer, just as a bank does on a mortgage, a creditor on an outstanding debt, a lawyer on unpaid retainer fees, a hospital on unpaid medical costs, a construction contractor, an agricultural worker, an architect, a dry cleaner, a hotel, a landlord, storage facilities, and many more. Supporters argue that such a streamlined, cost-effective, common tool to enforce wages is long overdue in California. ARGUMENTS IN OPPOSITION : As mentioned above, as originally introduced, this bill established the "wage lien" as a tool for employees in all industries and occupations. A large coalition of employer groups submitted a lengthy opposition letter which, among other things, stated the following: "ŬThis bill] would cripple California businesses by allowing any employee, employee representative, or the LC to file super priority liens on an employer's real property or any property where an employee has performed work for an alleged, yet unproven wage claim. This bill would essentially destroy commercial and personal real estate as Ŭthis bill] would allow a wage lien to take precedent over AB 2517 Page L almost all other liens or judgments, including mortgages? ?Despite the undeniable complexity of wage and hour law in this state, Ŭthis bill] would allow any employee, employee representative, or the LC to file a lien against the employer's real property simply on the basis that the employee believes he or she has a valid wage claim against the employer. At the time of filing the lien, the employee would have no burden to provide any actual evidence that the employer violated any wage and hour law? ?ŬThis bill] will also basically destroy commercial investments or lending in California as well as personal home loans. Specifically, Ŭthis bill] would give a wage lien priority over any other lien, except a tax lien. This means that first mortgages on real property would be secondary to an alleged wage claim. The direct result of such a requirement would basically end commercial investment and real estate in California. It is impossible to imagine that a financial lender would provide a mortgage on real property if its interest in that property could be surpassed at any time by a wage lien. Moreover, given that Ŭthis bill] allows an employee to file a lien on any real property where work was performed, this could directly impact personal homeowners as well. For example, a technician that does electrical installation, such as cable or internet in a home, could file a wage lien under Ŭthis bill] on that home because that is the site where work was performed. The real estate market in California is still struggling from the recession. If Ŭthis bill] is enacted, it will basically eliminate any opportunity for recovery, thereby destroying jobs in California?. ?This bill will negatively impair an employer's opportunity to seek future financing that is secured against the residential real property?This will preclude an employer from being able to refinance their mortgage or secure a home equity line of credit, even in the event of an emergency. The employer will not be able to expand or hire new employees due to the inability to secure financing to do so. In short, no lender is going to extend a loan to someone with a super-lien placed on their real or person property. Finally, under Ŭthis bill], it is unclear whether there will be sufficient disclosure by the LC informing employers of the ramifications should a super AB 2517 Page M lien be recorded. Article 1, Section 9 of California's Constitution states the following: "A bill of attainder, ex post facto law, or law impairing the obligation of contracts may not be passed." The Constitution of the United States declares in Article I, Section 10, that "No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any Title of Nobility." With respect to Ŭthis bill's] creation and recordation of a super lien for the payment of unpaid wages, the measure creates a violation of the terms of the mortgage or deed of trust for any prospective mortgage contract after the bill's enactment. The measure impairs the obligation of the mortgage contract in violation of the state and federal constitutions." Again, this opposition was submitted regarding the introduced version of the bill. It is not clear whether opponents continue to have the same concerns to the bill in its recently-amended form (limited to the car washing and polishing industry). However, out of an abundance of caution, the original opposition arguments are included here. REGISTERED SUPPORT / OPPOSITION : Support California Employment Lawyers Association California Immigrant Policy Center California Labor Federation, AFL-CIO California Rural Legal Assistance Foundation CLEAN Car Wash Campaign Jewish Labor Committee, Western Region Maintenance Cooperation Trust Fund National Day Laborer Organizing Network The Wage Justice Center Women's Employment Rights Clinic of Golden Gate University School of Law Worksafe, Inc. AB 2517 Page N Oppose unless amended California Land Title Association Opposition American Council of Engineering Companies California Associated Builders and Contractors of California Associated General Contractors Building Owners and Managers Association of California California Association for Health Services at Home California Association of Bed & Breakfast Inns California Association of Health Facilities California Attractions and Parks Association California Bankers Association California Building Industry Association California Business Properties Association California Chamber of Commerce California Chapter of the American Fence Association California Farm Bureau Federation California Fence Contractors' Association California Grocers Association California Hotel & Lodging Association California Independent Grocers Association California League of Food processors California Manufacturers and Technology Association California Mortgage Bankers Association California Restaurant Association California Retailers Association Engineering Contractors' Association Flasher Barricade Association International Council of Shopping Centers Marin Builders Association NAIOP of California, the Commercial Real Estate Development Association Western Growers Association Analysis Prepared by : Ben Ebbink / L. & E. / (916) 319-2091