A Primer To FLSA Claims And Wage & Hour Insurance
Few social media campaigns, if any, have generated the momentum achieved by the #MeToo movement. With reports estimating a 10-20% increase in sexual misconduct claims since its inception, its success at raising awareness and encouraging victims to come forward is undeniable.
Many companies however may need to increase their awareness of a more frequent employment liability risk: wage and hour claims. In the past month alone we have noticed a significant increase in claims alleging unpaid compensation and violations of the FLSA (Fair Labor Standard Act). According to the department of Labor, their wage and hour division had recovered a record $304 Million in back wages in 2018 (approximately a 13% increase from 2017). Additionally, Seyfarth Shaw, a leading employment law firm, indicates federal wage and hour filings have increased fourfold from 2000 to 2017, “far outpacing all other types of employment litigation”. On a more positive note for employers however, the law firms’ Workplace Class Action Report also indicates that class action settlements are actually declining. The value of the top 10 wage and hour class action settlements is down for the second consecutive year to $253 Mill, roughly half the value of the $525 Million settled in 2017. Together this would seem to imply that their frequency is increasing, with their severity potentially decreasing. As their name suggests, these claims can stem from, among other alleged wrongful acts:
- Failure to pay overtime wages
- Misclassifying employees as independent contractors, or as exempt from overtime wages
- Failure to provide employees with required meal or rest breaks
- Failure to compensate employees (such as during; meal breaks, travel, prep-time, and training)
- Improperly calculating and/or improperly rounding hours
Wage and hour litigation can also be particularly difficult to avoid. Even when the c-suite implements best practices to ensure compliance, litigation can still arise as a result of simple classification errors, failure to comply with regulatory changes, or when having to defend against frivolous allegations. Additionally, when employees file a suit against an employer for a workplace tort, it’s not uncommon for those same employees to file a follow-on wage and hour claim. While these claims are affecting businesses across all sectors (and of all sizes) certain industries appear to be at greater risk such as the hospitality industry, restaurants, and retail sector. We’ve also noticed a recent trend of claims against physicians’ offices and professional/financial service firms.
When it comes to mitigating the risk, companies can best protect themselves by incorporating well documented policies and procedures, accurately accounting for hours worked, ensuring employees are properly classified, ensuring compliance with any regulatory changes, and consulting with counsel to discuss available contractual language, such as mandated arbitration clauses and class waivers.
Companies should also incorporate wage and hour insurance within their management liability insurance portfolio. When reviewing or placing such insurance however, there is often considerable confusion, with many companies misunderstanding the actual structure (and limits) of their insurance programs. For example, some companies are unaware of the ability to purchase stand-alone wage and hour insurance policies that include coverage for (in addition to defense costs), monetary remedies such as back-pay. So, which insurance policies do, and do not provide protection against wage and hour claims?
- Workers Compensation Policies: Despite the potentially misleading name, there is simply no coverage for wage and hour claims under a workers compensation policy.
- General Liability Policies: General liability policies may or may not contain a basic endorsement for EPLI (employment practice liability insurance) but this endorsement often only provides a basic level of coverage for employment torts and wrongful acts, rarely ever providing coverage for wage and hour claims.
- EPLI Insurance Policies: Whether issued as part of a D&O policy or as a stand alone policy, EPLI policies provide the broadest level coverage for employment torts and wrongful acts, however these policies may or may not contain an endorsement for resulting wage and hour litigation. Even when policies are endorsed to provide such coverage, the degree of that coverage is traditionally more basic than a specific “wage and hour” policy, generally providing insurance solely for defense costs, subject to a lower policy sublimit.
- Dedicated Wage and Hour Policies: While these policies carry the highest premiums, they also provide the broadest level of coverage (with the ability to include coverage for resulting monetary damages), and allow for higher limits of coverage to be purchased. They are particularly useful for mid-sized and larger companies and those that may be subject to collective or class action claims.
- D&O Policies: In certain circumstances, directors and officers may be held personally liable for wage and hour violations. Two such recent examples are the; Air Check case discussed here, and Pama case discussed here. When wage and hour claims name individual directors and/or officers, certain D&O policies may provide protection; specifically Side A DIC policies and D&O policies that contain a Side A carveback to any employment-related exclusions.
To add to the confusion, the policy’s terms and conditions often contain nuanced differences from one insurer to another, making it difficult for companies to properly assess their options. Narrow policy definitions are one such example; how do the insurers define “loss”? Is it limited solely to defense costs or does it include monetary remedies? Are resulting fines, penalties and punitive damages included or precluded from the definition? Will the policy reimburse the plaintiffs’ legal fees or not? Strict notification requirements, specific policy exclusions and policy sub-limits can also act as barriers to coverage, warranting careful review.
In light of the increasing frequency (and potential severity) of wage and hour claims, it’s important that companies of all sizes carefully consider the implementation of wage and hour insurance – the greater number of employees, the greater that importance. Buyers should also partner with an experienced broker or coverage counsel to properly assess the policy’s terms and conditions.