Wage & Hour Suits Prompt New Insurer Considerations, Coverage Challenges

Last year, wage and hour litigation represented the largest percentage of all workplace collective and potential class action lawsuits. This trend continues today, accompanied by a variety of creative claims by employees challenging timekeeping and payroll practices.

Wage and hour claims allege violations of federal, state and local laws governing the payment of wages. Issues can involve the calculation of overtime pay, or the classification of workers for the purpose of determining eligibility for overtime or benefits.

While most of this litigation arises under state wage and hour laws, the federal Department of Labor, and more particularly, its Wage and Hour Division, has buttressed its enforcement budget and assumed a more aggressive stance to ensure full compliance with the federal Fair Labor Standards Act.

If the specter of an employment discrimination claim has not yet placed employers on high alert, an unannounced, surprise enforcement visit by the DOL should. The DOL recently reported a 21 percent increase in back wages collected last year, even though it handled fewer cases than in the previous year. Other settlements and judgments have ranged from upwards of $30 million to as high as $100 million.

There is one caveat, however. While today's enlightened employers can purchase employment practices liability insurance policies to provide at least some protection and peace of mind from many types of employment claims, most EPLI insurers either do not offer coverage for “wage and hour” matters or expressly exclude coverage as a covered loss. (Note: This article does not address coverage issues regarding retaliation claims under the subject wage and hour laws.) A number of EPLI carriers, though, have addressed this need for coverage, albeit cautiously.

Since the genesis of the EPL product, most carriers have taken great pains to expressly exclude wage and hour claims, audits and lawsuits as a “covered loss.” Most commonly believed–and still do in many cases–that because wage and hour plaintiffs are essentially claiming losses limited to back pay, they were seeking a form of “restitution” as opposed to, say, “compensatory damages” that are typically covered. Therefore, they refused to provide a defense or indemnification.

Insurers have also historically argued that the wage and hour claims are usually the product of an insured's willful conduct–an event that is typically excluded from coverage in most policies.

Some carriers have become prey to their own EPL policy language, however.

For example, a typical policy might provide coverage for wrongful discharge, employment discrimination, retaliation and the like, and it is not unusual for an FLSA plaintiff to include an allegation of unlawful discrimination, thereby triggering coverage for the subject insured.

On June 22nd, the U.S. Supreme Court issued a decision which expanded the protection to employees alleging they have suffered retaliation after making a complaint of discrimination or harassment under Title VII of the Civil Rights Act of 1964.

Employees who do make retaliation claims under Title VII no longer must prove they suffered an “ultimate employment decision” or “materially adverse change in the terms and conditions of employment,” such as a discharge, demotion, or loss of pay, in order to state a claim.

Instead, the Supreme Court adopted a broader standard, which holds that Title VII prohibits more subtle forms of retaliation, which can even include a change in schedule depending on the circumstances. There is concern that this type of expanded definition could be applied to both federal and stage wage and hour cases.

Various insurance providers, including specialty lines insurer Beazley and AVRECO, a wholesale brokerage, have introduced new coverage for the defense of wage and hour claims.

But even in situations where coverage for wage and hour claims is excluded, insurers can still add value to their traditional EPL products (and perhaps view the insured as a better risk at renewal time) by raising their insureds' awareness of these claims and by having the insureds initiate as many proactive measures as they can because it is likely the claim will not be covered.

Among the areas insureds should be familiar with include the following issues:

o Exempt and nonexempt employee status. Paying an employee a pre-set annual salary does not shield the employer from paying overtime. Rather, an employee must earn over $455.00 per week and perform certain types of duties, such as professional, artistic, management to be exempt from the overtime pay provisions of the FSLA.

A management employee, in order to be exempt, must supervise at least two persons and manage the enterprise or a department.

An administrative exemption exists where the person's work is directly related to the business operations of the enterprise and the employee exercises discretion and judgment in performing his/her duties.

The artistic exception is not that easily met and technical writers are generally considered nonexempt.

o Not paying an employee on the basis of a shift, but rather paying employees by the hour will eliminate the exemption, as will docking an employee's pay for hours of work missed.

o Little known exemptions, such as tacking or combination, highly compensated employee and business owner exemptions.

Tacking or combination refers to a situation where an employee performs two distinct jobs, causing his or her work week to exceed 40 hours in total, although it is less than 40 in any one job. Such an employee can be exempt if an advance agreement to that effect is clear and clearly understood (best if in writing).

Also, an employee who owns 20 percent or more of the company may be exempt, and an employee making over $100,000 per year may be exempt. In these two cases, the employee must perform artistic, professional or executive functions (Typically, in each of these areas, the employee will have to use his/her discretion and judgment in performing his/her duties.)

o What constitutes “hours of work”? If an employee arrives before scheduled or stays after he/she is supposed to leave and is “suffered or permitted” to work, these hours must be included in determining the employee's remuneration.

o Recordkeeping requirements. This is solely the employer's burden. Failure to maintain accurate records of hours worked results in certain presumptions and inferences in the employee's favor. For example, the employee need merely present anecdotal evidence from which an inference may be drawn of the actual hours worked.

o Wage and hour laws in your state. For example, California requires overtime be paid after eight hours of work in any given day.

An experienced attorney, knowledgeable about all of these aspects of wage and hour law and the many related nuances, can be a vital partner with the insurers and their policyholders in preventing wage and hour claims.

In the event that litigation does arise, however, there are key strategies in which the insurance defense attorney can also play a pivotal role. For instance, in our practice, we have clients complete an audit form that reveals how employees are classified (exempt/nonexempt), how overtime is paid and other common litmus tests utilized by the DOL. The form provides a snapshot of an employer's overall timekeeping and payroll practices.

A free copy of the checklist is available from the authors at pvoluck@kdsbvlaw.com.