If you haven't already heard of "wage-and-hour" lawsuits, chances are you soon will. They have surpassed employee discrimination suits, both in terms of number of filings and size of settlements, according to a recent Advisen study. A January report in Human Resource Executive Online shows wage-and-hour settlements increased 44 percent in 2009, compared with 2008. Class action lawsuits against large employers like Wal-Mart tend to attract the most attention, but small and midsized companies have seen the most significant increase in claims, according to Monitor Liability Managers, LLC. In fact, the Department of Labor estimates that 80 percent of employers are not in compliance with applicable wage-and-hour laws, as Advisen reports. While wage-and-hour claims may not directly involve E&O issues, they certainly pose risk management concerns, of which every employer needs to be aware.
The term "wage-and-hour" is the general description for cases concerning alleged non-payment of full and timely wages. Such cases often involve the Fair Labor Standards Act (FLSA), a federal law that focuses mainly on overtime rules and work week definitions. Under the FLSA, employees who work more than 40 hours per week are entitled to overtime pay unless they fall within one of the FLSA's categories of "exempt" employees.
It is a common misconception that employees who are paid by the hour are automatically nonexempt (and thus entitled to overtime), and that salaried employees are exempt. In reality, however, an employee's status depends on job duties, not payroll titles or method of payment. Consequently, many salaried employees are nonexempt and therefore entitled to overtime pay.
Small businesses–like many insurance agencies–are vulnerable to wage disputes for several reasons. Most have neither personnel departments nor written personnel policies. Hiring and firing are usually just added responsibilities for a manager or assistant. In addition, there is often a close, family-like relationship between employee and employer. Work flow in small businesses can be uneven and difficult to schedule, and people at all levels are accustomed to staying at work until the job is done. Defining on-the-clock versus off-the-clock hours can be a challenge, and distinguishing exempt from non-exempt employees is far more complex than most people realize.
Under the FLSA, four job categories are considered exempt from minimum-wage and overtime requirements: executive, administrative, professional and outside sales. Most claims against small businesses involve executive and administrative positions. To qualify for the executive exemption, an employee must:
- Be compensated on a salary basis at a rate of not less than $ 455 per week
- Have a primary duty of management of the enterprise in which the employee is employed, or of a customarily recognized department or subdivision thereof
- Customarily and regularly direct the work of two or more other employees; and
- Have the authority to hire or fire other employees, or at least make meaningful recommendations on hiring and firing.
To qualify for the administrative exemption, an employee must:
- Be compensated on a salary basis at a rate of not less than $455 per week
- Primarily perform office or non-manual work directly related to the management or general business operations of the employer or the employer's customers; and
- Be able to exercise discretion and independent judgment with respect to matters of significance.
Do the producers who work for your agency qualify as exempt "executive" employees? Do other employees fall within the "administrative" exemption? The lines drawn by these rules often become quite blurry in the real world. Consider the following example.
Jane Smith is a salaried customer service representative (CSR) for ABC Insurance Agency, where she makes $30,000 per year. Her duties primarily include issuing certificates of insurance, providing responses to basic coverage inquiries, adding and subtracting vehicles from commercial auto policies, setting up claims, and generally servicing accounts. Jane has worked for ABC for 5 years, and she has assumed more responsibilities with each passing year. ABC considers her a valuable employee, and empowers her to directly interact with insureds to a very large degree. She has received raises and bonuses each year, and the producers at ABC are very pleased with her work ethic. She typically works 8 a.m. to 5 p.m. and eats lunch at her desk while she works. It is not uncommon for her to stay until to 6 p.m., and she sometimes works from home on the weekends. She has her producer's license and hopes one day to have sales responsibilities.
Due to unforeseen and unfortunate circumstances, several of ABC's largest insureds leave for different agencies, and ABC is forced to lay Jane off. Two months later, Jane files a federal wage-and-hour claim seeking back pay for the extra hours she worked every day, plus the time she put in on weekends. Her manager had assumed that because she was salaried, wanted to work hard to advance her career, and received a bonus each year, he didn't need to pay her overtime. ABC tries to defend the claim by asserting Jane was an exempt "administrative" employee.
Under these circumstances, Jane Smith will likely prevail in her claim and be entitled to an award of back overtime pay from ABC. Even though ABC considered her valuable and gave her leeway in dealing with insureds, it's not likely she had the ability to "exercise discretion and independent judgment with respect to matters of significance." Notably, even if ABC believed in good faith it paid Jane what she was owed, in wage-and-hour cases the employer's intent is irrelevant, and ABC will be liable for her unpaid wages anyway.
While federal regulations offer some guidance as to what types of employees will fall within FLSA exemptions, there are no hard and fast rules. Moreover, many states have their own wage-and-hour laws which may be even stricter than federal laws.
Today's business environment continues to present novel challenges to the application of wage-and-hour laws. The growing use of handheld e-mail devices and remote network access make it easier for employees to work more than 40 hours per week. Employers are asking their employees to do more with less, and job duties are in constant flux as a result. Moreover, many employment practices liability (EPL) insurance policies do not cover wage-and-hour claims, so employers will often be on the hook themselves to cover such awards.
Insurance agencies need to be familiar with both federal and state regulations governing wage-and-hour issues, and need to take a close look at all of their employees' job responsibilities and descriptions. Ignorance about wage-and-hour rules can be a costly mistake.
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