Wage and hour violations are a significant and increasing exposure for employers today, with the number of wage and hour claims now exceeding discrimination claims. This trend is problematic for employers because litigating wage and hour claims can be very expensive. For example, a prevailing plaintiff may, depending on the statutory basis for the claim in question, recover double the actual damages, plus attorney’s fees.
Exposure to these claims is not limited to large employers. In fact, the impact upon smaller companies with limited financial resources may more devastating. In one recent case, a single employee recovered a six-figure settlement because he meticulously documented the time he spent "on call". In contrast, his employer failed to properly utilize time cards or otherwise document hours worked.
Typical FLSA Violations Alleged by Employees
Wage and hour claims are often based on an employers alleged failure to pay overtime to "nonexempt” employees however, there are numerous other bases for wage and hour claims. These may include:
- Relying on the misconception that salaried employees are automatically classified as "exempt" and not eligible for overtime pay
- Not properly paying employees for all overtime, i.e., compensation for hours worked in excess of 8 hours in a given day or more than 40 hours in a week
- Misclassifying employees as independent contractors and not paying them overtime
- Miscalculating the amount of wages owed, e.g., applying the wrong rate, improperly crediting tips, etc.
- Not paying qualified employees for time they are "on call"
- Requiring employees to work "off the clock" e.g., not paying for time spent on opening tasks or closing duties, or time worked before and after the official workday, or for time spent donning uniforms or attending seminars
- Not allowing employees to take meal or rest breaks
- Not paying all wages due and owing at the time of termination
- Docking exempt employees' salaries for absences
Insuring Against the Wage and Hour Claim Exposure
It’s clear that wage and hour claims are directly tied to employment-related practices and are therefore best covered to the extent possible by an Employment Practices Liability Insurance [EPLI] policy. There is however an important qualification; coverage currently available is very limited and the entire wage and hour exposure can’t be covered. A more detailed discussion of the major EPLI coverage-related issues follows.
EPLI - The Wage and Hour Exclusion
To begin, please note that other liability policies commonly purchased by employers, e.g. CGL, WC / EL, D&O Liability, likely won’t cover this exposure, either because the insuring agreements aren’t triggered or various exclusions apply. For a more in-depth discussion of these policies in the context of Employment Practices Liability, please review Employment Practices Liability Insurance In A Nutshell, Seitlin Newsletter, Volume I, Issue 1.
Turning to EPLI, even limited coverage for wage and hour claims is a relatively new phenomenon. EPLI policies typically included and continue to include an express Wage and Hour Exclusion. Assuming an EPLI policy can be triggered by establishing a covered Wrongful Employment Practice, the exclusions operate to eliminate coverage.
The Exclusions tend to be “total” exclusions in that coverage for damages and defense costs is excluded, e.g.:
The Underwriters shall not be liable to make any payment for Loss in connection with or resulting from any Claim ... for an alleged violation of the responsibilities, duties or obligations imposed on an Insured under any Wage and Hour Law.
"Wage and Hour Law" means any federal, state or local law governing or relating to the payment of wages including the payment of overtime, on-call time, rest periods, minimum wages or the classification of employees for the purpose of determining employees' eligibility for compensation or other benefits under such law(s) including any statutory or common law premised on such law.
"Loss" means money which an Insured is legally obligated to pay as a result of a Claim including compensatory damages, judgments (including prejudgment and post judgment interest awarded against an Insured on that part of any judgment paid by Underwriters), back pay, front pay, settlements, statutory attorney fees, Defense Costs and punitive, exemplary and multiple damages where insurable by law in the applicable jurisdiction most favoring coverage for punitive, exemplary or multiple damages.
Wage and Hour Coverage Endorsements - A Limited Grant of Coverage
Recently, some insurers have been willing to offer limited coverage for wage and hour claims. Given the virtually universal use by insurers of Wage and Hour Exclusions, the limited grant of coverage is added via endorsement to the policy. The endorsements operate to modify the Exclusions to the extent desired by the insurer.
These Wage and Hour Coverage Endorsements are not standard forms, but do tend to have key characteristics in common:
1. The endorsements are written to apply only to Defense Costs. Other elements of “Loss” are not covered.
2. Coverage is provided as a sublimit, not in addition to a per claim or aggregate limit.
3. These sublimits tend to be substantially less than the “per claim” limit applying to covered claims, usually $50,000 - $250,000.
4. The coverage is subject to the policy deductible, if any.
5. Other exclusions, e.g. Known Prior Acts, may apply to negate coverage.
Given the non-standard nature of these endorsements, it’s important for any prospective purchaser to review the policy and endorsement in question before coverage is bound. That is the only way to conclusively determine what is covered and what is excluded.
Other Risk Management Considerations
It’s apparent that EPLI is at best a partial solution to managing wage and hour-related risk. The other, perhaps more important, consideration is risk avoidance. If employment-related policies, practices and procedures are in compliance with the controlling law, the employer’s exposure should be substantially reduced or eliminated.
A detailed review of the law, and suggestions for drafting sound employment-related policies, practices and procedures, is beyond the scope of this overview and not within an insurance agent’s scope of expertise. Recognizing the complexity of these issues, we routinely advise our clients to consult with an attorney who specializes in employment-related law for assistance in devising and implementing state of the art policies, practices and procedures in this context. Review of policies, practices and procedures in light of the law should be continuous and ongoing, with modification and revision as needed. That is optimal from a risk management perspective
As an added benefit, having appropriate policies, practices and procedures in place provides an excellent basis for discussions with underwriters willing to insure an EPL wage and hour exposure. However, in any case, Seitlin agents are prepared to assist clients and prospects with review of existing EPLI coverage, development of a more comprehensive EPLI program, marketing of an EPLI submission and purchase of EPLI coverage appropriate to the insured’s unique circumstances. Please contact your Seitlin agent for more information.
For more information, please contact:
Grant Schuetz
VP Claims & Risk Management
Tel: 561.445.5847
