Wage-and-Hour Policies May Be a Useful Asset to Fill Potential Coverage Gaps

Jared Zola and Frank M. Kaplan

Zola, Jared Kaplan, Frank M.As a wise person once said, “It’s déjà vu all over again.” Anyone who thought wage-and-hour lawsuits would be a short-lived lawsuit du jour of the plaintiffs’ bar have been proven wrong. Claimants filed more than 8,900 FLSA cases in federal court last year, a 30 percent increase from 2011. In light of the continued trend and recent legislation that has the potential to expand liability to individuals acting on an employer’s behalf, employers should take a hard look at the insurance assets available to protect against these potential liabilities.

California’s new statute, the Fair Day’s Pay Act, has the potential to implicate a “person acting on behalf of an employer” to liability for the company’s allegedly improper wage-and-hour practices. Labor Code § 558.1 (eff. Jan. 1, 2016). New York amended its existing Business Corporation Law § 630, effective January 19, 2016, to extend potential liability for unpaid wages to the top 10 shareholders of privately held corporations incorporated in New York and foreign corporations. While employers and individuals are armed with a wide array of defenses, the potential risks warrant a close look at what insurance assets a company has available to offset any potential liabilities in this continuously growing area.

D&O and EPLI insurers frequently respond to wage-and-hour coverage claims with a panoply of defenses. Even if there is a question as to whether a wage-and-hour lawsuit gives rise to coverage, there may be a strong argument that coverage is implicated in most wage-and-hour suits because of the very nature of the lawsuits. Some of these lawsuits allege that employers misclassified or improperly designated the status of their employees as “exempt” from overtime laws, failed to enforce adequate wage-and-hour policies, or coerced employees into working excessive hours. In fact, many wage-and-hour lawsuits allege that employees were told that they were “exempt” from overtime requirements when they were, in fact, not exempt. Such allegations should constitute “misrepresentations” covered by an EPLI policy and, to the extent they implicate individuals, may be covered by D&O policies. Additionally, EPLI policies often expressly cover the types of allegations pled in wage-and-hour lawsuits under broad “Wrongful Employment Act” definitions that include coverage for “employment-related misrepresentations,” “employment-related discrimination,” “failure to implement and enforce appropriate corporate policies and procedures,” and “breach of implied contract.”

Notwithstanding arguments in favor of coverage, insurers frequently assert that FLSA exclusions and carve-outs from the policies’ “Loss” definition bar or substantially limit coverage for wage-and-hour lawsuits. Accordingly, companies should consider purchasing specialty wage-and-hour policies to fill potential gaps in coverage. Several Bermuda and London-based insurers, including Beazley, Markel, and AWAC, and at least one domestic insurer (AIG), are marketing wage-and-hour policies. Companies should be mindful, however, that these specialized policies include many of the less policyholder-friendly attributes frequently found in foreign-market policies. When deciding whether purchasing such a policy is a prudent business decision, companies should evaluate those attributes, which may include high self-insured retentions, mandatory London arbitration provisions, and New York choice of law provisions.

Coverage disputes involving wage-and-hour lawsuits are nothing new. But given the continued risk, companies may be well-served to revisit whether their present insurance portfolio adequately protects its business.