Assessing Wage and Hour Insurance Coverage Following Proposed FLSA Amendments
We recently discussed how Democrats in the House of Representatives sought to amend the Federal Labor Standards Act (FLSA) as part of new proposed legislation called the “Wage Theft Prevention and Wage Recovery Act”. The post concluded that the legislation, if enacted, would increase both the frequency and severity of not only FLSA collective actions but also of investigations and enforcement actions by the Department of Labor’s Wage and Hour Division.
Many businesses assessing potential new or growing FLSA and regulatory exposures may be wondering if their liability insurance policies will respond to protect the company and its officers and directors from wage and hour claims. The short answer is, it depends.
While many policies expressly limit or exclude FLSA-related wage claims, or only provide for a small cost of defense, coverage may be available, and companies should carefully review all potentially applicable policies for sources of coverage. We discuss several key issues to consider when assessing wage and hour insurance below.
1. Most EPL Policies Limit or Exclude Coverage for Wage and Hour Claims, but Don’t Assume That Exclusions Apply to All Wage-Related Allegations.
Many companies assume that all workplace-related litigation will be covered by insurance but are surprised to find out that most employment practices liability (EPL) policies exclude claims under the FLSA and similar state and local wage laws. This carve out from EPL policies can be significant—the Department of Labor (DOL) reports that in the 2021 fiscal year alone this one federal agency assisted more than 190,000 workers, recovered more than $230 million in back wages, and initiated nearly 25,000 compliance actions. Common wage and hour claims include, among others, “donning and doffing” claims, failure to pay overtime, employee misclassification, and failure to reimburse business expenses. In addition to the DOL, many states have their own robust wage and hour departments, often within their respective attorneys general offices, and this does not even take into account the incredibly active state and federal private litigation companies face in the wage and hour area.
The rise in wage and hour risk and exposure has led insurers to limit coverage under EPL policies by either outright excluding those claims or limiting coverage to costs of defense only, sometimes subject to small sublimits. However, all “wage and hour” exclusions are not created equal, and businesses should not assume that a wage-related exclusion will always apply to all forms of alleged labor code violations.
Take for example Southern California Pizza Co. v. Lloyd’s, London, 40 Cal. App. 5th 140 (Ct. App. 2019), in which a company sought coverage for a suit alleging, among other things, that it violated California labor code sections governing reimbursement of work-related expenses. The company’s EPL insurer denied the claim under the policy’s FLSA exclusion, except for a limited grant of coverage under a wage and hour endorsement providing $250,000 in defense costs. The company challenged the insurer’s interpretation of the FLSA exclusion, which applied to claims that arise out of, are directly or indirectly connected or related to, or in any way allege violations of any state “wage and hour or overtime laws.”
The court agreed with the company’s narrow interpretation of “wage and hour” to exclude only claims that allege a wage, hour, or overtime law violation and seek wages as relief. Because the underlying claims alleging failure to reimburse business-related expenses were “nonwage” tort claims under California law, they fell outside the scope of the exclusion and triggered the insurer’s duty to defend outside the limited coverage under the wage and hour endorsement.
Like all insurance claims, the labor code violations at issue in the Southern California Pizza were judged based on the actual policy language and facts alleged in the underlying suit. Because exclusionary language must be interpreted narrowly against the insurer and in favor of coverage, policyholders should not assume that the insurer’s preferred (i.e., broad) interpretation of wage and hour exclusions is correct without fully evaluating the specific facts, law, and policy language at issue in a particular claim.
2. Supplemental or Standalone Wage and Hour Coverage May be Available.
Even if recovery may be possible under EPL policies that include a wage and hour exclusion, companies may still be able to purchase express coverage for FLSA claims. The first example is a wage and hour endorsement or rider to an existing EPL policy. But those endorsements are typically “defense only” and will not indemnify the company for any settlements or judgments. In addition, wage and hour endorsements that provide defense coverage may be subject to a relatively low sublimit (like the $250,000 in defense coverage in South California Pizza).
Secondly, some carriers may be willing to write wage and hour coverage that includes both indemnity and defense coverage as part of a standalone policy. Wage and hour policies, usually through the Bermuda market, typically carry higher self-insured retentions and are targeted towards a specific class of small to medium-sized businesses based on loss history, exempt and non-exempt employee headcount, and other factors.
In addition to assessing availability of wage and hour coverage, companies should carefully review the language of the policy to understand how a covered EPL claim would play out in practice. One of the biggest issues aside from sublimits or scope of exclusionary language applicable to FLSA claims can be control of the defense, as most EPL policies allow the insurer to control the defense, including selection of insurer-approved defense counsel. Experienced coverage counsel and brokers can often negotiate around these provisions to protect the company’s preferred choice of counsel by endorsing the policy with preapproved counsel and, if needed, applicable rates, at the time of placement or renewal. Given the significant reputational harm that can go along with losing wage and hour claims, control over the selection of counsel should not be overlooked.
3. Consider All Potentially Applicable Policies.
Many companies purchase standalone EPL policies to protect against workplace-related risks, but that is not the only possible source of recovery. While professional liability or workers’ compensation policies are unlikely to respond to wage and hour claims, endorsements may be added to general liability policies to provide coverage for certain employment-related wrongful acts.
Directors and officers (D&O) and similar management liability policies also can include EPL coverage, either through standalone coverage sections or by endorsement, and may be triggered by ERISA-type claims, government investigations, or DOL enforcement actions related to workplace misconduct. In addition, D&O policies may also respond where individual officers or directors are targeted in FLSA suits attempting to hold them personally liable for causing wage and hour violations. See, e.g., Foday v. Air Check, Inc., No. 15-CV-10205, 2018 WL 3970142, at *4 (N.D. Ill. Aug. 20, 2018) (president who wrote company’s handbook, performed daily quality assurance inspections, and knew about disputed time card rounding practices could be held personally liable for FLSA violations). This is especially true under Side-A only D&O policies that provide broader coverage for non-indemnified claims for individuals that may not be subject to employment-related exclusions.
Finally, aside from identifying all sources of potential wage and hour coverage, those policies should be reviewed in tandem with in-house and outside risk professionals to ensure that there are no coverage gaps, including coordination of employment-related definitions, coverage grants, and exclusions, between D&O and EPL policies. The time to address any gaps, modify or supplement coverage, or negotiate different terms is at the time of policy placement or renewal, which will avoid surprises or unintended consequences in the event of a wage and hour claim.