September 2012 Bar Bulletin
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September 2012 Bar Bulletin

Insurance Coverage for Wage-and-Hour Lawsuits

By James R. Murray, Arthur F. Silbergeld and Omid Safa

 

Businesses have faced a tsunami of wage-and-hour lawsuits over the last decade, with the number of new class actions increasing particularly in recent years, as more and more disgruntled ex-employees file lawsuits against their former employers in the wake of the "Great Recession." In federal courts alone, more than 7,000 wage-and-hour lawsuits were filed last year, representing both a record high and a roughly 400% increase since 2000.1

Most often asserting claims under state labor laws, and to a lesser extent, the Fair Labor Standards Act (FLSA), these lawsuits pose potential multimillion-dollar liability and constitute a serious risk to the business of any employer. In fact, the costs of defending such wage-and-hour lawsuits can easily exceed hundreds of thousands, if not millions, of dollars.

Fortunately, employment practices liability (EPL) insurance will often protect companies against the substantial costs and liabilities associated with these types of lawsuits. EPL insurance provides coverage for claims arising out of the employment relationship and typically obligates an insurer to pay all "loss" resulting from an employment-related claim. This includes the payment of all damages, judgments, settlements, prejudgment interest, post-judgment interest and defense costs, subject to the policy language.

In addition to covering traditional employment-related claims, such as those alleging sexual harassment, discrimination or wrongful termination, an EPL policy ordinarily also provides coverage for a wide array of claims falling within the broad concepts of "employment-related torts," "employment practice violations" or similar catch-all terms. Examples of the latter types of claims include those alleging "misrepresentation," "negligent supervision" or the "failure to adopt adequate workplace or employment policies and procedures."

Wage-and-hour lawsuits commonly allege claims falling within the scope of such EPL coverage provisions. For example, many wage-and-hour plaintiffs assert classic employment-related claims, alleging that they were wrongfully terminated as retaliation for their complaints about inadequate overtime pay, meal breaks or rest periods. Plaintiffs also routinely assert claims falling within the broad concepts of "employment-related torts" or "employment practice violations."

Indeed, wage-and-hour lawsuits consistently involve allegations that the employer misclassified and misinformed employees as to their status with respect to overtime laws, failed to implement adequate wage-and-hour policies and procedures to protect employees, and allowed supervisors to force employees to work excessive hours without adequate pay. Such claims should trigger coverage under an EPL policy.

Nevertheless, employers should be mindful that many EPL policies contain exclusions that bar coverage for violations of the Fair Labor Standards Act or "similar provisions of any federal, state or local law." Insurers often incorrectly contend that such exclusions eliminate coverage for all wage-and-hour claims under state laws serving a "similar" purpose as the FLSA. This argument ignores the actual language of such exclusions, however, which merely limits coverage in circumstances where the relevant provisions of the state law are "similar" to the provisions of the FLSA.

Many wage-and-hour plaintiffs file claims under state labor laws, rather than the FLSA, precisely because of the differences between the state and federal laws. For example, the California Labor Code identifies an employee as "exempt" or "non-exempt" from overtime requirements based on the percentage of time the employee spends performing in a managerial capacity.


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