Today’s topic: Limited Insurance Coverage Options for Wage and Hour Claims Make Compliance Efforts All the More Necessary

Heidi Lawson, the head of Mintz’s Crisis Response, Risk Management & Executive Protection practice, and Dean Constantine, the Global Head of Employment Practices Claims in the Financial Lines Claims division of AIG Property Casualty, presented on various employment-related insurance issues. Topics included the surprising number of employers subject to employment law claims, EPLI Insurance coverage for private equity companies in connection with their portfolio companies, employer claim reporting misconceptions and obligations, and finally, the issue we address in more detail below, the continuing struggle of insurance companies to offer a viable product covering wage and hour claims.

Most human resource managers and in-house employment lawyers appreciate the need to ensure the proper payment of wages, including overtime to non-exempt staff, and to verify the proper classification of their service relationships, including whether employees are properly classified as employees, and if so, whether they are exempt.  Still, many companies underestimate the risks of not taking wage and hour compliance issues seriously and, as a result, fail to devote sufficient time and resources to the task, which can and has resulted in class/collective litigation damages, fees and costs reaching tens of millions of dollars.  But unlike many other types of employment-related claims, wage and hour claims are typically excluded from coverage under Employment Practices Liability Insurance (EPLI) policies or related policies, thus requiring employers to cover these costs themselves.

“Getting any kind of coverage for this risk is a challenge,” notes Lawson.  She added that currently, some insurance companies offer a product covering wage and hour claims, but it typically has very high retentions and premiums, and usually only relates to coverage of defense costs.  There is also an issue over whether these types of claims are insurable at all because they arguably involve “intentional” wrongdoing.  So until the industry effectively pieces together a coverage product, employers must go the extra mile to reduce the likelihood that they will be overwhelmed by litigation costs and damages that result from a wage and hour collective/class action.  To do that, we recommend the following tips.

First, employers should periodically conduct audits of their wage and hour practices, including of all exempt positions to confirm that (1) their exempt employees’ compensation still satisfies the minimum salary requirements of the FLSA and analogous state and local laws, and (2) exempt job functions continue to make up the “primary duties” of any exempt-classified positions that include both exempt and non-exempt tasks. Although this process may also include updating exempt employees’ written job descriptions, employers should be mindful that even a job description that lists clearly exempt duties will not offer protection if it does not accurately reflect the reality of the work the employees perform on a daily basis.  Employers should strongly consider revisiting their classifications once the Department of Labor publishes its highly-anticipated final changes to the white collar exemptions.

Second, accurate payroll recordkeeping policies, procedures and practices for non-exempt employees are critical, including ensuring that employees are recording their hours worked each day properly, accounting for any meal or break periods and overtime hours, and verifying that employees are being paid the correct amounts at the correct times.  Employers should be careful not to apply deductions to exempt employees’ pay for normal absences, as this may provide support for a subsequent claim challenging the exempt classification.

Finally, employers should periodically review and update their payroll policies and communicate specific guidelines in writing to non-exempt staff concerning work hours and any requirements to obtain approval before working more than eight hours in a day or forty hours per week, depending on applicable state law. Similarly, employers should provide training for managers to make sure they understand the company’s wage and hour practices with respect to recording hours for non-exempt staff and approval for overtime so that they can identify potential problems early and help minimize any legal exposure for non-compliance.  Employers should also introduce and enforce discipline for employees and managers that violate these policies.

The trend of increasing wage and hour collective/class actions in recent years shows no sign of abating, as recent litigation involving car services Uber and Lyft and a Second Circuit ruling lessening the burden of class certification demonstrate.  Thus, wage and hour compliance remains a critical component of effective business management and employers who tolerate complacency in compensation practices at their organizations risk finding their time, money and energy diverted from running their businesses and focused instead on responding to large-scale legal battles without the aid of their insurer.