Wage and hour risk is unfortunately one that every employer needs to consider. Through the years, an employer’s legal obligations have become more onerous that even the most well-intentioned employer can run afoul of confusing and conflicting wage and hour laws. Wage and hour class and collective actions continue to be the most filed employment litigation across the country. Duane Morris Class Action Review – 2023 (pages 219-236). There has also been an increase in state and federal wage and hour enforcement efforts. To the extent employers have not been faced with such a lawsuit or agency investigation, it is likely only a matter of time, particularly in hot bed states like California.
In this article we will explore common wage and hour claims, insurance coverage for wage and hour claims, and some best practices to implement to assist with remaining compliant with evolving wage and hour laws.
Wage and hour liability arises from a federal law known as the Fair Labor Standards Act (“FLSA”). 29 U.S.C. 201, et seq. The FLSA sets our nation’s minimum wage and overtime requirements, mandates that employees are paid for all time worked, and further sets forth the specific factors necessary to determine classification. Most states and localities have parallel wage and hour regulations that offer extra protection to the employee - such as daily overtime, meal and rest break requirements, and timing for wage payments.
Pursuant to the FLSA, employees can recover two years of back wages per employee; three years if there is a finding of a “willful violation”. In addition, they can recover liquidated (i.e., double) damages) if the employer did not act in “good faith”. Courts have found that double damages are “the norm and single damages the exception.” Herman v. RSR Sec. Servs. Ltd., 172 F.3d 132, 142 (2d Cir. 1999). Finally, they can recover attorneys’ fees and costs. Remedies under state laws vary and can sometimes be broader.
The law further provides for a collective action mechanism against employers for wage and hour violations. This procedure allows the aggregation of employees’ claims, which can grow quite rapidly. To proceed as a collective action under the FLSA, employees must be “similarly situated,” meaning the employees are subject to a common policy, plan or design that fails to compensate employees as required under the law.
Most states provide for a collective action procedure for state wage claims, similar to federal law. In addition, California employees have the protection of a very a powerful law - the Private Attorneys General Act (“PAGA”), which authorizes employees who are subject to alleged labor code violations to act as private attorneys general, i.e., they can pursue civil penalties as if they were a state agency. Typically, a California employee will file a PAGA lawsuit on behalf of themselves and other aggrieved employees of that company. Under previous caselaw it had been held that arbitration agreements or class action waivers did not apply to PAGA claims. However, in June 2022 the U.S. Supreme Court held that PAGA claims on an individual basis can be dismissed and referred to arbitration if certain provisions exist in the arbitration agreement. Viking River Cruises Inc. v. Moriana, No. 20-1573. The Court’s decision was a nuanced one and laid out a path for the CA Legislature to amend PAGA to survive federal preemption. In addition, the CA Supreme Court is also deciding the Adolph v. Uber case, which is focused on whether an aggrieved employee who must arbitrate their individual PAGA claims still has standing to pursue PAGA claims on behalf of other aggrieved employees. Adolph v. Uber Technologies Inc., No. S274671. As such, the effect of Viking River on PAGA claims is still to be determined.
The most common types of wage and hour allegations are: failure to pay and miscalculation of overtime, failure to comply with meal and rest break requirements, failure to pay minimum wage, donning and doffing, failure to pay for “off the clock” work, and misclassification of employees (particularly the misclassification of an employee as an independent contractor).
While most wage and hour claims arise out of the normal operations of a business, there are certain other instances that can unexpectedly lead to a wage and hour claim. For example, a ransomware attack that impacts all of an organization’s systems may impact payroll and therefore, lead to a failure to pay wages claim. Such was the case in a recent lawsuit filed by a group of nurses against a hospital operator. The nurses claimed they were underpaid for several pay periods following a ransomware attack.
Similarly, earlier this year the banking industry experienced the collapse of Silicon Valley Bank (SVB) which led to many tech client’s accounts being frozen and therefore, unable to access for payroll. While the government rescued SVB and ensured that all depositors were repaid in full, the event could have led to wage and hour claims if that had not happened. As noted above, employers are subject to the FLSA and similar state laws, some of which have specific requirements regarding timing of payroll payments. If the depositors were not paid in full there may have been some employers who would not have been able to make payroll, leading to failure to pay wages claims or allegations of violations of specific state laws regarding how and when wages must be paid.
Insurance coverage for wage and hour claims has been limited. Traditional Employment Practices Liability (EPL) policies specifically exclude coverage for these claims. The primary reason being that these claims typically do not allege an employment practices violation, such as, discrimination, wrongful termination, harassment, etc. However, there are some domestic markets that will provide a defense cost only sublimit on the EPL policy.
In 2013 the first wage and hour policy providing full wage and hour coverage (defense and indemnity) was written out of Bermuda. This policy provides coverage for standard wage and hour claims, such as: failure to pay overtime, misclassification, failure to provide meal breaks, donning and doffing claims, etc. The policy’s definition of Loss includes coverage for defense costs, settlements and judgments, as well as civil fines and penalties and punitive damages. Importantly, the policy provides coverage for California’s PAGA claims. The policy typically covers any employee which includes any director or officer or their functional equivalent and the company (including its subsidiaries). Of note, this coverage is only available through the Bermuda markets.
Given complex regulations and significant liability, there are certain best practices that should be employed in order to mitigate risk. Some critical steps include:
Wage and hour law is complex and unforgiving. It is highly recommended that organizations work with experienced counsel to ensure compliance - before being named in a collective action or subject to a time-consuming wage and hour audit by the federal or state department of labor. It is also important to evaluate your organization’s risk exposure and determine whether obtaining a wage and hour insurance policy makes sense for your organization.
Willis Towers Watson hopes you found the general information provided in this publication informative and helpful. The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors. In the event you would like more information regarding your insurance coverage, please do not hesitate to reach out to us. In North America, Willis Towers Watson offers insurance products through licensed entities, including Willis Towers Watson Northeast, Inc. (in the United States) and Willis Canada Inc. (in Canada).
