Rise in Wage and Hour Claims Unlikely to Change, Warns Advisen White Paper

Litigation of wage and hour claims has risen 58 percent between 2013 and 2015, according to insurance research provider Advisen Ltd. With the government’s expansion of employees entitled to overtime pay and the expanded definition of an employee, there is increased exposure of misclassification by employers, conclude the authors of Advisen’s latest white paper on the subject.

Last year, the Department of Labor issued a revised definition of an employee. In order for a company to determine whether a contract or temporary worker is an employee, the company must consider the worker’s investment in the business and the integrity of their role.

Though awareness of traditional exposures such as missed meal breaks has increased, “the claims haven’t gone away,” said Jessica Lindo, vice president of professional lines at Allied World. “In fact, emerging risks like mobile workforces, outsourced labor, and social media have only added to the number of ways employers can run afoul of wage and hour laws.”

According to the Allied World sponsored report, “Industries employing large numbers of non-exempt workers and having many payroll rules of their own are, in fact, more susceptible to claims. These include services such as retail, restaurants and healthcare, as well as manufacturing, construction and technology.”

Advisen data show the top states for frequency of wage and hour claims are Mississippi, West Virginia, Florida, California and Louisiana.

“California remains the most problematic state from a Wage and Hour perspective,” Lindo said. Advisen data show that 40 percent of all employment practices liability losses come from California, and the average value for these claims is more than $6 million — four times that of other states. “This should be a major concern for employers with any significant number of employees based in the state,” she added.

According to Advisen data, more than 20 percent of wage and hour cases cost in excess of $1 million, while around 50 percent cost employers more than $100,000.

NRLB Decision’s Impact on Franchises

A case decided in August 2015 by the National Labor Relations Board expanded the joint employer definition to include businesses that use third party staffing agencies. It is expected that franchises will be included in the category, according to the Advisen paper. Previously, franchises had been insulated from labor laws.

“This decision builds on the conversation around ‘fissured’ industries—when large companies indirectly employ workers that produce their products and services. It is not just a policy or practice that needs to be evaluated, in some cases it is a whole business model,” said Lindo. “Franchises are most obviously impacted by this ruling, and with over 8 million U.S. workers employed in franchise businesses, this is not a negligible issue.”

Arbitration and Waivers Can’t Fully Mitigate Risk

Employers hoping to reduce wage and hour claims by having employees sign arbitration agreements and class action waivers need to be made aware that they may not stick. According to Advisen, some courts have overturned the agreements. And even if a class action waiver is successful, an employer still faces a slew of arbitrations with unhappy employees.

“Due to this increased exposure, employers are relying more heavily than ever on class action waivers within arbitration agreements but even these aren’t foolproof,” said Lindo. “Recent court decisions have made clear that these agreements have significant variability in the protection they provide against employer liability.”

Though employment practices liability policies typically exclude wage and hour claims, some Bermuda carriers offer stand alone policies.

According to Advisen, the policies cover defense costs and indemnity for:

• Violations of FLSA and similar federal, state or local laws;
• Misclassification of employees;
• Inaccurate payment of wages;
• Incomplete pay stub disclosures;
• ‘Donning and doffing’ claims;
• Non-compliance with meal and rest-break requirements;
• Failure to compensate off-the-clock work.

Covered losses include:

• Pre and post judgment interest;
• Statutory attorney fees;
• Statutory liquidated damages;
• Punitive and exemplary damages.

The policies, developed three years ago, have seen limits increase and retentions drop. This has allowed companies to blend the new coverage with employment practices liability policies currently in place, Lindo said. “About half of W&H policies are now being blended into existing EPL programs.”