FSLA and employment practices liability issues.
As we look back on 2014 and forward to 2015, insurers should continue to pay attention to the effect of wage and hour employment claims on Employment Practices Liability Insurance (EPLI) coverage. Wage and hour claims brought under the Fair Labor Standards Act (FLSA) and state law equivalents continued to rise in 2014, and 2015 may very well be a record setting year for lawsuits. Employers have recently faced a massive number of FLSA lawsuits for overtime compensation and minimum wage violations. In fact, in some states FLSA cases encompass nearly half of all employment cases filed. The combination of the complexity of the FLSA and the sometimes unsettled law leads many employers to violate the FLSA without even realizing it.
Many EPLI policies do not cover wage and hour claims, and the ones that do usually only cover the cost of defense. However, the continued rise in claims may drive companies to purchase EPLI policies that cover these claims. Given these trends, and new federal regulations on the horizon that will negatively affect companies, insurers may want to think about incentivizing their insured clients to conduct self-audits and have policies that limit risk.
The FLSA is by no means a new law. In fact, it was passed decades ago by the U.S. Congress in 1938. Under the FLSA, employers must pay employees a minimum wage and pay overtime at time-and-a-half the employees’ hourly rate when the employee works over 40 hours in a work week. Employers do not need to pay overtime to employees who are exempt from overtime. Given that none of this is new, why are there so many wage and hour lawsuits, and why is the Department of Labor (DOL) suggesting that nearly 80 percent of companies in the U.S. violate the FLSA?
Confusing Exemptions and Upcoming Revisions
For years companies conducted business with a certain understanding of which employee positions would need to be exempt from the FLSA. However, the status quo has been changing. These changes are a result of the DOL revising regulations and the plaintiff’s bar challenging decades old understandings of what is an exempt employee. The working foreman in the construction industry, the loan officer in the mortgage industry, the home companion who works for a third-party home care company, and certain assistant managers at retail establishments are just some of the many positions that used to be considered exempt and are now considered non-exempt.
To make matters more confusing for companies, the President in the first quarter of 2014 asked the DOL to update the white collar exemptions that cover supervisors, administrators and other professionals to expand the number of workers who can receive overtime. Many believe that the new regulations will significantly increase the salary basis test. (Currently, supervisors, administrators and professionals must earn at least $455 a week to be eligible for the exemption.) Additionally, some commentators believe that the duties test to determine whether an employee is in an exempt position will be become more restrictive. The proposed regulations will likely be introduced sometime in 2015. As companies and industry groups look at responding to the proposed regulations, the unpredictability regarding who is an exempt employee could lead to additional litigation.
Misclassifying exempt employees is not the only issue for companies. In 2014, many companies are being sued for having employees who work on occasion. These claims are usually not about employers purposefully trying to avoid paying employees. Rather, these claims are much more discreet and unintentional. For example, companies are being sued for having employees who work on occasion while they are on a non-paid lunch breaks; hourly employees using a PDA to e-mail and talk to clients or venders after work; and hourly employees who are required to arrive to work 15 minutes early prior to clock-in time. In many of these cases, the company did not realize that their own policies were unintentionally creating lawsuits. However, unlike wrongful termination and discrimination claims, the company’s intent is irrelevant in a wage and hour claim. A violation of the FLSA regardless of the reason, can oftentimes be an unforgiving mistake.
Claim of Choice
FLSA lawsuits are the claim of choice for many employee-side attorneys. It is fairly easy for a disgruntled employee to locate and match-up with a plaintiff’s attorney these days. The savvy plaintiff’s counsel receives the call from the disgruntled employee and directs the conversation to how the former employee was paid. The plaintiff’s counsel often finds a wage and hour violation. Popular cases for employees’ attorneys include compensation for time spent donning and doffing, improper classification of employees as independent contractors, and exemptions from overtime pay requirements. These are much safer claims to file than a discrimination claim because there is less subjectiveness, fewer unknowns about the claims, and a more likely chance to survive a summary judgment motion even in weak cases. Most importantly, employee-side attorneys are drawn to these cases because of the automatic statutory attorneys’ fees awarded to the prevailing party. In a recent case in Georgia Federal Court, the Court awarded $173,000 in attorneys’ fees when the employee only recovered $13,000.
To make matters worse, FLSA violations usually aren’t limited to one employee and can easily be converted to a collective action lawsuit (the FLSA’s version of a class action). They often apply to a class of employees and extend over a lengthy period of time. Minor mistakes can result in significant liability for unsuspecting employers. For example, a misclassification of one job position or an automatic 30-minute lunch deduction when employees sometimes work through lunch could lead to a class of hundreds of employees. The employees’ attorney’s fees in the collective action cases significantly increase when a case gains class status.
Class Action Waivers
There is some good news for companies. Class action waivers in arbitration agreements have gained traction in recent years. In 2011, the U.S. Supreme Court decided AT&T Mobility LLC v. Concepcion, a landmark decision that addressed the enforceability of an arbitration agreement in a consumer contract that prohibited class arbitration. In a 5-4 decision, the Court held that the agreement was enforceable and reversed the 9th Circuit’s determination that the agreement was unconscionable under California law. Although the Concepcion case was not employment-related, many lower courts have used it to enforce class action waivers in the employment context. Since that time, many lower courts have found that employees can waive their right to file or participate in a collective action case.
Employee rights organizations and government agencies have tried to bypass the Supreme Court’s decisions. For example, the National Labor Relations Board (NLRB) takes the position that these agreements violate labor laws by prohibiting employees from coming together to complain about the terms of their employment. However, most courts have ignored or rejected the NLRB’s position.
Savvy employers stand to benefit tremendously through the successful implementation of arbitration agreements with class and collective action waivers. Such agreements could contain wholesale waivers of class and collective action claims, or they could apply only to wage and hour claims.
By having employees sign an arbitration agreement with a class action waiver, companies could prevent class actions involving wage and hour issues such as misclassification of exempt employees or independent contractors as well as off-the-clock work. Imagine a single sheet of paper possibly limiting a lawsuit to one employee instead of hundreds of employees — especially lawsuits that are so commonly filed.
What Insurers Can Do to Lower Risk
A majority of wage and hour lawsuits are preventable. Given the significant risks and exposure of wage and hour litigation, companies should be looking at taking proactive steps to limit these claims. Conducting wage and hour audits that analyze whether employees are properly classified can fix misclassification issues. Reviewing company policies that often unintentionally create FLSA lawsuits is another way to avoid lawsuits. For example, are employees clocking in manually or is there an automatic time clock that does account for the actual time an employee works? Is there a policy for recording work time that occurs at home or outside of work?
Additionally, instituting common sense policies can also reduce exposure and limit risks. Practical companies that have class action waivers can limit exposure to class action lawsuits. Many companies also choose to create a reporting policy for wage and hour claims (similar to an anti-harassment policy). Some other helpful policies have hourly employees acknowledge and affirm each week that their time has properly been recorded.
Insurers who have a duty to defend wage and hour cases may want to think of ways to reduce their risks. Asking insured clients to proactively self-audit should catch many errors before they turn into major claims. One option may be to require clients to complete an audit or put in place certain policies in their employee handbooks. Another suggestion is to incentivize insurers to review their policies is to reduce EPLI premiums for proactive measures, or offer an attorney or human resources professional at reduced rates to their insured clients to self-audit for wage and hour issues.
One thing is certain, wage and hour claims will continue to rise. However, insurers may be able to limit their exposure by helping their clients anticipate and avoid common pitfalls.