By Lynda A. Bennett and Eric Jesse
The Fair Labor Standards Act (FLSA) and state wage and hour laws generally require employers to pay employees a minimum hourly wage and overtime for working more than 40 hours a week. These statutes also classify workers who are required to receive overtime pay. State laws may impose more nuanced or industry-specific requirements on employers.
FLSA Lawsuits Soar Along with Costs
Violations of wage and hour laws are one of the largest employment practice risks that employers face. In 2011, 84 percent of all employment class-action lawsuits alleged wage and hour violations. The number of lawsuits claiming a violation of these laws is growing fast. In 1993, only about 1,450 FLSA lawsuits were brought nationwide. By 2002 the number had inched up to 2,035 cases. But by 2012 the number of FLSA lawsuits had nearly quadrupled, to 7,064.
Defending and paying wage and hour claims is not cheap. A class-action or multiple-plaintiff lawsuit substantially increases the cost. While the average discrimination or retaliation claim settles for $600,000 to $700,000, wage and hour class actions settle for $4.6 million, on average.
The most costly part of defending a wage and hour claim may be the legal fees. Along with paying their litigation expenses, employers may also have to cover the employees’ legal fees because of attorney-fee-shifting provisions in wage and hour laws. The FLSA and many state laws require employers in violation to pay “liquidated” damages and interest as well as the unpaid wages. Under the FLSA, liquidated damages are an additional 100 percent of the unpaid wages.
Insurance Coverage Is Disappearing
As claims skyrocket under the FLSA and similar state wage and hour laws, employers have found out the hard way that their insurance policies may not cover their claims, leaving them to bear the entire cost of the liability.
Commercial general liability policies usually do not cover wage and hour claims. Rather, employers typically must evaluate their employment practices liability (EPL) coverage for such worker-related claims. However, in recent years many EPL insurers have started to insert broadly worded wage and hour exclusions into their insurance policies. While the insurer sometimes is willing to allow policyholders to buy back the wage and hour coverage, the buyback often comes with a high premium. Moreover, increasingly EPL insurers are assigning to wage and hour claims a low sublimit that is quickly eroded by the payment of defense costs.
Those employers that haven’t faced a lawsuit must immediately review their insurance program to determine whether they have coverage for wage and hour claims and, if not, what they can and should do to close the coverage gap.
Evaluating Niche Policies
Some providers are beginning to offer new insurance products in an attempt to fill the void. For instance, Marsh, a large insurance broker, recently introduced a product called the Marsh Wage and Hour Preferred Solution, which it says is designed specifically to cover wage and hour violations for employers with 4,000-plus employees. While niche policies such as this one (which would not be “standard form” and often are heavily negotiated) may be appropriate for some employers, they need to review all the facts before deciding if it’s necessary and advisable. The devil will be in the details of evaluating the scope of coverage and securing terms that provide the greatest protection for employers.
Lynda Bennett is a partner at law firm Lowenstein Sandler. Eric Jesse is an associate at the firm.
Calculating Overtime Pay in the United States, SHRM Toolkits, February 2012
Complying With U.S. Wage and Hour Laws and Wage Payment Laws, SHRM Toolkits, December 2010
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