A wave of wage-and-hour claims has left employers and the commercial insurance industry scrambling for cover, literally.
While just 10 percent of US corporations are insured against the payroll claims, they represent an overwhelming majority of employment-related lawsuits, Gerald Maatman, co-chair of Seyfarth Shaw’s class-action litigation practice group told Advisen.
Wage-and-hour filings under the Fair Labor Standards Act jumped to 8,066 last year from 7,882 in 2013, the only major category of workplace litigation to rise, according to the law firm.
Employers may be facing a perfect storm. Not only have insurers been slow to underwrite the risk in the US, recent court rulings have raised the bar for class actions compared to the collective actions that can be brought under the 1938 FSLA.
“Underemployed class-action lawyers are expected to flock to labor law as a new source of profits in 2015,” Seyfarth’s 11th annual Workplace Class Action Litigation report said.
“You’ve got talented plaintiffs lawyers on the prowl, looking for payroll noncompliance,” Maatman told Advisen. “They need just one worker and they can sue on behalf of everyone else.”
An activist administration and technologically driven changes in work conditions have only added to the mix.
Bennett Pine, shareholder and chairman of Anderson Kill’s employment and labor practice, attributes the “geometric increase” in W&H cases to their simplicity.
“In discrimination cases, there are always eight sides to every story,” he said. “But with wage and hour, you either paid the overtime or you didn’t.”
The failure to pay overtime to employees who receive a salary but are not exempt from the FSLA is the “classic” W&H case, he said. Misclassification also arises with independent contractors who are employees in everything but name.
The third major violation of W&H laws concerns “off-the-clock” work, in which employees aren’t compensated for duties they perform outside of normal hours, typically on mobile devices.
Pine said a rash of recent settlements over unpaid intern work at high profile media companies, including Viacom (for an undisclosed amount), NBCUniversal ($6.4 million) and ICM Partners (in mediation), show how much more likely the cases are to be settled out of court than other workplace litigation.
“There are often household names involved with deep pockets,” he said. “The public knows them, and there is greater pressure to settle.”
The risk has become so complex, companies are hiring payroll compliance officers, Maatman said.
While telecommuting and outsourcing have created new claims under a federal law that was written decades ago, the bar to collective action under FSLA has been an even bigger contributor, added Maatman.
That barrier to entry, requiring only that plaintiffs be “similarly situated,” is lower than the one set for class certification by the 2011 Supreme Court decision in Walmart Stores Inc. vs. Dukes.
“As an attorney, I don’t have to spend money on an expert’s report or wait through 12 months of discovery” with FLSA claims, Maatman said. “They are low investment-high return. I can bring five wage-and-hour cases with one client.”
W&H claims can also be brought as class actions under state laws. But even where defendants defeat certification, victory can be pyrrhic.
“Plaintiffs’ class action firms willingly, almost gleefully, pursued claims in arbitration or court on behalf of individual claimants” in such cases, the litigation report said, resulting in the bombardment of companies with hundreds of cases or individual suits filed in multiple jurisdictions.
This has led to “a nuclear mushroom cloud of growth in these cases,” Maatman said, especially in such plaintiff-friendly states as California, New York and Massachusetts.
SEE DATA: Advisen Loss Insight: Wage-and-hour class actions outpace all others
State laws, which can differ, also complicate compliance. Regulations protecting workers’ mealtimes, for example, vary depending on the state a company is operating in.
The complexity makes the risk harder to underwrite. A handful of carriers offer comprehensive policies that can each cost more than an entire employment practices liability program—with deductibles running to $1 million per claim.
“The EPLI marketplace has shunned the coverage,” said Carole Lynn Proferes, managing director of Marsh USA Inc.’s Mid-Atlantic FINPRO practice. “There were broad exclusions for cases filed under wage-and-hour laws.”
But, she added, “This is an insurable risk.”
It took a lot of research and development before the broker could write what she said was the first standalone policy with Markel Global Insurance of Bermuda. The program launched in 2013, followed by policies from XL Group and Allied World Assurance Co.
“There were many questions as to how to underwrite this exposure, and concern that a client who hadn’t, for example, paid overtime could simply use the policy to cover it,” Lynn Proferes said.
The Marsh Wage & Hour Preferred Solution covers settlement costs of collective and class actions, including coverage for back pay, compensatory damages and defense costs. It requires a written application, with no outside interviews, audits or assessments—only a conference call with the broker.
Juno Turner, a partner at employees’ law firm Otten & Golden, disagreed that plaintiffs attorneys were attracted to W&H claims by a lower bar but said filings have risen and will continue to do so.
“During the recession, employers were pushing the envelope and violating the law with regard to pay,” she told Advisen. “Workers were desperate to keep working and avoid retaliation.”
The recent economic thaw might embolden employees, but a revision of overtime rules under the FLSA is definitely expected. The Obama administration directed the Dept. of Labor last year to develop new rules to further restrict so-called “white collar” exemptions under the law.
The last revision of the law, in 2003-2004, was followed by an uptick in W&H filings as companies adapted.
“Overtime pay rules under the FLSA set minimum salaries for exempt workers,” or those who don’t automatically qualify for OT, Turner said. “These are currently at poverty levels.”
The expectation that the revisions will further drive claims is something that even employers’ lawyers can agree with.
“The wave of W&H filings has yet to crest,” Maatman said.
