Paying Overtime is Cheaper than Getting Sued for the Failure to Pay: Wage and Hour Claims and Insurance Coverage

By James Tolfree, Senior Vice President, Alliant

Employers face a host of wage and hour exposures from employees. Assertions and claims can include overtime wages were owed, but not paid, lack of compliance with break periods, allegations of wrongful deductions from pay checks, failure to pay wages for off-the-clock work and failure to timely pay wages upon an employee being terminated. Further allegations can include the misclassification of employees as independent contractors or the misclassification of exempt or non-exempt status.

The litigation costs that can arise from alleged violations of the Fair Labor Standards Act (FLSA), US Department of Labor rules and other state and federal laws can be quite substantial.  Bank of America’s $73MM settlement was in regards to litigation accusing it of violating the Fair Labor Standards Act by requiring more than 180,000 hourly employees to work off-the-clock. T.G.I. Friday’s $19.1MM settlement included allegations of minimum wage violations, unpaid overtime, work without pay and tip credit issues.

In addition to employees, employers are also exposed to independent contractor liability.  A new Maryland law makes general contractors responsible if a subcontractor fails to pay their employees the wages that are owed.

A key element in reducing the risks of incurring these types of claims and lawsuits is having a strong written wage and hour policy. This policy should include timekeeping, break times and complaint procedures. Employees need to know the procedures to submit a wage and hour complaint. Employers should require employees to provide a written acknowledgement of the accuracy of recorded time worked. Outside counsel should review the policy and employers must keep the policies current. Audits of a company’s compliance with various wage and hour laws and regulations are vital and a best practice is to incorporate a dedicated team that focuses specifically on wage and hour compliance.

Regarding independent contractors, employers must pay very close attention to the indemnification provisions in their service contracts. Employers may require independent contractors to procure their own insurance to protect against wage and hour claims. It is also important to conduct sufficient due diligence to ensure the independent contractor has the financial wherewithal to honor the indemnity provisions of the contract.

Employment Practices Liability provides protections for various work place torts and third party exposures. Those policies generally exclude wage and hour claims, though some policies offer a smaller defense costs sub-limit. An additional solution is obtaining a wage and hour insurance policy. This can be purchased as a standalone policy or combined with an Employment Practices Liability policy. This wage and hour product was introduced out of the Bermuda market place several years ago. It can provide coverage for both defense and indemnity obligations. Both the premium and retention have come down significantly in recent years. The combined product protects against employment and third party claims and wage and hour liability including plaintiff’s fees.

Employers should take preventative measures to avoid being outflanked and caught off guard by these costly exposures. Strong, clear and currently updated wage and hour policies and service contract indemnification provisions can provide pre-emptive protections while an employment practices liability and wage and hour policy can provide an important financial back stop.